Top 5 Differences Between Tax-free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP)

  1. The intent of an RRSP is for your retirement. TFSAs were designed for any type of financial goal such as travel, buying house, emergency savings, and so on.
  2. You need to earn income to contribute to an RRSP but not with a TFSA.
  3. When you contribute to an RRSP, those contributions are tax deductible against the earned income you report on your tax return. However, with a TFSA you cannot deduct your contributions.
  4. There is a time limit on RRSPs and not on TFSAs. The last day of contributions for RRSPs is December 31 in the year you turn 71. After which the RRSP must be closed and converted to a Registered Retirement Income Fund (RRIF). For a TFSA you must be at least 18 years old to open one but you don’t have to stop contributing or close it at a certain age.
  5. When withdrawing your RRSPs, you pay tax on those withdrawals – this is referred to as a deferred tax. You made the contributions before you were taxed. Your gross income for the year was $50,000, you put $5,000 into an RRSP, so on your tax return, your taxable income line would be $45,000. Once you withdraw the $5,000 out of your RRSP account, it will be taxed. For TFSA the withdrawals are tax-free because you made the contributions with after-tax dollars. A strategy that many of my clients use is to deposit any refund they receive from CRA into their TFSA so it can increase in value tax-free.

Angela Mercier CDFA is an Independent Financial Consultant that does not work for any banks or insurance companies. Scroll down to contact Angela.


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