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RRSPs and TFSAs

Note: the information in this article is provided for educational purposes. For information or clarification about your specific tax situation, refer to Canadian legislation or contact the Canada Revenue Agency.


Many people have questions about whether they should contribute to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). The answer depends on many factors. How old are you? What is your income? Will you need to access the money before retire? It’s a good idea to talk to your financial advisor about your goals to determine how to best invest your money.

Here is a general comparison of the two plans.

TFSA RRSP
Description Savings vehicle that allows a person to earn tax-free income Savings vehicle that defers taxes on income until the money is withdrawn 
Primary purpose Save money for any reason Save money for retirement
Contribution limit  $5500 per person per year (for 2013) Determined by your RRSP deduction limit each year
Contribution deadlines Since the income earned is not taxed and it does not affect your tax return, there are no deadlines for contributions. Contribution limits are based on a calendar year Generally deductions can be made on contributions that are made during the taxation year or during the first 60 days of the following year
Unused contribution amounts Unused contribution room carries forward Unused contribution room carries forward
Penalties for exceeding contribution limits Yes - 1% per month on the excess contribution Yes - 1% per month on the excess contribution if the excess is over $2000
Implications of withdrawals If you withdraw funds, that amount will be added back into your contribution limit in the next year Your contribution limit is not reset
Eligible for tax deduction No Yes
Age minimum to open an account or plan Anyone over the age of 18 with a valid Canadian social insurance number Does not depend on age but rather when you first report earned income to create RRSP deduction room
Age maximum to close an account or plan None By the end of the year in which you turn 71
Eligible investments Mutual funds*, GICs, savings accounts, stocks, bonds, etc. Mutual funds*, GICs, savings accounts, stocks, bonds, etc.
Spousal contributions The account holder is the only person who can contribute directly to their TFSA (but the spouse/partner could give them the money to do so) A person can directly contribute to an RRSP plan in their spouse or common-law partner’s name
Affect on government retirement benefits Not considered income so no affect on government benefits If income is too high, government funds may be clawed back

Source:
Canada Revenue Agency

*Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.

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