Define TFSA, RRSP benefits for clients

As the tax deadline approaches, many Canadians are deciding whether they should invest solely in an RRSP, or split their dollars between RRSPs and TFSAs.

While the two vehicles both boast high adoption rates nationwide, a new BMO study says your clients are likely looking to TFSAs in particular.

The study finds more than half (67%) of Canadians have an RRSP, while only 39% have TFSAs so far.

Yet, almost 42% say they’d invest in a TFSA if they had more funds, compared to the 37% who’d still put it towards their RRSPs.

Read: TFSA holders aren’t investing

The study says people most like that TFSAs are tax-free (36%) and that they allow easy fund withdrawal (20%).

“Both products play important roles in helping Canadians save and invest in a tax-efficient manner,” says Serge Pépin, vice president of Investment Strategy at BMO Asset Management. “It’s important [for] investors [to] understand their differences.”

He notes TFSAs offer your clients the following benefits:

• No minimum contribution required when opening an account
• Deposits grow quickly through tax-free compounding
• Clients pay no income tax on investment returns earned in the account
• There are no taxes on funds withdrawn
• TFSAs hold a wide range of investments
• The federal government recently raised the annual contribution limit to $5,500

Read: Vik’s Pick: More TFSA room, more savings?

RRSPs, on the other hand, offer different advantages:

• Money grows tax-free until withdrawn
• Contributions are tax deductible and lower clients’ annual taxable income
• RRSPs can also hold a wide range of investments
• Funds can easily transition to retirement income
• Spouses can split income to reduce their combined tax bill

Read:

Income splitting in the TFSA era

Income splitting for business owners

Income splitting from beyond the grave

RRSP plans in a post-TFSA world

Go ahead and tap that RRSP

Improving the TFSA