RRSP vs TFSA: Which One Should You Choose?

3 min read

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Most Canadians are familiar with the Registered Retirement Savings Plan (RRSP), which the federal government introduced in 1957 to help Canadians save for retirement. Many people contribute regularly to an RRSP for the tax deduction benefit and to grow their money in a tax-deferred manner until retirement, at which time they will likely be in a lower tax bracket when they withdraw their accumulated funds.

In 2009, the government introduced the Tax-Free Savings Account (TFSA) as an additional, tax-advantaged way for Canadians to save. While investors contribute to a TFSA using after-tax dollars, whatever growth they generate in their account is tax-free, as are any withdrawals made. TFSAs can be used for any financial goal such as a home renovation, vehicle, vacation or even your retirement.

So, what should you do? You have to do what makes sense for your situation.

What are the key differences?

A financial advisor can help you understand what the key differences mean for you and how best to make use of these two plans based on your tax bracket and your short-term and long-term financial objectives.

Age restrictions

  • Minimum age: No minimum age, provided income was earned in the previous year and individual has a social insurance number (SIN).
  • Maximum age: 71.
  • Minimum age: 18.
    No maximum age.
Did you know?
  1. An RRSP can be rolled into a Registered Retirement Income Fund (RRIF) at any time, but you are not required to do so until the end of the year in which you turn 71 years of age; at which time, the RRSP matures and must be converted to either a life annuity or a RRIF, or deregistered.
  2. You can’t open a TFSA in the name of a minor (person under 18). You typically must have reached the age of majority to enter into the RRSP or TFSA contract.

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  • A beneficiary can be named for estate-planning purposes. (optional)
  • A beneficiary or a successor holder can be named for estate-planning purposes. (optional)
Did you know?
  1. For an RRSP:
    When you die, the value of your RRSP is included in your income. If the following two conditions are met, the deceased annuitant is not considered to have received the Fair Market Value (FMV) of the RRSP at the time of death:
    • The spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP; and
    • By December 31 of the year following the year of death, all the RRSP property is directly transferred to an RRSP or a RRIF under which the spouse or common-law partner is the annuitant (or to an issuer to buy an eligible annuity for the spouse or common law partner)
  2. For a TFSA:
    Choosing a successor holder or beneficiary is optional. If you don’t designate either, the value of your TFSA will go to your estate. If you designate both a successor holder and a beneficiary, the successor holder takes precedence.

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  • RRSP contribution room accumulated after 1990 can be carried forward indefinitely to subsequent years.
  • Unused contribution room can be carried forward.
  • Any withdrawals are added back to unused contribution room the next calendar year.
Did you know?
  1. With an RRSP, withdrawn contributions are not added back to your contribution room and cannot be re-contributed.
  2. With a TFSA, you have the flexibility to withdraw and then re-contribute that amount again the following year.

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Contribution limits

  • The lesser of $29,210 for 2022/$30,780 for 2023 and 18% of earned income from your previous tax year, minus any pension adjustments, plus unused contribution room from previous years
  • Over-contributions: There is a $2,000 lifetime over-contribution limit and a penalty tax of 1% per month on the amount over the $2,000 limit may apply until withdrawn from the plan
  • $6,500 for 2023 (plus unused contribution room)
  • Over-contributions: 1% per month on over-contribution amounts (even if the contribution was withdrawn in the same tax year).
Did you know?
  1. To find your contribution limit: see your previous year’s Notice of Assessment from the CRA or access your information online using the My Account feature on the CRA website at www.canada.ca/en/revenue-agency.
  2. With an RRSP, withdrawn contributions are not added back to your contribution room and cannot be re-contributed.
  3. Any withdrawals from a TFSA are added back to the unused contribution room – but not until the next calendar year.

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Effect on government benefits

  • RRSP withdrawals are considered income, so the added income may reduce the amount you receive from income-tested benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS).
  • No effect, since TFSA withdrawals are not considered income for tax purposes.
Did you know?
  1. RRSP withdrawals can impact OAS, which is reduced or clawed back when net income exceeds certain thresholds. Contact your financial advisor if this applies to you.
  2. If you’re saving for retirement, a TFSA can help manage your taxable income since withdrawals from an RRSP or RRIF are fully taxable.

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  • You need to have filed an income tax return to open an RRSP. This creates the contribution room for your RRSP.
  • A valid Canadian Social Insurance Number.
  • To be a Canadian resident
Did you know?
  1. You typically must have reached the age of majority to enter into the RRSP or TFSA contract.
  2. To contribute to an RRSP or a TFSA, you need to have a Canadian Social Insurance Number and be a Canadian resident.
  3. To contribute to an RRSP, you need to have filed an income tax return, You cannot contribute to an RRSP if your income consists solely of estate income, dividends, royalties or capital gains.

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Spousal Plans

  • Contributor receives a tax deduction, but their spouse or common law partner is the registered owner/annuitant of the plan.
  • With a Spousal RRSP, couples can split income and reduce their combined tax rate. The spouse with the higher income makes the contribution and takes the immediate tax deduction. Then the money in the RRSP is taxed to the other spouse when it is withdrawn – often at a lower rate.
  • Spouses (and common-law partners) can give each other money to contribute to their own TFSA as long as it is within the maximum allowed.
Did you know?
  1. After age 71, if you continue to have earned income, you can contribute to a spousal RRSP up until December 31 of the year your spouse or common-law partner turns 71.
  2. All or part of the RRSP contributions can be put into a Spousal RRSP. For example, an investor with contribution room of $7,200 for this year can contribute $5,000 to their own RRSP and $2,200 to a spousal RRSP or the full $7,200 to the spousal RRSP.
  3. An annuitant can have a spousal plan and a non-spousal plan.
  4. The spouse (the annuitant, not the contributor) does not need to have earned income or their own contribution room.
  5. Once a plan is designated as spousal, it can only be changed to a non-spousal plan upon death of the contributor or marriage breakdown if certain conditions are met.

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  • Contribution tax-deductible.
  • No tax on any investment income or growth.
  • Withholding tax applies if withdrawn – the amount withdrawn is added to taxable income.
  • Contribution not tax-deductible.
  • Grows tax-free.
  • Contributions and income earned are not subject to tax when withdrawn – so the amount withdrawn is not added to taxable income.
Did you know?
  1. All the money in a TFSA can be withdrawn tax-free.
  2. You can borrow from your RRSP to buy a home – and not pay tax on the withdrawal. With the Home Buyers’ Plan (HBP), as a Canadian resident, you can withdraw up to $35,000 from your RRSP (or $70,000 per couple) to help buy or build your first home. You have 15 years to pay back the amount you withdrew, and must start paying it back in the second year after you buy your home. To find out more, read this article.
  3. You can use your RRSP to pay for your education – and not pay tax on the withdrawal. With the Lifelong Learning Plan (LLP), you can borrow up to $10,000 a year from your RRSP – to a maximum of $20,000 over four years – to help cover full-time education costs. You can use this program to fund your education or your spouse’s, but not your children’s. To find out more, read this article.

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  • With the exception of the first-time Home Buyers’ Plan and the Lifelong Learning Plan, RRSP withdrawals are subject to withholding taxes.
  • Withdrawals are taxed as income.
  • Tax-free.
  • Generate contribution room the next calendar year.
Did you know?
  1. If you make a withdrawal from an RRSP, you don’t receive the full amount. This is because a withholding tax is deducted from your withdrawal amount. The withholding tax rate that is applied depends on the amount requested to be withdrawn and which province you reside in.
  2. A T4RSP will be issued in the amount of the withdrawal requested and must be included on your tax return for that tax year.
  3. If the withdrawal is from a spousal plan, the contributor may have to declare it as income. Normally, a withdrawal from a spousal RRSP is taxed to the spouse who is the annuitant / owner and not the contributor. However, if the withdrawal involves contributions made in the same year, or in the two previous years, the contributor must include in their income the lesser of the amount withdrawn, or whatever they contributed for those years. This is sometimes called the 3-year attribution rule.

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The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.

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RO 2682658  
February 21, 2023