The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are some of the most beloved tax-advantaged accounts in Canada. Both can help you save on taxes, but they each have unique characteristics. This may leave many investors wondering which one they should invest in first.
Unfortunately, there is no straight answer. It really depends on your situation and preference. Letās discuss how these two Canada Revenue Agency (CRA) registered plans might work for you.
The TFSA: No tax now or when you withdraw
The TFSA is the most straightforward to understand. You put cash into the TFSA and invest. All income (which includes interest, dividends, and capital gains) earned in the TFSA is safe from tax. You donāt need to report your income and you donāt need to pay any tax on that income.
You can really simplify tax season if you just place all your investments into a TFSA. Likewise, when you withdraw your cash (say for retirement or a big-ticket purchase like a car or house), there is no reporting or tax requirement. When you withdraw, you lose the same contribution limit value in that year. However, you recover it the following year again.
The TFSA is the most flexible of the two. The tax-free benefits make it a great place to hold investments that compound wealth for the long term. However, you have the freedom to withdraw from the account with very little consequence if you need/want to.
The RRSP: Defer tax while preparing for retirement
The RRSP is a little bit more complicated. It is more of a tax-deferral account with tax-saving benefits. When you contribute to the RRSP, you get a tax receipt that you can use to lower your taxable income in the year.
This can be particularly beneficial if the contribution can help lower your income tax bracket. Many people use this to get a tax refund, which they often then invest into their TFSA.
Any income earned inside the RRSP is deferred from tax. Like the TFSA, you can compound your capital for years (even decades) without a tax consequence. However, when you withdraw, that amount will be taxed as income at your then-current tax bracket.
That is why the RRSP is largely considered the account to use for retirement savings. You contribute when you are making peak income (and get a tax refund). You withdraw when your taxable income is lower in retirement.
A solid stock for a TFSA or RRSP
Both the TFSA and RRSP can help you save tax and build wealth. If I were first starting out investing, I would use the TFSA first almost every time. However, as your wealth grows, the RRSP can be a great tax deferral tool to enhance your overall investing and tax-saving strategy.
If you want to invest tax efficiently for the long term, one stock you might consider holding is WSP Global (TSX: WSP). With 66,500 employees, WSP is one of the largest consulting and professional services firms in the globe. With expertise in environment, engineering, design, and project management, it is helping build the world of tomorrow.
WSP has grown earnings before interest, tax, depreciation, and amortization by a 24% compounded annual growth rate (CAGR) over the past 10 years. The stock has delivered a similar return with a CAGR of 23% (or a 716% total return) over that time period.
As this business scales, it also gets more profitable. As it gets larger, it can offer more services and cross-sell across its business segments. Despite its strong return record, this business and stock could still be a great bet for a long-term TFSA or RRSP.
