This article was originally published by RBC Healthcare
There are a number of options when it comes to saving for the future. Some are more tax-efficient, while others provide more flexibility. We compare 3 savings vehicles common for physicians and medical professionals — TFSA, RRSPs and Savings Accounts.
When examining your saving choices, it’s important to note there is no single or absolute answer that fits everyone’s situation. Instead, there are many considerations that may make a particular savings vehicle (or a combination of several vehicles) more suitable for you. In making a decision about where to save, remember to give some thought to your personal goals and objectives.
We've broken down the 3 most common saving vehicles into:
- The Basics
- What Happens with Taxes
- Contribution Must-Knows
- Withdrawal Usage
The Basics
| TFSA | RRSP | Savings Account | |
|---|---|---|---|
| What is it? | A registered investment plan where your investment earnings and withdrawals are tax-free. | A registered investment plan where your investment earnings are tax-deferred and your contributions are tax-deductible. | An account with interest paid on every dollar, calculated daily and paid monthly. |
| How can I use it? | Save for anything you want — short or long-term goals | Save for retirement | Save for anything you want |
| Who owns the account? | Individual only | Individual only (Learn about Spousal RRSPs) | Individual or joint |
Tax Treatment
| TFSA | RRSP | Savings Account | |
|---|---|---|---|
| Tax-deductible contributions? | No | Yes | No |
| Savings grow tax-free or tax-deferred? | Tax-free (never taxed) | Tax-deferred (taxed upon withdrawal) | The interest you earn is taxable |
| Taxed withdrawals? | Tax-free (never taxed) | Taxed (added to taxable income the year the money is withdrawn) | No |
Free eBook: Wealth Management and Financial Tips for Doctors
Contributions
| TFSA | RRSP | Savings Account | |
|---|---|---|---|
| Annual contribution limits? | $6,000 for 2022 (subject to change) plus previous years’ unused contribution room | 18% of the previous year’s earned income, less any pension adjustment, up to the maximum annual contribution limit | No limit |
| Over-contribution penalty tax? | Yes, 1% per month on excess contributions | Yes, 1% per month on excess contributions if you exceed the $2,000 lifetime over-contribution amount | No |
| Carry-forward of unused contribution room? | Yes, indefinitely | Yes, until the year you turn 71 | Not applicable/no limit |
| Need earned income to contribute? | No | Yes | No |
| Ability to contribute after age 71? | Yes | No, must convert to an RRIF or annuity by the end of the year you turn 71, or close the plan | Yes |
Withdrawals
| TFSA | RRSP | Savings Account | |
|---|---|---|---|
| Withdraw savings for any reason? | Yes, although timing depends on your investments | Yes, but taxes are withheld at the time of withdrawal (unless participating in the Home Buyer’s Plan or Lifelong Learning Plan) | Yes, at any time |
| Withdrawals affect contribution room? | Yes, withdrawal amounts are added to the contribution room the following year | No, contributions are based on the previous year’s earned income | No |
| Withdrawals affect government benefits? | No | Yes | No |
There isn’t a one-size-fits-all answer in deciding how you want to save. It’s a personal decision you should make based on your goals, circumstances, tax rates and personal habits. Learning more about these types of accounts can set you on a better path to improving your overall financial knowledge and management skills.
If you need help with the decision-making process, speak to a dedicated RBC Healthcare Specialist, who can help you examine your options.
