The deadline for contributing to an RRSP for the 2018 tax year is on 01 March, leaving many Canadians with an important decision – should they allocate money to an RRSP or their TFSA?
A Bank of Montreal (BMO) report indicated that over half of Canadians prefer TFSAs. However, the study also showed that 32% of Canadians don’t know the difference between the two investment vehicles.
According to Mathieu Lepine, head, term investments at BMO, the challenge for financial advisers is to educate their clients on the advantages and disadvantages of the two investment vehicles. "It's encouraging to see Canadians investing for longer term goals – buying a house or retirement – and putting more money into investments to get there," said Lepine.
"What will be important going forward for Canadian investors is seeking financial advice so that they don't succumb to any of the downsides of either the TFSA or RRSP. Getting hit with tax penalties or being penalized for over contributing can start to eat away at the amount invested."
The report also found that baby boomers are leading the charge on TFSAs. Since 2014, the gap between Canadians choosing a TFSA over an RRSP has risen to over 20%, with 69% of those age 55 and over preferring to contribute to a TFSA over an RRSP. On the other end of the scale, millennials are the least likely to have an RRSP account, with 56% claiming to not have one.
Lepine noted that baby boomers have been consistently good, long-term savers, which could point to why they're turning to TFSAs. For baby boomers that have built up their RRSPs, the TFSA can be used to enhance their lifestyle and dipped into for discretionary purchases like travel.
"It's a positive indicator to see Canadians flocking to TFSAs – the savings vehicle provides a good amount of flexibility. Leveraging both accounts simultaneously can provide even greater value over the long term. As millennials start earning more and turn their minds towards retirement, RRSPs will nicely supplement what is being built up in the TFSA.”
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