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The Differences Between RRSPs and TFSAs

For years, the RRSP was the best way to save for retirement. That is until the TFSA became available in 2009. If you could only make contributions to one account, which one would you choose?

Before getting into what the best option is, here’s a quick overview of the similarities and differences of RRSPs and TFSAs.

Similarities

RRSPTFSA
Tax-sheltered savingsYesYes
Numerous investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and GICsYesYes
Unused contribution room carries forwardYesYes
  • Both RRSPs and TFSAs allow you to grow your savings in a tax-sheltered account.
  • A TFSA isn’t a typical savings account where you can only hold cash. Like an RRSP, it can hold GICs, stocks, bonds, mutual funds, and ETFs.
  • If you weren’t able to contribute the maximum amount to your RRSP or TFSA this year, you can always contribute that amount next year.

Differences

RRSPTFSA
Earned income needed to make contributionsYesNo
Tax deduction for contributionsYesNo
Tax-free withdrawals at anytimeNoYes
Age limit for making contributionsYesNo
Lose contribution room if you withdraw fundsYesNo
  • You need to have earned income in order to make a contribution to an RRSP. If you’re 18 or older, you’re automatically given TFSA contribution room every year (currently $5,500) even if you weren’t working.
  • When you contribute to an RRSP, you can deduct the contribution from the income you report on your tax return. Contributions to a TFSA aren’t tax deductible.
  • If you make a withdrawal from your RRSP, you’ll need to pay income tax unless you use the money for the Home Buyers’ Plan or Lifelong Learning Plan. When you withdraw money from your TFSA, you don’t need to pay any income tax.
  • When you turn 71, you’re no longer allowed to contribute to an RRSP and must convert it to a registered retirement income fund (RRIF) or buy an annuity. You could also withdraw all your money but you’ll take a huge tax hit. On the other hand, you can make TFSA contributions forever and keep the account for as long as you want.
  • If you decide to make an RRSP withdrawal, you lose that contribution room forever. If you withdraw money from a TFSA, you can contribute that money back in future years.

Choosing between an RRSP or TFSA

What’s the best option? Unfortunately, there’s no clear-cut answer. It’ll depend on your own personal financial situation to determine what’s a better choice from a tax perspective.

If you had to pick between contributing to an RRSP or a TFSA, a TFSA is the better choice if you have a low income. Withdrawing money from an RRSP or RRIF in retirement could reduce your Guaranteed Income Supplement benefits. And if you belong to a defined benefit pension plan and expect to stay at the organization as long as you plan on working, saving in a TFSA could help you avoid a potential clawback of your Old Age Security benefits.

But an RRSP is probably your best bet if you expect to be in a lower tax bracket in retirement and you reinvest your tax refund. If you’re tempted to make an early withdrawal from your retirement fund for something frivolous, a TFSA may not be a good choice because it’s so easy to take out money and you won’t face any tax penalties.

Whatever you decide to do, make sure you save money for retirement in an RRSP or TFSA on a regular basis.

Flickr: KMR Photography

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