When it comes to putting money aside, both the TFSA and the RRSP are great savings vehicles. You have undoubtedly heard about them by now, but what is the difference between the two? Learn more about the TFSA and RRSP so you can tap fully into the benefits and begin saving according to your situation.
Tax-Free Savings Account (TFSA)
TFSAs are generally less well-known than RRSPs. Yet TFSAs offer many advantages if you’re looking to boost your savings.
Did you know that interest on funds you place in a TFSA grow tax-free?
Since it’s relatively simple to make deposits and withdrawals, the TFSA lets you save for a specific project or gives you flexible access to your money if an unexpected need arises. And with TFSAs, time is your best friend: the higher the TFSA amount, the more tax-free interest you get.
However, your annual contribution amount is limited to $5 500, no matter your income, but can be carried over year-to-year if not used. If you want to know the amount you’re entitled to, simply look for it on your most recent notice of assessment.
Registered Retirement Savings Plan (RRSP)
The RRSP, on the other hand, is a long-term investment vehicle that lets you save for your retirement.
The sums you deposit into an RRSP are deducted from your taxable income. The money you invest in an RRSP, along with the interest, grows tax-free as long as it stays in your plan. You will still have to pay taxes on these funds when you make withdrawals from your RRSP. Logically, however, your income at retirement will be lower and you will be able to benefit from a lower tax rate.
Your RRSP contributions are limited to 18%¹ of the previous year’s income, up to a maximum of $26,010². As with TFSAs, your unused contribution amounts accumulate and are indicated on your notice of assessment.
So which product is right for you?
You can withdraw funds from your RRSP under the HBP (paying for your first home) or the LLP (to pay for training or education) and lets you contribute to your spouse’s RRSP and still get a tax deduction.
On the other hand, the TFSA is practical if you need money quickly and you don’t want to be taxed on the amount. Furthermore, TSFAs are just as beneficial for people with low incomes as they are for those with higher incomes nearing their retirement.
Since they have different features and benefits, the TFSA is not designed to compete with, but rather complement the RRSP. That’s why you should look at these savings vehicles as a unit. Each situation is different for each person. Therefore, it would be best to meet with your financial security advisor who can help you make the right choice.
One thing is for certain: both the TFSA and RRSP are profitable. Make your TFSA and RRSP work for you!
RRSP: Registered Retirement Savings Plan
TFSA: Tax-Free Savings Account
RRIF: Registered Retirement Income Fund
HBP: Home Buyers’ Plan
LLP: Lifelong Learning Plan