Tax-Free Savings Accounts vs. Registered Retirement Savings Plans

Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are savings vehicles that offer tax advantages for Canadians. They have many similarities, as well as a few differences, but the differences are what we want to focus on here.

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RRSPs are considered a retirement savings vehicle while TFSAs are considered to be a straight savings vehicle. They both allow you to accumulate any gains tax free, however the key difference between the two is the timing of when you pay taxes. With TFSAs, you’ve already paid taxes on the money you contribute, so you don’t pay any taxes on withdrawals. With RRSPs, you get a tax deduction when you make contributions, so you do pay taxes on withdrawals.

This means that the appeal of a TFSA or a RRSP might depend on what tax bracket you’re in when you plan to make withdrawals – if you’re in a high tax bracket, a TFSA might make more sense as you’ve already paid taxes on your contributions, whereas you haven’t with a RRSP. Ideally, investors will have enough funds to contribute to both but if not, the choice will depend on their individual financial situation. The general rule is to maximize your RRSP contribution before adding to your TFSA, however everyone’s circumstances are different. If you require assistance in making this decision contact us and we would be glad to help.

There are some additional differences in regard to contributions and withdrawals.

RRSP contributions are based on employment earnings and must be made before the age of 71, which is when RRSPs need to be closed or converted. TFSA contributions are free from these restrictions.

Contribution limits vary for RRSPs, depending on your earnings, while TFSAs have a set annual contribution limit that is indexed to inflation.

When it comes to withdrawals, TFSA withdrawals can be made at any time, while RRSP withdrawals have more restrictions. If you make a withdrawal from a TFSA, you regain an equivalent amount in contribution room. With a RRSP, unless the withdrawal is for use in buying or building a house, or for educational purposes, you cannot regain that contribution room. And housing and education withdrawals must be repaid to the RRSP within a 10-15 year timeframe.

Finally, both vehicles allow you to name your spouse as a beneficiary. The difference is that with a RRSP, after your spouse dies, taxes must be paid on the remaining balance. With a TFSA, only the increase in value since the date of the death is taxed in the year it is received by the spouse’s beneficiary.

There are additional differences between RRSPs and TFSAs that have not been discussed here but we’ve covered the main differences. If you have any questions as to which vehicle is right for you, please contact us and one of our advisors would be happy to help.