Decisions, decisions: TFSA or RRSP?


Ever since the Tax Free Savings Account (TFSA) was introduced by the Canadian government in 2009, it’s been compared to the veteran Registered Retirement Savings Plan (RRSP), another government-sponsored “tax-advantaged” account, introduced in the late-1950s.

Both the TFSA and RRSP are great savings tools, no matter your income, and are in fact the two most popular when it comes to saving for your future.

Whether you’re looking to save for an emergency, a down payment for a home, retirement, or any milestone in between, here’s what you need to know about TFSAs and RRSPs—including which makes the most sense for which goals.

TFSA

A TFSA means what it says—whatever you contribute and the interest you earn within it is tax-free. That means more money and less tax-time paperwork for you. The benefits don’t end there. You can access any amount of your funds at any time, without penalty.

So if you contribute $10,000 to a TFSA, and earn $200 in interest on it, the $10,000 has already been taxed previously, and you don’t pay any taxes on the $200 gained. Also, any money you withdraw does not get taxed.

The TFSA is a solid option if you’re thinking a little less long-term, and you’re not in your peak income years. If you want to create a financial safety net or save for something that’s not too far off, but also want unrestricted access to your savings, the TFSA is your best bet.

What’s the catch? The government mandates how much you’re allowed to contribute each year. The maximum amount varies yearly. You can find out more about contribution room on the CRA website.

Your contribution room does roll over, however, so if you contribute less than your maximum, that unused room gets added to your maximum the following year. Also, if you happen to withdraw from your TFSA, the amount you take out is added to how much you’re allowed to contribute the next year.

RRSP

An RRSP is a type of tax-deferred account. Instead of your earnings being tax-free, like the TFSA, the money you contribute to an RRSP, and any you earn within it, is exempt from income taxes the year you contribute.

Let’s say you earned $75,000 this year, but put aside $10,000 into your RRSP, you would only have to pay income tax on $65,000.

The idea behind the RRSP is to withdraw the funds years later in retirement, when you’ll likely be in a lower tax bracket—which means more money in your pocket.

This is the best option if your current income is higher than $50,000, and you’re looking to build a solid nest-egg. An RRSP gives you tax breaks now, while allowing you to save for retirement later. Consider this your long-term plan, where you’ll place funds that you won’t need access to for many years to come.

What’s the catch? If you withdraw from an RRSP before you turn 71, you’ll be taxed at a higher rate than if you waited. You’ll also be charged a withholding tax and you’ll permanently lose that contribution room.

There are also contribution limits with the RRSP, but they’re based on your income. Find out more about contribution room and deduction limits here.

Quick comparison: TFSA v. RRSP

TFSA RRSP
Ideal use All-purpose Retirement
Best if your income is Less than $50,000 Over $50,000
Contribution limit (2019/2020) $6,000 18% of earned income
(up to $27,230)
Tax-deductible No Yes
Withdrawals are taxed No Yes
Interest earned Tax-free Tax-deferred
Maturity date None Age 71

Go get those tax advantages

The taxman is giving you some big breaks with the TFSA and RRSP. When it comes to choosing which is best for you, your decision rests on two factors:

  • Your financial goals
  • When you’ll need to access the money

Once you’ve decided, it’s time to get started—because it’s never too late, and the sooner you start, the more you’ll earn.

One last tip: both options work best when you contribute to them on a regular basis. At the end of the day, whether you choose the TFSA or the RRSP (or both!), know that you’ve taken a solid step toward a lifetime of smart money habits and financial security.

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