Comparing TFSAs and RRSPs

TFSAs and RRSPs both offer tax advantages to help you reach your savings goals. If you can afford it, a good strategy is to contribute as much as you can to both. But if you have to choose one over the other, make sure you understand how they differ. And then make your choice based on your own individual financial and tax situation.

A quick comparison

Need earned income to contribute
Tax-deductible contributions
Tax-free withdrawals
Age limit for making contributions

Top 6 differences between TFSAs and RRSPs

  1. An RRSP is intended for retirement savings. A TFSA can be for any type of savings goal.
  2. RRSP contributions are tax deductible. TFSA contributions are not. With an RRSP, you deduct your contribution from the income you report on your tax return. With a TFSA, you can’t deduct your contributionContribution Money that you put into a savings or investment plan.+ read full definition on your taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition return.
  3. You pay tax on your RRSPRRSP See Registered Retirement Savings Plan.+ read full definition withdrawals because you made the contributions with pre-tax dollars. TFSATFSA See Tax-Free Savings Account.+ read full definition withdrawals are tax free because you made the contributions with after-taxAfter-tax The money you have left after you pay taxes on money that you made working or investing.+ read full definition dollars.
  4. In the year you turn 71, you can’t make any more contributions to your RRSP and you must close it. At that time, you have to use your savings to buy either an RRIF or an annuity. With a TFSA, you don’t have to stop contributing or close it at a certain age.
  5. You need earned income to contribute to an RRSP but not to a TFSA.
  6. With both plans, you can name your spouse as a beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition. The money will roll over to them upon your death. But with an RRSP, after your spouse dies, taxes will due on any money left in the accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition. So if your children inherit the money, they will receive what is left after the tax is paid. With a TFSA, only the increase in the value of the TFSA since the date of death is taxed in the year the children receive it. If the amount they receive is not greater than the value of the TFSA at death, no tax is paid.
Can you save more with an RRSP or TFSA?

It depends on your individual circumstances, tax situation and when you plan to take money out.

Key point

The main difference between an RRSP and TFSA is the timing of taxes:

  • An RRSP lets you defer taxes – an advantage if your marginal tax rateMarginal tax rate The amount of tax that you have to pay on each extra dollar of income you make. As your income rises, so does your tax rate.+ read full definition is lower in retirement.
  • With a TFSA, you’ve already paid tax on the money you contribute – an advantage if your marginal tax rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition is higher when you withdraw the money.
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