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.
|Description||TFSA: Savings vehicle that allows a person to earn tax-free interest||RRSP: Savings vehicle that defers taxes on income until the money is withdrawn|
|Primary purpose||TFSA: Save money for any reason||RRSP: Save money for retirement|
|Contribution limit||TFSA: Approximately $5500 per person per year (adjusted for inflation, see Contribution Limits table on this page)||RRSP: Determined by your RRSP deduction limit each year|
|Contribution deadlines||TFSA: 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||RRSP: 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||TFSA: Unused contribution room carries forward||RRSP: Unused contribution room carries forward|
|Penalties for exceeding contribution limits||TFSA: Yes - 1% per month on the excess contribution||RRSP: Yes - 1% per month on the excess contribution if the excess is over $2000|
|Implications of withdrawals||TFSA: If you withdraw funds, that amount will be added back into your contribution limit in the next year||RRSP: Your contribution limit is not reset|
|Eligible for tax deduction||TFSA: No||RRSP: Yes|
|Age minimum to open an account or plan||TFSA: Anyone over the age of 18 with a valid Canadian social insurance number||RRSP: 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||TFSA: None||RRSP: By the end of the year in which you turn 71|
|Eligible investments||TFSA: Mutual funds*, GICs, savings accounts, stocks, bonds, etc.||RRSP: Mutual funds*, GICs, savings accounts, stocks, bonds, etc.|
|Spousal contributions||TFSA: 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)||RRSP: A person can directly contribute to an RRSP plan in their spouse or common-law partner’s name|
|Affect on government retirement benefits||TFSA: Not considered income so no affect on government benefits||RRSP: 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.