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Contribute to RRSPs or TFSA?

Should you make a lump sum contribution to RRSP or the new Tax Free Savings Account?

Q. For the past six years, my wife and I contributed very little to our RRSPs. In this time, we saved the down payment for the purchase of our own home. Should we make a lump sum contribution to our RRSP or the new Tax Free Savings Account?
— Paul

A. March 2, 2009, is the final date to make a Registered Retirement Savings Plan (RRSP) contribution that can be deducted for 2008. The new Tax Free Savings Account (TFSA) has a maximum $5,000 contribution per calendar year. The TFSA has no deadline.

The RRSPs and TFSAs have very similar features with some differences:

• Investments limitations are identical

• RRSP contributions can be deducted, not so with a TFSA

• TFSA holders can make withdrawals without being taxed. All RRSP withdrawals are taxed

• RRSP should be held for retirement, TFSA can shelter short-term funds.

– Reach Henry Choo Chong, CGA, at choochonghcga@yahoo.ca.

 
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