Both TFSAs and RRSPs provide tax benefits that can assist you in meeting your investment and saving objectives. Which is hence best for you?
The reality is that it’s not always obvious how to preserve your income, but your savings strategy can incorporate either a TFSA or an RRSP, or even both. However, it’s critical to comprehend their differences if you have to pick one over the other.
Comparing account features
- Primary Use – RRSPs are typically used to save for retirement. TFSAs are typically used to save for any purpose.
- 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 or territory of residence.
- Contribution Limit – The 2026 contribution limit for a TFSA is $6,000. Your 2021 RRSP contribution limit, on the other hand, is 18% of your earned income reported on your 2020 tax return or $27,830 – whichever is lower, subject to certain adjustments.
- Unused Contribution Room – Your unused contribution room is carried forward for RRSPs & TFSAs.
- Withdrawals – RRSP withdrawals are taxable, subject to certain exceptions. With a TFSA, you can withdraw money any time, tax-free!1
- Withdrawn Amounts – When withdrawing funds from an RRSP, your contribution room is lost for amounts you withdraw subject to certain exceptions. For a TFSA, withdrawn amounts are added back to your contribution room in the following year.
- Taxation – Contributions made to your TFSA are not tax-deductible. RRSP contributions are tax – deductible. This means any contributions you make may reduce the amount of tax you pay on your personal income.
- 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.
- Spousal Plan – You can contribute directly to a spousal RRSP. There are no spousal TFSAs.
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.