While Canadians see the benefits of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), a study showed that many cannot distinguish the two, especially in terms of how they could help in coming up with a home-loan deposit.
According to the TD Bank study, more than half of Canadians consider TFSAs and RRSPs as crucial parts of their savings strategy. However, around one in four admit not knowing the difference between the two.
"Many Canadians have both short-and long-term goals, so a mix of both TFSAs and RRSPs is often a good solution. However, it's important to understand the key differences between the two so you can feel confident about having the right plan in place to help meet your financial needs and goals," said Jenny Diplock, associate vice president for personal savings and investing at TD Bank.
Also read: What savings options are available for Canadians?
The TFSA program allows people aged 18 and above to have a valid social insurance number to set aside money. While contributions to a TFSA are not deductible for income tax purposes, the income earned from this type of savings account is tax-free.
An RRSP, on the other hand, is a savings plan that Canadians and their spouses can use to save for their retirement. RRSP contributions can be used to reduce income taxes but any withdrawals from the fund will incur a duty.
Around 41% of Canadians believe TFSA is the best choice when saving for a deposit for a first-home purchase, while 25% claim RRSP is the better option. Despite the associated tax implications, 15% of experienced homeowners said an RRSP is the right option to help save for a down payment on a new home.
Overall, 35% of Canadians do not understand the tax implications of a TFSA and an RRSP. In fact, one in four said they would choose a TFSA to help reduce their taxable income, reaffirming the lack of understanding of how TFSAs work.
"The survey data show that many Canadians do not fully understand key characteristics of a TFSA and an RRSP, such as the tax benefits and withdrawal considerations," Diplock said. "An advisor can help educate on these financial products and work with you to assess your personal situation and find the right solutions for your specific goals and financial needs."
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