When you’re just starting out, two of the most common ways to save are TFSAs and RRSPs. And that leads to two of the most common investment questions: “What’s the difference between RRSP and TFSA accounts?” and “Should I choose a TFSA or RRSP?” The fact is, both plans offer tax advantages and opportunities for growth. Understanding the differences is what will help you decide – and make the most of your savings.
Whether you start with an RRSP or TFSA depends on factors like your reason for saving, your time horizon, and your current and future tax rates. Below we offer an in-depth RRSP and TFSA comparison to help you make the right call.
TFSA vs RRSP: the basics
In general terms, Registered Retirement Savings Plans (RRSPs) are better suited to high-income earners who want to save for their retirement, their first home or to further their education. Tax-Free Savings Accounts (TFSAs), meanwhile, provide advantages for lower-income earners, as well as those who are looking to save for short-term goals, like a vacation or a home renovation.
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 7,000 | 18% of your income, up to a maximum of $31,560 |
| 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 | 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 $95,000 of contribution room available in 2024.
- 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.
TFSA vs RRSP: the choice
Ultimately, the best way to choose an RRSP or TFSA is to compare your current marginal tax rate (the percentage of income tax you pay each year) to the rate you expect to pay in retirement. This involves a little thinking and calculating, but it can help you save a lot of money.
First, get a sense of how you want to live in retirement. Do you want to travel, learn new skills, indulge in hobbies? Or are you content to maintain or lessen your current standard of living? Second, estimate how much your retirement plans, along with your regular living expenses, will cost each year. Third, when you have an idea of your annual retirement income needs, check to see how much tax you’ll pay. Remember to include both federal and provincial taxes. For example, compared with your current tax rate, do you predict that you’ll have:
- a lower tax rate in retirement? You may want to start with an RRSP.
- a higher tax rate in retirement? You may want to start with a TFSA.
- the same tax rate in retirement? You may want to start with a combination of the two, even if you’re not maximizing your annual contribution limits.
Try our retirement savings calculator to get a better idea of how much you’ll need to save to live the life you want in retirement.
With a better idea of how RRSP and TFSA accounts compare, what’s your next move?
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*In the province of Quebec, the authorized representatives are Financial Security Advisors who have been duly certified by the Autorité des marchés financiers. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional tax advisor on tax related matters. Mutual funds are offered through Co-operators Financial Investment Services Inc. to Canadian residents except those in Quebec and the territories. Segregated funds and annuities are administered by Co-operators Life Insurance Company. Co-operators Life Insurance Company and Co-operators Financial Investment Services Inc. are committed to protecting the privacy, confidentiality, accuracy and security of the personal information that we collect, use, retain and disclose in the course of conducting our business. Visit www.cooperators.ca/en/Privacy for more information. Co-operators® is a registered trademark of The Co-operators Group Limited..
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