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The Paris Independent
January 13, 2024
F I N A N C I A L M AT T E R S
RRSP vs. TFSA: How are they different? The similarities and differences between the RRSP vs. TFSA and how you can decide which is the best fit for you.
Common Cents with Jacob Gaudet Canadians know a good thing when they see it. Governmentregistered savings plans, such as the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) offer excellent tax benefits for Canadian residents. It’s perhaps surprising, then, that there is still some confusion about what each of these plans are for. In fact, over a quarter of Canadians don’t know the difference between a TFSA and an RRSP.3 While there are certainly some similarities between the two plans, it is the differences that are crucial in understanding which plan is the right one for you.
Investments grow without incurring any immediate tax, however, once you withdraw from your RRSP, you must pay tax on that amount. Therefore, it’s taxdeferred: you get a tax deduction when you contribute and the investments grow without tax, but you pay tax on the eventual withdrawals. Here are some of the RRSP’s key features: *Primarily suited accumulation
to
retirement
*Early RRSP withdrawals are discouraged since they will lead to tax
*You can contribute up to 18% of your previous year’s earned income (to a The pros and cons of RRSPs maximum dollar limit of $31,560 for The RRSP is a tax-deferred retirement plan: what this means 2024) is that, when you make a *If you don’t maximize your RRSP contribution, that amount contributions, the room is carried forward reduces your income for tax purposes. So, for example, if you *You can make contributions to a spousal earn $70,000 and contribute RRSP and get a tax deduction $10,000, you will only pay income tax on $60,000. *If you withdraw any amounts, you don’t Contributors to RRSPs typically get back that RRSP contribution room receive a significant tax refund, which they can then re-invest in Your RRSP matures in the year in which you turn 71; you can’t contribute after their RRSP or TFSA. that unless you have a younger spouse
and are making spousal RRSP contributions Your RRSP matures in the year in which you turn 71; you can’t contribute after that unless you have a younger spouse and are making spousal RRSP contributions The benefits of TFSAs Are contributions to a TFSA tax deductible? No, there is not the same immediate tax break with a TFSA that you get with an RRSP (that’s a key advantage of an RRSP vs. TFSA). However, even though the TFSA hasn’t been around anywhere near as long as the RRSP (it was only introduced in 2009), it’s already become a firm favourite with Canadian investors. With these advantages, it’s easy to see why: *Anyone over the age of 18 can contribute to one (income level is not an issue) *All growth and income within a TFSA are tax-free (including interest, dividends and capital gains) *All TFSA withdrawals are tax-free *The current annual contribution limit is $7,000
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