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If you’re saving up to fund your financial dreams, you’re faced with a choice: Should you put your money in an RRSP or a TFSA?
First, let’s clarify what each of these accounts are:
RRSP (Registered Retirement Savings Plan)
When you contribute to an RRSP, you don’t pay taxes on that money. Instead, you pay taxes when you withdraw the money.
TFSA (Tax-Free Savings Account)
You contribute after-tax dollars to a TFSA - then, any interest earned on that money is tax-free. That means you don’t pay taxes when you withdraw it!
We met with Bill Do, Personal Banking Advisor at Cambrian, to answer discuss the difference between a TFSA and an RRSP:
“Your RRSP is best suited for long-term goals, such as retirement,” says Bill.
Any money you put in an RRSP is sheltered from taxes, until you eventually withdraw it.
The idea is that you contribute to an RRSP when your income is higher. Then, you withdraw it when your income is lower.
Since most people have lower income in retirement, they end up paying less in taxes.
Even though it has the word “retirement” in the name, you can borrow money from your RRSP for other purchases, too.
You can borrow RRSP contributions to pay for your education costs through the Lifelong Learning Plan or for your down payment through the Home Buyers’ Plan.
“Another reason to invest in an RRSP is to take advantage of income splitting through a spousal RRSP,” says Bill.
“A spousal RRSP can help balance your income as a couple. It works best when a there’s a large disparity between you and your spouse’s income.”
“The higher earning spouse can contribute to their spouse’s retirement via a spousal RRSP, so that when the money is eventually withdrawn from the spousal RRSP, their spouse will get taxed at a lower rate.”
If you have a workplace pension plan, your employer might match RRSP contributions up to a percentage of your salary. But depending how much money you’ll need in retirement, you may also want to make contributions to a personal RRSP.
To help answer that question, you can learn more about how to start your retirement plan.
“Your RRSP contribution room is based on your income,” says Bill. “If you make less income, you won’t have as much contribution room in your RRSP.”
“Once you withdraw from an RRSP, that contribution room is gone forever – you don’t get it back the way you would with a TFSA. The one exception is if you withdraw through the Lifelong Learning Plan or Home Buyer’s Plan.”
“A TFSA is more for short-term goals - like a down payment, vacation, or car repair,” says Bill.
Your TFSA contribution room is not determined by your income; it’s a set amount determined by the CRA. Any contribution room that you don’t use is carried forward to the next year.
Learn more about the advantages of a TFSA.
No, contributions to your TFSA do not give you any tax deductions.
You can think of RRSPs or TFSAs as vehicles for investments.
On their own, they’re places to park your money and enjoy tax advantages. But combined with investments, they can stretch your dollar even further.
“Many people think a TFSA or RRSP is just a savings account. But you can actually use the funds within them to invest in different products,” says Bill.
For example, you can open the following types of TFSA or RRSP accounts:
If you’re choosing between an RRSP vs TFSA, you can ask yourself questions like:
“For someone who makes less than 55k per year, their retirement income may put them in a similar tax bracket – which makes an RRSP less advantageous,” says Bill.
“But for high income earners, chances are when they retire, they’ll be in a much lower tax bracket. Then, it makes more sense to put retirement contributions in the RRSP.”
In general, TFSAs may be better suited for lower-income earners, and RRSPs may be a better fit for higher-income earners.
In a perfect world, you could contribute to both your RRSP and a TFSA, and support both your short-term and long-term financial goals.
But if you have to make the choice between them, the answer is highly dependent on like your income and the time horizon of your goals.
Something to consider before you contribute to an RRSP is that if you want to withdraw the money for purposes other than retirement, education, or a down-payment, you’ll need to pay withholding tax on it.
With a TFSA, you won’t pay any tax when withdrawing the money, because you made those contributions with after-tax dollars. That makes your money more accessible if you need it.
If you already have an emergency fund, this will be less of a concern for you. But if you need money to cover an unexpected expense, a TFSA may be a better fit.
Now that you know the difference between an RRSP and a TFSA, you’re closer to deciding which one you should start contributing to!
“Let’s have a discussion and see if we can find an extra $100 or $200 in your budget to put towards a savings account,” says Bill.
“It all depends on your income and situation. You can start small, putting away just $50 or $100 every payday, and build those habits to save more money in the long-term.”
As your income, financial goals, and life circumstances change, your TFSA / RRSP contributions may too. Book a meeting with an advisor today!
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
It takes less than 5 minutes to make an appointment or to apply online. It is up to you how you want to meet your advisor - you will have the option to meet your advisor:
