Tax-free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) both offer tax advantages to help you reach your savings goals. If you can afford it, a good strategy is to contribute as much as you can to both. But if you need to choose one over the other, make sure you understand how they differ. And then make your choice based on your own financial and tax situation.
On this page you’ll find
A quick comparison of TFSAs and RRSPs
| RRSP | TFSA | |
| Need earned income to contribute | ✓ | ✗ |
| Tax-deductible contributions | ✓ | ✗ |
| Tax-free withdrawals | ✗ | ✓ |
| Age limit for making contributions | ✓ | ✗ |
| Can contribute to your spouse’s account | ✓ | ✗ |
| Hold investments or savings deposits or both | ✓ | ✓ |
| Can carry forward unused contribution room | ✓ | ✓ |
Top 6 differences between TFSAs and RRSPs
1. You need earned income to contribute to an RRSP but not to a TFSA.
All Canadians have the same TFSA contribution limits each year. Your RRSP contribution limit is determined by your income.
2. An RRSP is intended for retirement savings. A TFSA can be for any type of savings goal.
There are two exceptions that allow you to borrow from your RRSP before retirement – buying your first home or paying for education.
3. RRSP contributions are tax deductible. TFSA contributions are not.
With an RRSP, you deduct your contribution from the income you report on your tax return. With a TFSA, you can’t deduct your contribution on your tax return.
4. There are different tax implications for withdrawals from your TFSA and RRSP.
You pay tax on your RRSP withdrawals because you made the contributions with pre-tax dollars. TFSA withdrawals are tax free because you made the contributions with after-tax dollars.
Depending on your situation, if you are over 65 but younger than 71, you could contribute your RRSP withdrawals to your TFSA. You could also convert them to a RRIF. Speak to your financial advisor to see what approach is best for you.
5. There are different age limits for contributing to your TFSA and RRSP.
You need to be 18 to open a TFSA, but you can open an RRSP at any age as long as you are earning income. The last day you can make contributions to your RRSP is December 31 of the year you turn 71, after which it must be closed. At that time, you can either convert your RRSP to a RRIF or buy an annuity. With a TFSA, you don’t have to stop contributing or close it at a certain age.
6. Your spouse or your children can be your beneficiary for both TFSAs and RRSPs.
With an RRSP, taxes are due on any money left in the account. If your children inherit the money, they will receive whatever is left after taxes are paid.
With a TFSA, taxes are due on any increase in the value of the TFSA since the date of death in the year your spouse or children receive it. If the amount they receive is not greater than the value of the TFSA at death, no taxes are paid.
CAN YOU SAVE MORE WITH AN RRSP OR TFSA?
It depends on your individual circumstances, tax situation and when you plan to take money out.
2 similarities between TFSAs and RRSPs
- You can hold investments and savings in TFSAs and RRSPs.
- For TFSAs and RRSPs, your contribution room carries forward to the next year if you don’t use it all.
KEY POINT
The main difference between an RRSP and a TFSA is the timing of taxes:
- An RRSP lets you defer taxes — an advantage if your marginal tax rate is lower in retirement.
- A TFSA lets you withdraw money tax-free because you’ve already paid tax on the money you contribute — an advantage if your marginal tax rate is higher when you withdraw the money.
If you expect to earn a higher income after you retire, then the TFSA may be the better option for retirement savings. Speak to your financial advisor about the right approach for you.
