TFSA vs RRSP

In Canada, there are two main tax-sheltered savings vehicles – the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). 

Both shelter your investment gains from taxation and come with their own sets of pros and cons. 

TFSA

One of Canada’s most popular savings accounts is the Tax-Free Savings Account. It’s a tax-sheltered savings account, which means you can take whatever you gain on your investments out of the account tax free. TFSAs are relatively new to Canadians and are only available to Canadian residents with a valid social insurance number (SIN) after they turn 18. 

How much can you contribute?

TFSAs have a yearly contribution limit, which means you can only contribute a set amount of money into a TFSA each year. That amount is generally indexed annually to inflation, and rounded to the nearest $500 (except in 2015 when it was bumped to $10,000). You can find the current amount and historical limits on the CRA website or down below. 

If you exceed the contribution limit, you’ll get taxed one per cent per month on the excess amount. That’s why before you contribute to your account, it’s best to do a quick calculation to see how much room you have. 

Here are the TFSA contribution limits since their inception: 

There are many online tools and resources to help you determine the amount of money you can contribute to your TFSA, including this one from MoneySense. 

TFSAs also have a rolling contribution amount, so if you don’t contribute in a given year, any unused contribution room is carried forward to future years.

For example:

• If you turned 18 in 2009, you would have $95,000 in TFSA contribution room by 2024.
• If you turned 18 on June 22, 2024, you would have $7,000 to contribute into your TFSA for that year, but you can only contribute on or after your 18^th birthday, so June 22, 2024.
• If you turned 18 on April 27, 2020 you can contribute a maximum of $18,000 in 2022. 

What can you hold in your TFSA?

The Income Tax Act (ITA) states that you may only hold qualified investments in your TFSA, including mutual funds, government bonds, publicly listed stocks in Canada and the U.S., certain corporate bonds, ETFs, GICs, cash and even certain options. 

Withdrawals

You can withdraw money from your TFSA tax-free at any point in time; however, withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year or give you additional contribution room. For instance, if you’ve already contributed $6,000 but take out $2,000, you can’t re-contribute the $2,000 in the same calendar year you withdrew it. But, you can re-contribute that amount during the next calendar year. 

How do you get one?

You can open an account through a variety of different platforms. Most Canadian banks offer them so you can walk into your bank branch and ask to open a TFSA. You could even open one right on most bank’s mobile apps as well. 

If you don’t want to go with your bank and prefer to keep your investments separate, companies like WealthSimple and Questrade are other options that offer access from your phone or laptop. 

RRSP

The Registered Retirement Savings Plan (RRSP) is another account that working Canadians can use to shelter some of their income and have it grow tax-free until the RRSP matures – currently at the end of the year in which the accountholder turns 71. You can open an RRSP at any age before you turn 71; however, you must receive employment or business income to earn contribution room. It’s prudent to save at least some of your contribution room until you are in a higher tax bracket, as contributions to RRSPs are tax deductible, so they can be used to reduce your taxes owing or possibly net you a refund. You can hold stocks, bonds, mutual funds, GICs, ETFs and many of the same assets you’d hold in a TFSA within an RRSP.

How much can you contribute?

In 2024, your contribution limit would equal the sum of any unused contribution room from previous years, plus the lessor of up to 18% of your 2023 earned income or the maximum amount for the current year, as specified by the CRA, which is $31,560. 

Below are the limits set out by the CRA for the last 11 years. 

Withdrawals

You can withdraw money from your RRSP at any time; however, you will be taxed on it, and the amount you withdraw will have to be added to your income when filing your taxes for that year. 

Withholding tax is charged on what you withdraw from your RRSP and acts as a form of prepaid tax. The current rate of RRSP withholding tax is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000. Note that this deduction occurs at source, meaning you only get a payout equal to the net amount. 

In addition to the withholding tax, the money you take out counts as income, so you could owe more tax on that amount, depending on your income tax bracket. That’s why people should wait until they convert their RRSP to a Registered Retirement Investment Fund, or RRIF, before dipping into these savings. Once no longer receiving employment income, most people will find themselves in a lower tax bracket. This means any amount taken out then will presumably be taxed at a lower rate than it would be for a working individual. 

For example:

Let’s say you make $50,000 a year (your federal tax bracket as of 2022 would be 15%) and you want to take $5,000 out of your RRSP. If you withdraw $5,000, you’ll be assessed a withholding tax so you’ll actually receive just $4,500 (5000 – (5,000 * 0.1)). 

That $4,500 also gets added as income which puts you at $54,500 for earned income for 2022, which means you’re now in a higher tax bracket of 20.5%. You’ll now have to pay $11,172.5 in taxes ($54,500 – ($54,500 * 0.205)), whereas, if you didn’t withdraw that money you’d be in the lower tax bracket of 15% and only have to pay taxes of $7,500. 

How do you get one? 

You go about getting an RRSP the same way you go about getting a TFSA.

So Which Should You Choose?

The main differences between a TFSA and an RRSP is the tax you pay when you withdraw your money and the amount you can contribute to it every year. Generally, TFSAs are viewed as less restrictive because it’s easier to access funds there versus those in an RRSP. 

Purpose of the account: RRSPs are typically meant for saving for retirement while TFSAs are usually used for personal savings. 

Age: You can open a TFSA the day you turn 18, but you can get an RRSP at any age before your turn 71, as long as you have a SIN, have income and have filed for income tax. 

Contributions: You can contribute more money into an RRSP compared to the TFSA. For a TFSA, it’s usually around $6,000 a year, whereas an RRSP is either 18% of your earned income or whatever amount is specified by the CRA, so generally higher than the TFSA limits. 

Taxes: With TFSAs, you can withdraw your money at any time and with RRSPs, you can do the same, but you will be charged withholding tax and then possibly taxed further as this will be added to your income for that year. Note that if your income is low enough you might actually get back some of the withholding tax, but consult a tax professional to assist with this determination before counting on a refund. 

Anything within both TFSAs and RRSPs grows tax free while inside the savings vehicle. The money that you contribute to an RRSP is tax deductible but TFSA deposits are not. Still, all of the income and growth are completely tax free when you take it out. 

Unused room: Can be carried forward indefinitely for both accounts.