Both of these plans offer tax advantages. Both may be useful for your savings goals. Make sure you understand the differences before you choose one over the over.
Top five differences between RRSPs and TFSAs
- An RRSP is mostly aimed at saving for retirement. A TFSA is for all your other savings goals.
- You don't pay tax on the money you save in an RRSP until you take it out. With a TFSA, you must pay any income tax due on the money you contribute. You don't get to deduct your contribution from the income you report on your tax return.
- When you take money out of an RRSP, the amount is added to your income and taxed at current rates. With a TFSA, there's no tax on any money you take out ? not even the money you made investing, including capital gains.
- You have to close an RRSP after age 71. There is no time limit for contributing to a TFSA.
- With both plans, you can name your spouse or common-law partner as a beneficiary. The money will roll over to them upon your death. But with an RRSP, after your partner dies, there will be taxes due on any money left in the account. So if your children inherited the money, they would have to pay that tax.
A TFSA is different. Your children would get the whole amount tax-free. That's because you've already paid the tax on the money you contributed to your TFSA.
Which plan should I use for my savings?
Is a TFSA better than an RRSP? Will one plan help you save more? There's no simple answer that's right for everyone or every situation.
Let's say you've been saving money in a TFSA and an RRSP each year. Now you want to spend $20,000 to renovate your home. You have two choices:
- Take $20,000 tax-free from your TFSA. You will be able to re-contribute the $20,000 to your account in the future. And, you can always contribute the yearly maximum.
- Take money from your RRSP savings. Here you may have to withdraw up to $37,000 to have enough money to pay for the renovation. That's because you'll pay taxes on the money you withdraw. And, if you take $37,000 out of your RRSP, you can't re-contribute that amount on top of the yearly maximum.
Clearly, in this case a TFSA would be the better choice. But it's not always the case. It depends a lot on when you take the money out and your situation. In some cases, you may save more over time if you save in an RRSP. To learn more, RRSP or TFSA? Tia's story .
Remember: The big difference between an RRSP and a TFSA is the timing of the taxes.
You'll pay that tax sooner or later, so it's important to understand how it will affect your total savings. You may want to seek some professional advice to get the most benefit from your tax planning.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.