RRSP vs. TFSA: How are they different?

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

The pros and cons of RRSPs

The RRSP is a tax-deferred retirement plan: what this means is that, when you make a contribution, that amount reduces your income for tax purposes. So, for example, if you earn $70,000 and contribute $10,000, you will only pay income tax on $60,000 Contributors to RRSPs typically receive a significant tax refund, which they can then re-invest in their RRSP or TFSA.

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 to retirement accumulation

*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 maximum dollar limit of $31,560 for 2024)

*If you don’t maximize your RRSP contributions, the room is carried forward

*You can make contributions to a spousal RRSP and get a tax deduction

*If you withdraw any amounts, you don’t get back that RRSP contribution room

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 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 similarities and differences between the RRSP vs. TFSA and how you can decide which is the best fit for you.

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 Continued on page