investing
What is the difference between TFSAs and RRSPs
January 14, 2019

To help Canadians save for retirement and other life-stage goals, the Government of Canada has created a number of tax-advantaged registered accounts that Canadians can use to help save for a financially secure future.

Two of the most popular accounts are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). An RRSP helps you save for retirement, while a TFSA can be used for any type of savings goal (including retirement). The two accounts are very similar. In a broad sense, the biggest difference between RRSPs and TFSAs comes down to taxes.

RRSPs, TFSAs, and taxes

Both TFSAs and RRSPs are tax-advantaged accounts that Canadians can use to save for a future goal such as retirement, but the details about those specific tax advantages differ.

To start with, the two accounts share one key advantage—you don’t pay taxes on qualified investment growth within the account. For more information on qualified/non-qualified investments, please visit the CRA web page.

The difference between the two accounts is based on the idea of pre-tax and after-tax income. In the simplest terms, pre-tax income is the salary listed in your job contract, while after-tax income is the amount you get for your paycheque.

Contributions to your RRSP are tax-deductible, meaning the amount you contribute reduces the amount of your taxable income for that year. This turns the money you have in your RRSP into pre-tax income. When you withdraw from your RRSP, you need to pay income tax on the amount you take out.

On the other hand, contributions to your TFSA are made with after-tax dollars, meaning, the amount you contribute to your TFSA cannot be used to reduce your taxable income. Since you’ve already paid taxes on money deposited to your TFSA, withdrawals from your TFSA are tax-free.

  • A comparison between RRSPs and TFSAs

    While taxes are the primary difference between RRSPs and TFSAs, they are far from the only difference.

    Here’s a quick comparison between the two accounts:

    CriteriaRRSPTFSANotes
    Contribution room based on earned incomeYesNoFor an RRSP, contribution room accumulates, based on your earned income in the previous year. For a TFSA, contribution room is based on limits set by the government each year. While you need earned income to contribute to an RRSP, you do not need it to contribute to a TFSA.
    Tax-deductible contributionsYesNoContributions to an RRSP are tax-deductible; contributions to a TFSA are not.
    Qualified investment income on contributions is tax-shelteredYesYesFunds held in both account types typically grow tax-free with a few exceptions. Please visit the CRA web page for more details.
    Tax-free withdrawalsNoYesFor an RRSP, withdrawals are taxed as if they were earned income in that year; in this way, an RRSP allows you to defer tax until retirement. For a TFSA, withdrawals are not taxed.
    Age limit for contributionsYesNoFor an RRSP, there’s no minimum age for opening one—every Canadian is eligible as long as they have employment income and file a tax return. However, you have until the end of the year you turn 71 to close your RRSP (typically converting it to a Registered Retirement Income Fund, or RRIF). For a TFSA, you start earning contribution room at age 18. This increases every year for your entire life.
    Carry forward unused contribution roomYesYesUnused contribution room carries forward for both account types.

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