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BMO Bank of Montreal

January 19, 2012 09:00 ET

REPEAT: TFSA vs. RRSP: BMO Study Finds 40 Per Cent of Canadians Don't Know the Difference

- More than a third of Canadians don't know the difference between a TFSA and an RRSP

- 44 per cent of Canadians have a TFSA; more than 60 per cent have an RRSP

- Average annual TFSA contribution is $3,700, average RRSP contribution in 2010 was $4,700

- BMO offers tips on how both vehicles can work together

TORONTO, ONTARIO--(Marketwire - Jan. 19, 2012) - The arrival of RRSP season leads many Canadians to think about what investment vehicle is right for them: a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).

A BMO study, conducted by Leger Marketing, found:

  • More than two-thirds (69 per cent) of Canadians are knowledgeable about RRSPs.
  • Sixty-four per cent are knowledgeable about TFSAs.
  • However, more than a third (40 per cent) of Canadians remain unclear on the differences between the two.

An RRSP is a tax-deferred savings vehicle that allows Canadians to help fund their retirement. Contributions are tax deductible, which means the individual's taxable income is reduced by the amount contributed in a given tax year. A TFSA is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to meet lifetime savings needs more easily.

"While your present financial situation and life stage will impact how you contribute and the benefit derived from making a contribution, both the TFSA and RRSP are strong and flexible savings vehicles that together can help you reach short-term and long-term financial savings goals," said Tina Di Vito, Head, BMO Retirement Institute and author of 52 Ways to Wreck Your Retirement… and How to Rescue It.

Ms. Di Vito added that Canadians should be aware of their financial goals and how long they expect it will take to achieve them. RRSPs are an excellent tool to save for the long term; meanwhile, TFSAs can help Canadians reach some of their shorter-term investment goals faster because they won't be paying any income taxes on the investment earnings. However, leveraging both accounts simultaneously can provide even greater value over the long term.

TFSA and RRSP Basics:

TFSA RRSP
- With a TFSA, you do not need to have any earned income to accumulate the $5,000 per year contribution room. - With an RRSP, you must have earned income in order to accumulate contribution room.
- Withdrawals from a TFSA are tax-free. Any amount withdrawn is then added to your contribution room in the following year, so that you can later recontribute the amount that you withdrew. - Withdrawals from an RRSP are taxed in the year of withdrawal (with the exception of the Home Buyer's Plan (HBP) and Lifelong Learning Plan (LLP) which are not taxed provided they are repaid on schedule). Any amount withdrawn cannot be added to your contribution room in the following year.
- Contributions to a TFSA are not tax-deductible on your income tax return. - Contributions to your RRSP are tax-deductible on your income tax return.
- Investments held in a TFSA include cash, stocks, ETFs, mutual funds, securities, government and corporate bonds, and term deposits. - Investments held in an RRSP include cash, stocks, ETFs, mutual funds, securities, government and corporate bonds, and term deposits.
- There is no requirement to convert the TFSA to an income payment option (e.g. a RRIF or an annuity) at any age. - An RRSP must be fully withdrawn or be transferred to a RRIF or annuity by the end of the year you turn 71.

BMO offers several helpful tools and resources to help Canadians make sense of their investments and minimize the taxes they pay. BMO recently launched BMO SmartSteps for Investing, a program designed to help Canadians make sense of savings and investing and help them keep more of their money, stay on track with their investments and grow their money for the future. Please visit www.bmo.com/smartinvesting.

TFSA & Financial Literacy Survey Data:

The survey was completed on-line from October 17th to October 20th, 2011, with a sample of 1508 Canadians, 18 years of age or older. A probability sample of the same size would yield a margin of error of 2.5 per cent, 19 times out of 20.

RRSP Survey Data:

The survey was completed on-line from November 21st, 2011 to November 24th, 2011 using Leger Marketing's online panel, LegerWeb, with a sample of 1520 Canadians. A probability sample of the same size would yield a margin of error of 2.5% 19 times out of 20.

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