Is a TFSA better than an RRSP? The major difference between RRSP and TFSA accounts centres around tax implications. RRSPs offer a tax deduction when you contribute, but you have to pay tax when you withdraw the money. TFSAs offer no up-front tax break, but you don’t pay tax on any withdrawals, including growth.
TFSA vs RRSP: the comparison
The major difference between RRSP and TFSA accounts centres around tax implications. RRSPs offer a tax deduction when you contribute, but you have to pay tax when you withdraw the money. TFSAs offer no up-front tax break, but you don’t pay tax on any withdrawals, including growth.
Therefore, earnings within both accounts grow tax-sheltered, which helps you reach your savings goals faster than a simple savings account. Both accounts also allow you to carry forward unused contribution room. But beware: both have penalties for over-contributing.
Here are important factors to consider when choosing a TFSA or RRSP.
| TFSA | RRSP | |
|---|---|---|
| When did the federal government establish the account? | 2009 | 1957 |
| What are the age restrictions? | Anyone 18+ can open an account. | Anyone up to age 71,1 with earned income and a filed tax return can open an account. |
| What are the annual contribution limits? | Currently 6,000.2 Limits change periodically. | 18% of your income, up to a maximum of $29,210.3 |
| Can you carry unused contribution room forward? | Yes | Yes |
| What are the penalties for over contributing? | Penalty tax of 1% per month on the excess funds. | Penalty tax of 1% per month on the excess funds. |
| What are the tax advantages? | Your money grows tax-free; you pay no tax on withdrawals. | Your money grows tax-sheltered, with taxes deferred. Contributions are tax deductible and can be deferred for a future tax break. |
| What are the tax disadvantages? | Contributions are not tax deductible. | You must pay tax on withdrawals. |
| What are the withdrawal rules? | Tax-free, at any time and for any purpose (subject to any specific investment terms). | At any time and for any purpose. Withdrawals are taxed as income unless used for your first home or continued education. You must convert the funds to a RRIF or annuity by age 711 and pay tax on income you withdraw. |
| Can withdrawals be redeposited? | Yes; after a withdrawal, contribution room is adjusted and readded in the next year. | No, unless related to the Lifelong Learning Plan or Home Buyers’ Plan. |
| Can you name a beneficiary? | Yes | Yes |
| Can you benefit by contributing to your spouse’s account? | No. TFSA accounts belong to individuals. | Yes. You can contribute in your spouse’s name and enjoy a tax benefit. |
- You can contribute to your own RRSP until Dec. 31 of the year that you turn 71. You can contribute to a spousal RRSP until Dec. 31 of the year that your spouse turns 71. RRSPs must be converted to a Registered Retirement Income Fund (RRIF) by Dec. 31 of the year that you turn 71.
- Anyone who was 18 or older in 2009, and has not yet contributed, will have $81,500 of contribution room available in 2021.
- Since unused contribution room carries forward, you may be eligible to contribute more than the annual maximum. To find out your individual RRSP limit for the current year, check your most recent Notice of Assessment from Canada Revenue Agency (CRA). Annual contribution limits are also reduced by any existing pension adjustments from an employer-sponsored pension plan. Your limit may be less than 18% if you contribute to a company pension plan.
Wait! Why not invest in both accounts?
Good question. Since both plans provide tax-sheltered growth, maximizing your allowable RRSP and TFSA contributions – if you’re able – can help you reach your savings goals that much faster. But, if investing in multiple accounts isn’t realistic, here’s how to know which account you should you open first.