The arrival the Tax-Free Savings Account (TFSA) in January 2009 has many investors wondering where they will direct their savings this RSP season.

“While the RRSP has long been the go-to retirement planning solution for most Canadians, the arrival of the TFSA presented investors with a new, highly flexible savings vehicle with a seemingly endless number of practical applications,” says Jamie Golombek, managing director of tax and estate Planning for CIBC.

“And for those who did not open a TFSA last year, they now have the opportunity to contribute up to $10,000 in 2010,” he adds.

Advisors can help investors decide on a course of action. Golombek offers an overview of both plans:

The case for TFSAs

“While the TFSA is an effective investment vehicle for virtually any purpose, its higher liquidity and lower annual contribution limit may make it more useful to some as a short-term savings option for a major purchase or an emergency fund as you can withdraw anytime without tax repercussions,” says Golombek.

The case for RRSPs

“The most appealing advantages of the RRSP are that contributions go towards reducing your taxable income while you earn tax-sheltered growth on assets and earnings held within the plan,” says Golombek.

“RRSPs can also be used for other purposes beyond retirement, as some funds can be accessed tax-free if withdrawn towards the purchase of a first home or to pay for post-secondary education.”

“Investors closer to retirement who expect to retire to a reduced income and taxation level should make their RRSP a priority,” says Golombek. “Any money leftover after making your maximum annual RRSP contribution can always be put towards a TFSA.”

Advisors and investors also need to consider the importance of liquidity when weighing their options.

“You need to examine your own financial needs and goals and know how much liquidity you require as the tax consequences of early RRSP withdrawals can result in the temporary loss of income-tested benefits and permanently reduce your contribution room,” Golombek concludes.

IE