Canada provides some amazing investing opportunities for its residents. The Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are undoubtedly two of the most popular investment vehicles among all. However, both have their own merits and Canadians need to know exactly what they are to make the most of them.

Both TFSA and RRSP are not just ‘saving’ or ‘investing’ tools. The Canada Revenue Agency (CRA) has given both these opportunities with bags of benefits attached to them.

The gist of the matter is that both TFSA and RRSP give you tax benefits, which can be pretty amazing. However, the two of them work quite differently. In this article, we will brief you on TFSA vs RRSP benefits.

TFSA and RRSP Meanings

What is a TFSA?

The Tax-Free Savings Account is an investment tool that provides tax-free benefits on the money you put into this account. More specifically, you will be exempted from taxes on the growth of the money–be it capital gains or dividend income. Even when you withdraw money from the TFSA (be it with gains within the account), you will not be liable for taxes.

What is an RRSP?

A Registered Retirement Savings Plan works a little differently than a TFSA. Usually, an RRSP is defined as a savings tool for your retirement, whenever that may be. Deductible contributions to the RRSP can be used to reduce the tax you pay during the contribution year. However, when you receive payments/withdrawals from the RRSP at retirement, you have to pay taxes on these ‘incomes.’ So, in essence, you get a chance to defer your tax payments to a later date.

Differences between TFSA and RRSP

Here’s a summary of the major differences between a TFSA and an RRSP.

Criteria	TFSA	RRSP
1. Primary objective:	For any investment objective	For retirement
2. Eligibility:	18 years of old and is a Canadian resident	Having an earned income source such as employment or other
3. Contribution limit:	The CRA decides the annual contribution limit for everybody-check here	lower of 18% of your earned income in the previous year or the annual RRSP limit set for everybody by CRA
4. Withdrawals	Not taxed	Taxed
5. Unused contribution room	Carried forward	Carried forward

TFSA and RRSP Pros and Cons

There are many advantages and some disadvantages to both TFSAs and RRSPs. Knowing these will help you make smarter decisions when it comes to your personal finances.

TFSA
Pros	Cons
Any income earned or capital gains within the TFSA are tax-free	Contributions are already taxed (after-tax income)
Withdrawals are tax-free	No contributions match from employers
Since withdrawals are tax-free, money can be easily accessed anytime	The contribution room is highly regulated
No maximum age limit for contributions	Need to be above 18 years old to contribute
RRSP
Pros	Cons
Can be used to reduce the income tax paid in the year of contribution	Withdrawals are taxed
Most employers have RRSP contribution match plans	A high income at retirement defeats the purpose of deferring tax until retirement
Programs such as First Time Homebuyers Plan and Lifelong Learning Plan benefits	Since withdrawals are taxed, money cannot be easily accessed anytime
No minimum age limit for contributions	Need to have an earned income to contribute
	Maximum age limit of 71 for contributions

FAQ on TFSA vs RRSP

Can you have both a TFSA and RRSP?

The short answer is, yes, of course.

As long as you meet the eligibility criteria that we mentioned above, you can open up both TFSA and RRSP accounts under your name with the CRA.

Is it better to put money into a TFSA or an RRSP?

This depends on your financial situation and we can help you decipher the answer for yourself. Since, RRSPs allow you to defer taxes until your retirement, if you have a high income, you might be better off deferring tax payments until later. Your RRSP contribution each year acts as a ‘deduction’ of income on your tax file, and hence you will pay a lower tax on the net income. So, you can defer your high tax liability until retirement during which your income will be lower and hence a lower tax liability.

However, if you earn, as a rule of thumb, less than $50,000 per annum, a TFSA might be better. Contributing to an RRSP might not give you a significant tax advantage. The growth of your investments, in the long run, could offset the higher tax liability you undergo now.

Moneysense has an excellent article on further elaborating this point.

Do you have to pay taxes when you take money out of an RRSP?

The short answer is, yes.

The CRA determines the rates at which your withdrawals are taxed. As of this article, below are the tax rates charged on your RRSP withdrawals;

• 10% (5% in Quebec) on amounts up to $5,000,
• 20% (10% in Quebec) on amounts over $5,000 up to including $15,000,
• 30% (15% in Quebec) on amounts over $15,000

For the most recent information, check out the CRA website.

Let us know if you have any questions about TFSAs and RRSPs in the comments below.