TFSA versus RRSP

Even without the long acronyms, these two money saving products have a lot on common. Both investment vehicles offer tax incentives for savers and encourage you to plan for the future.

Here’s how these 2 options measure up against each other.

TFSA RRSP
Tax deductible? TFSA contributions are not tax-deductible.  So your contribution will not affect your taxable income in the year that you make a deposit. The contribution and investment earnings are exempt from taxation upon withdrawal. Money that you put towards your RRSP is tax deductible. It therefore reduces your taxable income in the year that you contribute.When you withdraw from your RRSP this money is added to your income and taxed at current rates.
Contribution limit You can invest up to $10,000 per calendar year in a TFSA. However, this may change as the new Federal Liberal government implements its new budget strategy. It’s a bit more complicated trying to figure out the maximum contribution limit for an RRSP without tax implications – It is dependent upon your previous year’s income and pension adjustments.  For more information, visit the Canada Revenue Agency.
Access You can access your money at any time. There are different types of RRSPs.  Locked-in RRSPs will not allow you to access your money until you hit a certain retirement age.  If your RRSP is not locked-in you can withdraw the funds at any time.Money that you withdraw from an RRSP will then be taxed in that year.
Taxes on withdrawal All of the money that you earn from your investment (i.e. interest, capital gains, etc) is tax free.
This means that your money can grow in the fund tax free and when you want to withdraw it, that income will also be tax free.
RRSPs are tax deductible and your portfolio grows tax sheltered.This means that you get the tax benefit when you put your money in.  When it comes time to withdrawing the funds, you will be taxed then.
Investment vehicles accepted A number of different investment vehicles qualify, including high interest savings accounts, GICs, bonds, mutual funds and stocks It can contain a variety of investments such as: RRSP savings deposits, treasury bills, GICs, mutual funds, bonds, and equities.
Beneficial for People who expect to be in a high tax bracket during retirement years. People who expect to be in a lower tax bracket during retirement years.
Minimum age limit You need to be 18 years of age and a Canadian resident to qualify No age restriction necessarily, but you do need to have generated RRSP contribution room by claiming earned income – which can be done by filing a tax return.
Maximum age limit There is no age limit. You are not eligible to contribute after the age of 71.
Benefits The money in your TFSA can be put towards whatever you’d like – there are no restrictions as to how or when you can use the money.
Also, unused contribution can be carried forward and accumulates in future years.
The tax benefits are immediate.  Also, come retirement age, you’ll be glad you put some extra money away

KEY TAKEAWAY

The main difference between an RRSP and TFSA is the timing of taxes:

  • An RRSP lets you defer taxes – an advantage if your marginal tax rate is lower in retirement.
  • With a TFSA, you’ve already paid tax on the money you contribute – an advantage if your marginal tax rate is higher when you withdraw the money.

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