RRSPs and TFSAs are two popular investment vehicles in Canada that offer different benefits and features. Here is a comparison of RRSPs and TFSAs:
Tax benefits: RRSPs offer an upfront tax deduction for contributions, which means that you can reduce your taxable income by the amount you contribute to your RRSP. This makes an RRSP an ideal first choice especially for high-income earners. The investment growth in an RRSP is tax-deferred, meaning you don’t pay taxes on it until you withdraw the money. TFSAs, on the other hand, do not offer an upfront tax deduction, but any investment growth in a TFSA is tax-free. Both are great accounts. If you don’t have enough money for both, your circumstances will determine how you allocate your resources. here are a few scenarios to consider: If you reasonably expect your tax bracket in retirement be lower than it is currently, then, since RRSP contributions give you a tax break now, and your withdrawals in retirement may be taxed at a lower rate, it may make sense to contribute to RRSP over TFSA. Having said that, never underestimate the indefinite tax-free growth of TFSA account specially when you already have other good sources of income during retirement such as company pension plans or you are in a low tax bracket now but reasonably expect to earn more in the future. Another tax related issue to consider is estate considerations: An RRSP can be transferred directly to your spouse or common-law partner upon your death on a tax-deferred basis, however, proceeds will be taxable income for any beneficiary other than spouse. This can have significant effect on the actual amount the beneficiary will receive. TFSA on the other hand, will be transferred to beneficiary or successor tax-free. In addition, any income earned in a TFSA and amounts withdrawn do not affect eligibility for federal income sensitive benefits and credits, such as Old Age Security or the Canada Child Tax Benefit. RRSP/RIF withdrawals do and can reduce your benefits if you reach/pass some dollar amount thresholds for your total taxable income. RRSP provides valuable income splitting opportunities and immediate tax benefits through spousal RRSP accounts. There is no such a provision for TFSA accounts though still spouses can share their after-tax income and contribute into low-income spouse’s TFSA the additional funds they may have left (instead of investing in a non-registered account). In other words, there is nothing to prevent the higher-earning spouse from giving his or her spouse/partner money to contribute to a TFSA.
Contribution limits: RRSP contribution limits are based on a percentage of your earned income, up to a maximum amount each year. You can obtain the exact and updated dollar amount from CRA. If you don’t work, you don’t have a RRSP contribution room. TFSAs, on the other hand, have an annual contribution limit that is not based on your income and is given to you as long as you are resident in Canada. In 2023, the annual TFSA contribution limit is $6,500, and the cumulative contribution room since the inception of TFSAs is $88,000.
Withdrawal rules: Withdrawals from an RRSP are taxable as income, and you must pay tax on the amount you withdraw. The total % payable tax depends on your total income and marginal tax bracket at the time of withdrawal and can be more, equal or less than the tax rebate you got back when you initially contributed. Withdrawing from an RRSP before age 71 will result in the loss of contribution room. Withdrawals from a TFSA are not taxable, and you can withdraw your money at any time without penalty or loss of contribution room. Withdrawal amounts from TFSA are not lost and will be given back to you in the following year dollar for dollar.
Retirement savings: RRSPs are primarily designed as a retirement savings vehicle, and the tax deduction for contributions can help you save more for retirement. TFSAs can be used for any savings goal, including medium-term goals like a down payment on a home, as well as long-term retirement savings.
Eligibility: Both RRSPs and TFSAs are available to Canadian residents who have a valid Social Insurance Number (SIN). TFSA can be opened once you reach 18 and can be maintained for as long as you live but RRSP can be opened anytime! So, Yes! parents can open an RRSP for their child if their kid has earned income and filed a tax return. You cannot, though, continue to have RRSP or contribute into it once you become 71. RRSP must collapse before the end of calendar year in which you turn 71. There are, though, multiple options still available after age of 71 to continue tax-differed growth of RRSP funds at least to some extent.
Investment options: Both RRSPs and TFSAs can hold a variety of investment types, including cash, stocks, bonds, mutual funds, and ETFs. The investment options available to you will depend on the financial institution where you hold your RRSP or TFSA. Note: TFSA funds can be used as collateral for loans (to an extent) but RRSP funds cannot.
Ultimately, the decision to contribute to an RRSP or TFSA will depend on your individual financial situation, goals, and tax situation. A financial advisor can help you determine the best investment strategy for your needs.