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TFSA vs RRSP savings accounts: which is right for you?

Sandra Macgregor

This post is sponsored by EQ Bank. The views and opinions expressed in this blog, however, are my own.

We Canadians are very fortunate to have two powerful, government-approved ways to ease our tax burden and save for the future: the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). TFSA and RRSP are both sheltered registered accounts but one helps Canadians defer taxes until retirement (the RRSP) and another helps us avoid taxes on the capital gains we earn (the TFSA).

Despite both being awesome money-saving machines, TFSAs and RRSPs operate differently and it can be confusing to know when to rely on which one when you’re trying to grow your savings. To help you decide which savings vehicle works best for your needs, we’ve highlighted each one’s unique benefits and most appropriate uses.

When an RRSP savings account is a great option

If you’re a soon-to-be first-time home buyer

If you’re working towards saving for a first-time home purchase within the near future (say, the next two years or so), keeping your down payment in an RRSP savings account is a great option.

In an RRSP savings account, your down payment can earn interest safely and is guaranteed to never go down with the stock market (a risk you would have if you put your money in an RRSP investment account instead of a savings account), which gives you the security you need when saving for a home. While investing in the stock market is a great option for long-term financial goals, if you’re planning to buy your first home relatively soon, short-term market fluctuation can negatively impact the size of your down payment when you need it the most – like when you finally find your dream property.

Best of all, thanks to the Canadian Government’s Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP tax-free to put towards your first home purchase while still leveraging the tax-deferment benefits of an RRSP. Just remember that you have to pay back the withdrawn funds within a 15-year period.

You plan on getting a new degree

Similar to the Home Buyers’ Plan, under the Canadian Government’s Lifelong Learning Plan, you can withdraw up to $10,000 annually (up to a total of $20,000 over the period you are participating in) from your RRSP to put towards higher education for you, your spouse, or your common-law partner without worrying about paying withholding taxes. This program makes the RRSP savings account an ideal way to grow an education fund slowly and safely without worrying about the risks associated with investing your school fund in the stock market. You must repay the amounts you withdraw within ten years.

You’re nearing retirement

Another good time to put your money into an RRSP savings account is when you’re close to retirement and therefore have a lower investment horizon. At that time, you don’t want to take big risks with all of your savings, and it’s recommended you set aside a sizeable chunk of your retirement into a reliable high interest RRSP savings account that can deliver solid earnings at low risk.

When a TFSA savings account is a great option

You’re making a big purchase in the near future

Planning to save up for a car or that big screen TV you’ve had your eye on? If you have a particular, big-ticket purchase in mind and you know you’ll need easy access to the cash in the near future, a TFSA savings account is a solid choice.

A TFSA savings account allows you to grow your money securely and avoid any capital gains taxes. What makes the TFSA a real superstar when it comes to savings is that unlike an RRSP, a TFSA isn’t a tax deferred account but withdrawals are tax free so you can withdraw your money at any time for any reason with no tax penalties.

You’ve got plenty of TFSA contribution room

Every year since they were begun in 2009, the government sets a new yearly maximum amount Canadians are allowed to contribute each year for all TFSAs held. In 2021, the contribution room increased to $6,000 – plus any unused contribution room you have from previous years. If you’ve never contributed to a TFSA before, and you were eligible to contribute since they were introduced in 2009, you can contribute a total of up to $75,500.

If you’ve got contribution room to spare in your TFSA, try to put some money in a TFSA savings account, as low risk option where your money can grow tax-free. That way you can diversify your portfolio and still have room to put some funds in a TFSA investment account, which can be riskier but likely offers better growth in the long term.

You’re a conservative investor and don’t want to take on risk

Investing in the stock market and ETFs is a great way to grow your investments in the long-term. Markets, however, can be volatile (and seem to be becoming increasingly so) and there are no guarantees you’ll get a good return on your investments – especially in the short term. If you don’t want to dabble in equities and prefer to grow your money safely and reliably with no risk while still avoiding tax on your gains, a TFSA savings account may be the right choice.

When an unregistered savings account is a great option


Emergency fund

Of course, there are times when an unregistered savings account without the tax benefits can be a smart option. One of those times is when you’re trying to build an emergency fund to cover unforeseen expenses. With a regular, unregistered savings account, you can set money aside and take it out immediately as needed without any risk of burdensome tax consequences, penalties, or impacting contribution limits.

General savings

Savings don’t just have to be for an emergency. Rather than have money sitting in a chequing account earning no interest, you might as well have it sitting at-the-ready in a high-interest savings account, like EQ Bank’s Savings Plus Account. Opening a non-registered high-interest savings account lets you keep your TFSA and RRSP accounts reserved for higher-growth investments for the future. With a high interest savings account, your money can grow incrementally and help combat inflation, while still being easily accessible if you need to make a withdrawal.

The bottom line

Different people save for different reasons. And deciding which is better – an RRSP or TFSA savings account – will depend on your particular financial goals as each registered account type has its unique advantages.

Aside from being a safe and conservative way to grow your retirement savings and reduce your taxable income, an RRSP is an ideal choice for anyone looking to save for a first home or a new degree, as the Canadian Government’s Home Buyers’ Plan and Lifelong Learning Plan both allow for early penalty-free withdrawals.

Unlike an RRSP, TFSAs allow for tax-free withdrawals at any time and for any reason, making them ideal for achieving short-to-medium term financial goals (like a wedding or kitchen remodel) while offering a low-risk investment vehicle to grow your savings tax-free.

If you’re a savvy saver, there’s nothing stopping you from contributing to both an RRSP and TFSA at the same time and leveraging both to help you achieve different sets of financial goals.

1 Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

2 Equitable Bank is a member of CDIC. EQ Bank is a trade name of Equitable Bank. Deposits made under EQ Bank and Equitable Bank are aggregately eligible for CDIC protection up to $100,000, per insured category, per depositor.

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