RRSP vs TFSA: what's the difference?

Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are registered accounts with distinct features and benefits. While their components are different, both are great options to help you achieve your financial goals.

The best way to leverage these two options depends on your particular objectives and priorities. To help you determine how these products may work for you, consider these points:

TFSA

A TFSA is a general-purpose savings vehicle that allows you to earn tax-free investment income.

  • Your annual contribution limit is $6,000
  • Your investments within the account can grow and earn income tax-free
  • Your unused contribution room can be carried forward indefinitely
  • Your withdrawals are not taxable. Plus, any funds you take out are added back to your contribution room the following year
  • You must be at least 18 years old and have a valid Social Insurance Number to open one
  • Your account can be maintained for as long as you live

RRSP

A Registered Retirement Savings Plan is designed to help you save for retirement.

  • Contributions are tax deductible up to the deduction limit found on your most recent Notice of Assessment from CRA
  • Investments within the account can grow and earn income on a tax-deferred basis, as long as the funds remain in the plan
  • Tax is payable only when you withdraw funds from your plan
  • Eligibility is based on income, not age. There is no minimum contribution age, but you must have reported income to the CRA
  • Accounts must be closed by the end of the year in which you turn 71

 

What are you investing for?

How a TFSA or an RRSP might be part of your solution:

Investment Purpose RRSP TFSA
Real estate purchase

If you are a first-time homebuyer, you can use the Home Buyers’ Plan (HBP) to borrow up to $25,000 individually ($50,000 per couple) from your RRSP. You must repay the borrowed amount within 15 years.

 

Savings are easily accessible. Withdrawals from your TFSA are tax-free and can be re-contributed later.
Education

You can use the Lifelong Learning Plan (LLP) to borrow up to $10,000 per year (up to a maximum $20,000) from your RRSP to support your or your spouse's (but not your children's) qualifying full-time education program. You must repay the borrowed amount within 10 years.

 

Savings can provide additional education funding for you or anyone else you choose to support. You can gift withdrawals to your children, with no tax consequences, to supplement savings from a Registered Education Savings Plan.
Retirement planning

RRSPs are the most popular retirement savings vehicle due to their preferential tax treatment and related account features.

 

Typically used to complement your RRSP.
Big ticket item or vacation

Since withdrawals are part of your taxable income, using RRSP assets for big-ticket purchases is not ideal.

 

Ideal for saving for purchase goals, since withdrawals are tax-free.

 

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