Tax-Free Savings Accounts (TFSAs) have not been around for as long as Registered Retirement Savings Plans (RRSPs), yet they continue to overtake RRSPs in popularity. An increasing number of Canadians are prioritizing contributions to their TFSAs compared to their RRSPs. It does not come as a surprise because TFSAs are notably better than RRSPs.
The Canadian government introduced TFSAs in 2009 as a means of encouraging Canadians to save more. Most people invest and save to ensure a better life in retirement with the nest egg they have created. Of course, that is not the only reason why you might want to save money right now. RRSPs created a lot of limitations for Canadians that the TFSA addresses.
Here are two reasons why I think TFSAs are better than RRSPs.
Greater flexibility
One of the limitations of an RRSP is a lack of flexibility when it comes to utilizing the money you are saving in the plan. When you withdraw money from an RRSP, the amount is added to your regular income for that tax year. TFSA withdrawals are more flexible, and they do not add to your tax burdens. If you are ever in need of cash, you can withdraw the amount from your TFSA without taxation.
For the younger lot, the TFSA presents a better option. It can be ideal for major expenses like buying your first home, making payments for a new car, getting married, and so much more. With TFSAs, investors who purchase growth stocks hope to generate substantial returns to cash out the proceeds. Trying the same with RRSPs can result in investors incurring withholding taxes on the withdrawal.
Easier to understand
Another primary reason why TFSAs are increasing in popularity compared to RRSPs is a simple fact that they are easier to understand. The RRSP comes with a slew of regulations, tax restrictions, and withdrawal limitations that make it challenging to understand your liberties with the money you contribute.
Additionally, the maximum contribution limit to your RRSP is a little complicated to understand. Your contribution limit every year is 18% of your total income from the year prior, up to $26,230, depending on whichever is lower. In TFSAs, there is a fixed maximum contribution limit that annually increases by $5,000 or $6,000. With the update for 2020, the maximum contribution room in TFSAs is now $69,500.
Foolish takeaway
To make the most of the advantages offered by TFSAs over RRSPs, you should consider utilizing your contribution room to hold reliable and dividend-paying stocks instead of cash. Investing $69,500 in getting shares from Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) can allow you to grow your wealth in your TFSA.
Scotiabank stock is up 7.62% from the start of the year at $73.47 per share. The bank is racking up more robust fundamentals to deal with the imminent recession and mitigate the adverse effects it has on banking stocks. Additionally, BNS pays its shareholders dividends at a yield of 4.9% at writing.
Between the capital gains and the extra cash from dividends, your TFSA can substantially increase your wealth and give you access to more money than an RRSP can within the same period.
