A Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) are both investment accounts created by the Canadian government to help Canadians save and invest their money.
What are the differences between a TFSA and an RRSP?
|Tax-incentive||You've likely already paid income tax on any contributions you make to a TFSA. Because of this, gains can be made and withdrawn tax-free.||Funds you put into an RRSP are deductible from your income for tax purposes, and gains are not taxed when made within the account.|
|Ownership||Each person must open their own TFSA. You cannot have a joint TFSA as contribution room is calculated on an individual basis.||You can open either a personal RRSP or a Spousal RRSP (with a spouse or partner).|
|Contribution limit||TFSAs have an annual contribution limit set by the government. This limit is the same for all Canadians 18 and older.||RRSPs have an annual contribution limit set by the government. This limit is 18% of your annual income from the previous year, up to a maximum of $29,210 (for 2022). You may have less contribution room if you contribute to a company pension plan.|
There are no restrictions when it comes to withdrawing from a TFSA. Funds can be withdrawn for any kind of purchase. If you withdraw from a TFSA, you will get this amount back as contribution room on January 1st of the next calendar year.
|Withdrawals from this account are treated as taxable income and there are tax implications when you withdraw funds from an RRSP, unless you make a withdrawal under a Home Buyers Plan or a Lifelong Learning Plan.|
|Expiry||TFSAs never expire and they are never converted into a different kind of account.||Once the account holder reaches the age of 71, they must convert their RRSP into a Registered Retirement Income Fund (RRIF).|
When should you put money into a TFSA?
Your annual income is less than $50,000
A TFSA isn’t conditionally linked to your income like an RRSP. Everybody gets essentially the same contribution room that keeps growing each year, starting from the moment they’re 18. So you’re not limited by that 18% rule that governs RRSPs.
If your annual income is less than $50,000, you’ll be in a low tax bracket. This means that the tax deduction of an RRSP won’t be especially beneficial. If you were to enter a higher tax bracket later in life, using an RRSP once you are in that higher tax bracket and using a TFSA in the meantime would provide better tax deductions.
You do not want any restrictions when it comes to accessing your funds
A TFSA has no withdrawal rules and no tax consequences for making a withdrawal. If you are saving for a particular goal other than retirement, this will ensure that you can withdraw the funds from your account for that goal without any tax implications.
You don’t want a timeline attached to your account
Unlike an RRSP, there is no expiration date with a TFSA. There are also never any withdrawal minimums that you must meet after a certain age. With an RRSP, when you turn 71, it automatically converts into what’s known as a Retirement Income Fund (RIF). You’re then legally obligated to withdraw a minimum amount each year from that RIF, starting from the year you turn 72.
When should you put money into an RRSP?
Your employer offers a group RRSP plan with matching
Some employers offer a group RRSP matching plan meaning that they will match up to a certain amount of whatever you put into your RRSP. If your employer does offer this, you should make sure to put the maximum amount that your employer will match into an RRSP before turning to a TFSA. This is regardless of your annual income.
Your annual income is more than $50,000 (but not always!)
If you are making over $50,000, then an RRSP might be the account for you due to your tax bracket. When you put money into an RRSP, you are able to deduct it from your total income for the year for income tax purposes. Ideally, you’ll want to be putting money into an RRSP when you have a high-income level, and then withdrawing it when you’re at a lower income level to really maximize those tax benefits.
You have available income for long-term savings goals
The higher your income, the more likely it’ll be that you have a significant chunk of money you can contribute to your RRSP (while still keeping contribution room and deduction room limits in mind), which you’ll then get back as a tax refund.
You want to invest heavily in foreign stocks, specifically US stocks
The Internal Revenue Service (IRS) in the United States recognizes an RRSP as a retirement account, so you won't have to pay non-resident withholding taxes on any income that flows from U.S. sources. This is not true for a TFSA, where you’d have to pay non-resident withholding taxes on any income that flows from U.S. source
You and your spouse/partner have significantly different income levels
In this case, you can benefit from opening a spousal RRSP with your spouse or partner. A spousal RRSP can help reduce your income taxes in retirement.
Still unsure which account to open?
You can use the flow chart below to help you decide the best tax-sheltered account to open for your circumstances.