As the RRSP contribution deadline nears, the choice between Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) becomes an important consideration. Let’s look at these options and delve into a detailed comparison to help you make a well-informed decision.
Both TFSAs and RRSPs offer tax advantages that can help you achieve your savings goals. If you can afford it, a good strategy is to contribute as much as you can to both. But if are choosing one over the other, understand how they differ. And then make your choice based on your own individual financial and tax situation.
OCU’s wealth management team is ready to guide you through this decision-making process and help you select the investment that best suits your needs. Contact us at 250-495-6522 or email contact@ocubc.com to schedule an appointment.
RRSP (Registered Retirement Savings Plan)
Registered Retirement Savings Plans (RRSPs) are government-registered plans designed to save for your retirement years. Some of the advantages of an RRSP contribution include paying less income tax because the money you contribute to your RRSP investment, and the interest earned, is tax-sheltered until withdrawn. This means faster growth for retirement savings because the earned interest compounds without erosion from income tax.
If you earn an income of $100,000 and your RRSP contribution is $10,000 throughout the year, you’ll be taxed at the 90,000$ income bracket that year. RRSP withdrawal rules indicate that when you withdraw the funds, they will be taxed like income. You will be taxed at a lower tax rate if your income is lower at retirement than during your working years. Maximizing your annual RRSP contribution limit will provide you with the greatest benefits, both short-term and long-term.
TFSA (Tax Free Savings Account)
Another option is a TFSA (Tax Free Savings Account). TSFA investment options offer members a simple tool that allows investments to grow tax-free. However, a TSFA contribution will not provide you with the tax-deduction benefits like your RRSP investment. A high interest TSFA is ideal for more immediate financial goal, but can be used for retirement in certain cases. Depending on your current income, your future income expectations, and overall financial goals, we may recommend a TSFA contribution for your individual circumstances.
At OCU, our wealth management team will work with you and take the time to fully understand your financial goals before recommending the best retirement plan. Typically, your TSFA contribution is ideal if you’re saving for something big, but more immediate than your retirement such as a home, wedding, vacation or car.
Let’s look a little deeper at the two options:
Purpose and Functionality:
TFSA: A TFSA serves as a versatile tool for general savings purposes. It provides flexibility and tax advantages, enabling individuals to save for various short-term and long-term goals without specific limitations.
RRSP: Designed explicitly for retirement savings, RRSPs are tailored to build a financial cushion for retirement. Contributions are encouraged to benefit from tax deferrals and long-term savings growth.
Tax Treatment of Contributions:
TFSA: Contributions to a TFSA are made with after-tax dollars and are not tax-deductible.
RRSP: Contributions to an RRSP are made with pre-tax dollars, offering a tax deduction that reduces the contributor’s taxable income for the year of contribution.
60-Day Contribution Provision:
TFSA: There is no provision allowing contributions in the first 60 days to be attributed to the previous year’s contribution room.
RRSP: RRSPs have a provision allowing contributions made in the first 60 days of the year to be counted towards the previous year’s contribution limit.
Residency Requirements:
TFSA: Requires the individual to be a resident of Canada when opening the account.
RRSP: Does not have residency requirements when opening the account.
Contribution Limits:
TFSA: Contribution limits are not based on earned income.
RRSP: Contribution limits are based on a percentage of the previous year’s earned income.
Spousal Contributions:
TFSA: Does not allow spousal contributions directly into the spouse’s TFSA.
RRSP: Permits spousal contributions, enabling one spouse to contribute to the other’s RRSP.
Impact on Federal Government Benefits:
TFSA: Withdrawals from a TFSA do not impact eligibility for federal government benefits.
RRSP: Withdrawals from an RRSP can affect eligibility for certain federal government benefits due to the added income.
Age Limit for Contributions:
TFSA: Does not have a maximum age limit for contributions.
RRSP: Contributions must cease by the end of the year the account holder turns 71. At this point, the RRSP must either be converted to a Registered Retirement Income Fund (RRIF) or used to purchase an annuity.
Tax Treatment on Growth and Withdrawals:
TFSA: Offers tax-free growth on investments and allows tax-free withdrawals at any time for any purpose.
RRSP: Offers tax-deferred growth on investments until withdrawals are made, at which point they are taxed as income.
| Features | Tax Free Savings Account (TFSA) | Registered Retirement Savings Plan (RRSP) |
| Purpose | General Savings | Save for retirement |
| Tax deductible deposits | ✗ | ✓ |
| First 60-day contribution provision | ✗ | ✓ |
| Residency requirements (resident of Canada when the account is opened) | ✓ | ✗ |
| Contribution limit based on earned income | ✗ | ✓ |
| Spousal contributions allowed | ✗ | ✓ |
| Qualifying withdrawals impact federal gov’t benefits | ✗ | ✓ |
| Maximum age limit (71) | ✗ | ✓ |
| Tax free growth | ✓ | ✓ |
| Tax free withdrawals | ✓ | ✗ |
| Pay back requirements | ✗ | ✓ |
| Transfers | Can transfer to a TFSA | Can transfer to an RRSP or RRIF |
| Tax treatment on death | Income earned after date of death is taxable to the beneficiary. The holder is not taxed on the date of death amount. | Income earned after date of death is taxable to the beneficiary. There is no tax where the spouse transfers to an RRSP or RRIF. The holder is taxed on the date of death amount if not transferred to the spouse’s registered account. |
| Maximum contribution (2023) | Annual limit | Lessor of $30,780 or 18% of previous year’s earned income. |