The Differences Between a TFSA and a RRSP

A TFSA is a government registered account that allows you to grow your savings tax free. One of the benefits of a TFSA is that you can use it for both short-term and long-term goals. You can withdraw from your savings if you ever need to, without paying any tax. Contributions into your TFSA are not tax deductible. This account allows you to keep more of what you earn so you can experience the benefits of saving. Anyone over the age of 18 with a valid social insurance number and Canadian residency can open a TFSA.

You can contribute to your TFSA throughout the year, but it’s important to make sure you do not go over your maximum contribution amount. You can find your contribution limit on your Canada Revenue Agency account. If you do not contribute to your allowed amount, your contribution room will be carried forward.

An RRSP is a government registered plan that allows you to reduce your taxable income until you are 71 years old. The purpose of the RRSP is to reduce your taxable income during your working years, grow your retirement savings tax-deferred, and to withdraw from the account to fund your retirement. Anyone in Canada who has a valid social insurance number, files a tax return, and earns employment income can open this account. You can contribute to your RRSP until December 31 of the year you turn 71. You can find your contribution limit on your Canada Revenue Agency account.

Like a TFSA, if you do not use all your contribution room on your RRSP, your unused contribution room can be carried forward.

This type of account is perfect for saving for retirement, reducing your taxable income, buying your first home, or financing your education. RRSP contributions are tax deductible, meaning that they can be deducted from your current year’s tax return, which may reduce the total amount of taxes you pay.

A TFSA and RRSP offer valuable benefits to help you reach your financial goals. Luckily, if you see benefits with both accounts, you can open both. Here are some comparisons for each account.

RRSPs are designed for long-term investments, while TFSAs are built for flexibility and multipurpose use. If you choose to withdraw funds from either type of account, you can do so, but an RRSP will require you to pay taxes on the funds you take out, while a TFSA is completely tax free.

With an RRSP, you can only contribute until December 31 of the year you turn 71, while there is no maximum age limit to make TFSA contributions.

The best course of action is to work with a professional. Financial Advisors will discuss your financial goals and the timeline for those goals. From there, you can discuss what you would like to see come out of investing so they can determine which account is best for you, or if you would benefit from both. Investing in your future is not one size fits all, so remember to practice patience and don’t feel discouraged. Our team of advisors will help you stay on track with your goals and ensure you reach them.