TFSA & RRSP Basics

TFSAs vs. RRSPs - the Basics

TFSA blog

Tax Free Savings Accounts (TFSAs) have been around since 2009 for all adult (18 or over) Canadian residents. The annual limit for making a contribution is set by the government, and has varied between $5,000 and $10,000 per year. If you met all the requirements since the beginning of the program, your total limit for contributions is now $75,500! Some of the benefits of TFSAs are:

  • since you contribute after-tax money, any income accumulated will not be taxed. So all the money in the plan will be yours, and this includes withdrawals.

  • you can withdraw money from the plan, and then recontribute that amount by making a contribution the next year up to the same amount as the withdrawal. 

Registered Retirement Savings Plans (RRSPs) have been around for much longer. Unlike TFSA's the amount you can contribute is based on a percent of your "earned income". So the higher your earned income, the more you can contribute. Some of the benefits are:

  • an immediate dollar-for-dollar deduction from your taxable income. That means you save taxes based on your tax bracket. If you are in a higher bracket, you save more money. Of course, when you withdraw from an RRSP all of the money is taxable. (But hopefully at a lower tax bracket.)

  • the money feels more 'locked-in' than TFSAs, making them a good psychological place to put your retirement savings

A question I'm often asked is, "what's a better option, TFSAs or RRSPs?" The answer, like many answers in this complicated world of tax and personal finance, is: "it depends". There is some evidence that TFSAs tend to be better for younger people and RRSP's for those later in their earning career. But each individual situation is different.

If you can cobble together the all the information below, there are calculators that compare your projected returns. This information includes:

  • your earnings now and over time

  • the amounts you will contribute over time

  • the expected return on investments

  • OAS and CPP timing

Then you can crunch the numbers and see which type of plan is more favorable. Either your accountant or your investment advisor should be able to help you with that decision.

Personally, I can recommend either plan. The most important thing is to start saving on a systematic and regular basis, starting as soon as possible.