The Differences Between an RRSP vs a TFSA – Young Guys Finance

**NOTE** There is an error in our RRSP example. The contribution limit increases by 18% of your earned income, not 17% as noted in the video.

Now that we’ve gone over some of the basics of investing what’s the next step well you’re almost ready to head to the bank and get your investment accounts set up at this point there’s only two main things to learn what kind of account to open and what to put in that account in this video we’re going to compare the rrsp and tfsa investment accounts and explain

How they work are espys and tfsas are like brothers they have a lot of similarities you can go to the bank and open either one and then you contribute by depositing money into them using the money you’ve contributed you can buy stocks bonds mutual funds index funds and mostly anything in between rrsps and tfsas are what’s known as registered accounts meaning that

Any gains you make inside of these accounts through your investments is tax sheltered you don’t have to pay any taxes when you sell a stock or fund as long as the money stays inside the account but of course just like any brothers there are a lot of differences between these two so let’s walk you through them an rsp is very dependent on the income that you make

Each year through your job your income determines two main things number one the amount of taxes that you pay and number two your rrsp contributions limit pay close attention when you contribute to your rrsp by depositing money into your account your taxable income is reduced which also means you have to pay less taxes let’s look at an example if you make $40,000

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Per year and pay taxes at a rate of 15% you’re expected to pay $6,000 to the government each year in taxes for your rrsp your contribution limit is 17 percent of that income which is sixty eight hundred dollars so next year let’s say you make $40,000 again that’s another six thousand dollars in taxes but from the previous year you can contribute sixty eight hundred

Dollars to your rsp account if you contribute six to eight hundred dollars to your rsp count your taxable income is now reduced to thirty-three thousand two hundred dollars if your average tax rate is still fifteen percent you only have to pay forty nine hundred and eighty dollars in taxes but wait you already paid six thousand dollars in taxes over the course of

The year through your paycheck doesn’t that mean you paid too much well don’t worry the government isn’t that cheap when it comes time to file your taxes in april you’ll get the amount you overpaid as a check this is your tax refund so many many years later what happens when it’s time to withdraw that money from your rsp when you withdraw from your rsp account

That money is added to your taxable income for that year this means you have to pay taxes to the government on that amount so what rrsps are really doing is deferring when you pay your taxes you’ll get a refund for today but you’ll have to pay back the taxes later with a tfsa everything is much more simple the amount you can contribute to your tfsa is based

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On your age the government introduced the tfsa program in 2009 and allowed us to contribute five thousand dollars per year this number has increased throughout the years so if you were born in nineteen ninety or earlier you can contribute a total forty-one thousand dollars to your tfsa in 2015 but unlike your rsp contributing money to a tfsa doesn’t lower your

Taxable income you might be wondering then why would i want to contribute to that i like the check that i get at the end of the year well with a tfsa the benefit is that when you take your money out in the later years you don’t get taxed on it at all so whatever you take out it’s all yours and that’s why it’s a tax-free account so you might be thinking which one

Should i contribute to first the answer really depends on your situation but think about it this way which do you prefer coke or pepsi canon or nikon mac or pc you could spend hours days and months debating between these two choices there are benefits and drawbacks to any decision but picking any of them is way better than doing if you don’t choose one and try it

Out you’ll never know what works best for your situation starting either at efsa or an rrsp put you well ahead of your friends that haven’t done anything so we really encourage you to just start investing in any of these accounts just to get your feet wet okay if you’re really unsure at efsa is much more simple and is a great starting place for your investments

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Transcribed from video
The Differences Between an RRSP vs a TFSA – Young Guys Finance By Young Guys Finance