Canadians know a good thing when they see it. Government-registered savings plans, such as the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) offer excellent tax benefits for Canadian residents. So much so that almost 15 million Canadians have a TFSA1 and almost six million of us make RRSP contributions each year.2
It’s perhaps surprising, then, that there is still some confusion about what each of these plans are for. In fact, over a quarter of Canadians don’t know the difference between a TFSA and an RRSP.3 While there are certainly some similarities between the two plans, it is the differences that are crucial in understanding which plan is the right one for you.
In this article, we’ll look at each plan in depth and then make a direct comparison of RRSP vs. TFSA to make it easy for you to decide which one to choose for your circumstances and goals.
The pros and cons of RRSPs
The RRSP is a tax-deferred retirement plan: what this means is that, when you make a contribution, that amount reduces your income for tax purposes. So, for example, if you earn $70,000 and contribute $10,000, you will only pay income tax on $60,000. Contributors to RRSPs typically receive a significant tax refund, which they can then re-invest in their RRSP or TFSA.
Investments grow without incurring any immediate tax, however, once you withdraw from your RRSP, you must pay tax on that amount. Therefore it’s tax-deferred: you get a tax deduction when you contribute and the investments grow without tax, but you pay tax on the eventual withdrawals.
Here are some of the RRSP’s key features:
- Primarily suited to retirement accumulation
- You can start making RRSP contributions when you have contribution room available
- Early RRSP withdrawals are discouraged since they will lead to tax
- You can contribute up to 18% of your previous year’s earned income (to a maximum dollar limit of $30,780 for 2023)
- If you don’t maximize your RRSP contributions, the room is carried forward
- You can make contributions to a spousal RRSP and get a tax deduction
- If you withdraw any amounts, you don’t get back that RRSP contribution room
Your RRSP matures in the year in which you turn 71; you can’t contribute after that unless you have a younger spouse and are making spousal RRSP contributions
When you can make special RRSP withdrawals
There are two instances when you can make special RRSP withdrawals without paying tax:
The Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP to use as a down payment on a new home. You have to qualify as a first-time home buyer pay the money back to your RRSP within 15 years.
The Lifelong Learning Plan lets you withdraw up to $10,000 per year (up to $20,000 cumulative) from your RRSP to pay for full-time training or education for you or your spouse. You typically have to repay the money to your RRSP, in instalments, after you finish your full-time education.
The benefits of TFSAs
Are contributions to a TFSA tax deductible? No, there is not the same immediate tax break with a TFSA that you get with an RRSP (that’s a key advantage of an RRSP vs. TFSA). However, even though the TFSA hasn’t been around anywhere near as long as the RRSP (it was only introduced in 2009), it’s already become a firm favourite with Canadian investors. With these advantages, it’s easy to see why:
- Anyone over the age of 18 can contribute to one (income level is not an issue)
- All growth and income within a TFSA are tax-free (including interest, dividends and capital gains)
- All TFSA withdrawals are tax-free
- The current annual contribution limit is $6,500
- If you don’t use up your limit, you can carry it over to the next year
- Any withdrawals are added to your contribution limit the next year
- If you were over 18 in 2009 and have never contributed to a TFSA, the total contributions you could make in 2023 are $88,000
- You can make TFSA contributions at any age above 18, so you can keep saving after 71
- You can give money to your spouse to save in their TFSA
TFSAs are far more flexible than RRSPs. They can be used for retirement, but also for any other reason, including an emergency fund, a wedding or a down payment on a home. While you won’t receive an immediate tax break with a TFSA contribution, the important difference is that you won’t be taxed when you withdraw from it.
RRSPs vs. TFSAs: head-to-head
|Maximum annual contribution||18% of earned income
(max. $30,780 in 2023)
|Carry forward unused amount||Yes||Yes|
|Tax deductible contributions?||Yes||No|
|Investments grow tax-free?||Tax-deferred||Yes|
|Contribute to spouse's plan?||Yes, tax deductible||Yes, but not tax deductible|
|End date to make contributions?||Year owner turns 71
Start your tax-efficient savings
Your IG Consultant can help you choose between an RRSP vs. TFSA, based on your circumstances and goals. Either plan is far more tax-efficient than holding investments in non-registered accounts. Talk to your IG Consultant today about RRSPs and TFSAs: if you don’t have an IG Consultant, you can find one here.
2 Statistics Canada: The Daily
3 BNN Bloomberg: One in four Canadians don’t know difference between TFSA and RRSP
4 Government of Canada - The Tax-Free Savings Account
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.