RRSPs and TFSAs: What’s the Difference?

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are both great places to save. RRSPs have been around a lot longer and one of the main differences is RRSPs are for retirement savings and usually you can’t withdraw until you do retire, whereas a TFSA is for any kind of long-term savings.

Quick comparison

Main differences

Contributions:

  • Your RRSP account has a limit of how much you can contribute. You can contribute up to 18% of your earned income, up to a maximum of $26,500 per year, as of 2019.
  • Your TFSA account also has a limit – for 2019, it’s $6,000.

Taxes:

  • When you contribute to an RRSP, you don’t have to pay tax on the money you contribute. If you contribute with your after-tax dollars, you’ll get a refund when you file your taxes. The money in this account will grow tax-free, but when you withdraw it in your retirement, you have to pay tax on it.
  • When you contribute to your TFSA, you don’t get a deduction on your taxes. Your money grows tax-free inside your TFSA and you don’t pay additional tax when you withdraw.

(An easier way to remember this is a TFSA contribution is made with after-tax dollars so withdrawals are not taxed, whereas an RRSP contribution is made with pre-tax dollars, so withdrawals are taxed.)

Age limits:

  • In the year you turn 71, you can’t make any more contributions to your RRSP and you must close it. At that time, you have to use your savings to buy either an Registered Retirement Income Fund (RRIF) or an annuity.
  • With a TFSA, you don’t have to stop contributing or close it at a certain age.

Depending on how you look at it and what your needs are, an RRSP is a great way to save for retirement because once you contribute, you can’t withdraw without incurring penalties (with some exceptions such as the Home Buyers’ Plan, which lets you take out money for a down payment on your first home). A TFSA has no penalties when you withdraw, so it’s become a popular savings vehicle for big goals like a down payment on a home or building an emergency fund, although it’s still good for retirement savings if you have the discipline to not dip into it.


Source:

https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

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