Savings & Investments

RRSP vs. TFSA – Which is the Better Choice?

Registered Retirement Savings Plans (RRSP’s) and Tax-Free Savings Accounts (TFSA’s) are both vehicles for investment which has a tax-free component within them.  Before deciding that one or the other (or both) are worthy of some funds, it’s important to know the similarities and differences between the two, and compare that to your own unique situation before making a decision.

Tax-Free vs. Tax Deferred

TFSA’s are tax-free, which means that as you contribute to your TFSA, you can contribute up to the maximum limit and not one cent over the maximum limit ($6500 fr 2019).  If you over contribute there are penalties, and if you take out money from your TFSA, you can put in more money at any time up to the TFSA ceiling.  If, and when you decide to withdraw funds, there are no tax implications for you to take note of.

Contributions to your RRSP, however, are tax-deferred, which means that not only do you pay tax on any funds that you withdraw (take out) from your retirement savings, but if you withdraw funds before you reach the age of 71-years-old, you do not, in most cases, have the opportunity to put finds back in to the account.  You lose that space.

The intention of the RRSP is that it provides an opportunity for Canadians to save for their retirement, but putting away money when then are presumably at a higher income level than when they withdraw the funds at age 71.

When putting funds in to a RRSP, the government uses those contributions and reduces your taxes owing / increases your refund so not only are you putting away money until you retire but also you get a tax reduction as a result.

If you plan on withdrawing some or all of your investment before retirement, then TFSA’s might be the better option for you.

What’s the Maximum Amount You Can Contribute to Your TFSA for 2018?

TFSAs were first introduced in 2009 and many if not most Canadian financial institutions now offer them. A TFSA allows any Canadian over the age of 18 to save or invest money in a tax-free account. Essentially the “tax free” part means that you don’t pay taxes on the money you make within your TFSA. That means things like interest payments, stock dividends or capital gains.

However, like everything good in life, there are limits.  With TFSAs there’s a maximum amount of money you can deposit each year. Currently, this annual maximum is $6,500. Luckily, your total contribution is cumulative, so you can roll over this contribution room year-to-year. So the amount you can save will go up each year, whether you deposit money or not.

Year TFSA Annual Limit TFSA Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500

2019        $6,000                                                 $63,500

Other RRSP Income Tax Deductions

On the off chance that you have maxed out your contributions to your RRSP, you can also make contributions to your spouse’s) RRSP, and those contributions are tax deductible on your tax return.  While the deduction does not translate to an income tax refund on its own, it can help to lower your tax payable. Contributions come off your gross income dollar for dollar, dropping your taxable income which is the amount you pay tax upon.

TSFA contributions yield no tax deduction on your annual tax return.

If you’re looking for the added benefit of a tax deduction, RRSP’s might be best for you.

Additional Options

RRSP’s have a few extra features which might appeal to you and help sway your decision as to which investment vehicle to use.   Funds contributed to RRSP’s can be withdrawn in two special situations without penalty – the Home Buyer’s Plan and the Lifelong Learning Plan. Both of these plans allow you to withdraw funds from your contributions and repay the amounts over time.  If you’re looking to purchase your first home, you can withdraw up $25,000 from your qualifying RRSP contributions without penalty and then repay the withdrawal back into your RRSP account over the next 15 years. Similarly, the Lifelong Learning Plan allows taxpayers to withdraw up to $10,000/year for two years to pursue full-time training or education for you or your spouse. The designated repayment period for an LLP is ten years.

TFSA’s do not have extra options.  It’s as simple as contributing and withdrawing within the limits.

If you’re unsure about which savings plan is best for you, think about why you’re saving.  Are you putting money into an RRSP in order to reduce your taxes owing and put away money for retirement, or are you saving money to purchase something like a cottage or a boat?  Maybe your intention is to go back to school, or purchase your  first home, or maybe you just don’t know if you’ll need the money and want the tax benefits.  In the above examples, the option of RRSP, TFSA or both should be considered, reviewed and weigh the pros and cons of every option.