TFSA vs. RRSP: What is the difference?

Can you save for the future and get a tax break? TFSAs and RRSPs, both, offer tax advantages that can help you achieve your saving and investing goals. So, which is right for you?

The truth is, how you should protect your income isn't always clear cut, but your savings plan can include a TFSA and an RRSP, and ideally, both. But – if you must choose one, over the other, it's important to understand how they differ. In what follows, we share several important considerations to help you decide which option is right for you.

Comparing Account Features

  1. Primary Use: RRSPs are typically used to save for retirement. TFSAs are typically used to save for any purpose.
  2. Eligibility. You can contribute to an RRSP after you start earning income from employment or certain other sources. To open a TFSA at TD, you must be the age of majority in your province of residence.
  3. Contribution Limit: The 2019 contribution limit for a TFSA is $6,000. Your 2019 RRSP contribution limit, on the other hand, is 18% of your earned income reported on your 2018 tax return or $26,500 – whichever is lower, subject to certain adjustments.
  4. Unused Contribution Room. Your unused contribution room is carried forward for RRSPs & TFSAs.
  5. Withdrawals. RRSP withdrawals are taxable, subject to certain exceptions. With a TFSA, you can withdraw money any time – tax-free!3
  6. Withdrawn Amounts. When withdrawing funds from an RRSP, your contribution room is lost for amounts you withdraw; for a TFSA, withdrawn amounts are added back to your contribution room in future years.
  7. Taxation. Contributions made to your TFSA are non-tax deductible. RRSPs are tax-deductible. This means any contributions you make may reduce the amount of tax you pay on your personal income.
  8. Plan Maturity. An RRSP matures at the end of the calendar year in which you turn 71. There is no upper age limit for a TFSA.
  9. Spousal Plan. You can contribute directly to a spousal RRSP.

What is Your Savings Goal?

If you're saving for college, a new car, home improvements or any short-term goal, a TFSA might be the best option. You won't be taxed on any of your withdrawals.

If you're saving for retirement, then an RRSP can be a great choice.

What About the RRSP Home Buyers' Plan (HBP)?

The HBP is a program that allows first-time home buyers to withdraw up to a maximum of $35,000 from their RRSP towards buying their first home1.

If you're saving for a new home, a good strategy can be to use the money from your RRSP to help pay for your down payment. The amount withdrawn can be paid back into the RRSP through instalments over a 15-year period.

What about the Lifelong Learning Plan (LLP)?

The Lifelong Learning Plan (LLP) allows you to withdraw amounts from your RRSP to finance eligible training or education for you, your spouse or your common-law partner2. You don't have to include the withdrawn amounts in your income, and there is no withholding tax on these amounts. Withdrawals made must also be repaid to the RRSP over a period of no more than 10 years, and unpaid amounts must be included in your income for the year they were due.

A TFSA can also help you to save for your education; but, withdrawals are treated differently; whereas LLP withdrawals must be paid back, there is no obligation to pay back TFSA withdrawals.

What is Your Income Bracket?

The higher your income, the higher your personal tax bracket; If you're in a low tax bracket, consider putting your money into a TFSA to build up your capital. As you enter higher income brackets you can withdraw your TFSA funds and make contributions into your RRSP to help lower your income taxes.

Will You Have Other Sources of Income?

it's important to understand how your RRSP and TFSA can impact your eligibility for some federal income-tested benefits such as Old Age Security (OAS). The OAS is available to those with incomes lower than $74,788 (2017), meaning that any income above this limit will reduce the amount of benefit you're entitled to.

If you anticipate having a large pension during retirement, consider putting some money into your TFSA. Monies withdrawn from your TFSA are not considered income and are not taxed. This means you can withdraw funds from your TFSA in retirement, increase your cash flow, and not affect your eligibility for federal income-tested benefits

How Do I Open a TFSA at TD?

While a TFSA is not specifically designed as a retirement savings account, its flexibility potentially makes it an excellent complement to an RRSP. If you have already maximized your RRSP contributions, then a TFSA is an option for you to save more money and get the benefits of tax-free growth and withdrawals.

For more information on TFSAs and how you can reach your savings goals, book an appointment and visit a branch at a time that’s convenient for you.

Already have an EasyWeb account? Apply online and fill out an online application if you already have a TD Canada Trust chequing or savings account.

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1,2 Subject to eligibility and conditions.

3 Subject to any restrictions on the investments chosen.

The above information about the Tax-Free Savings Account is based on the information currently available from the Canadian government. To learn more or to check for updates, visit the TFSA information page on the Canada Revenue Agency website.

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