Everything you need to know about RRSPs and TFSAs

Although a tax-free savings account and registered retirement savings plan both work as savings accounts, they still differ in many aspects

Everything you need to know about RRSPs and TFSAs

All of us want to prepare for our future whether it is for retirement, investment, and even luxurious living. However, preparation is not an easy task because it needs some essential tools that will highly affect its outcome.

One of the tools needed for future preparation is the savings account and savings plan. This is where a registered retirement savings plan (RRSP) and tax-free savings account (TFSA) come in.

But, between RRSP vs TFSA, which one could highly affect your hard-earned finances? In this article we will be talking about the differences between TFSA and RRSP and share insights on what could be the best for you.

What is RRSP?

Registered Retirement Savings Plan or RRSP is a type of savings plan for employees or self-employed residents of Canada. Opening an account in RRSP requires registration with any financial institution like banks or credit unions.

Pre-tax money is deposited into an RRSP account and grows tax-free. Most of the time, any income you earn in your RRSP account is exempt from tax as long as your funds stay in the account. When the time of withdrawal comes, your income might pay tax at a marginal rate before receiving the payments.

Simply having finances in your RRSP account does not guarantee that you can retire comfortably, because the growth of its returns is determined by its content. But what you can guarantee in this account is that your investments will generate compounded growth without being taxed.

What is TFSA?

A tax-free savings account or TFSA is a savings account available in Canada where the saved money or contributions, dividends, interest earned, and capital gains grow tax free. Even though it is called a savings account, a TFSA account holds different investments like bonds, mutual funds, and securities. Withdrawn money from the TFSA is also tax-free.

Your money in TFSA is not taxable because the finances you deposited are already an after-tax contribution. The money contributed to the account has already been taxed.

The TFSA has been in the market since 2009 and is available for those 18 or older. The requirement in opening a TFSA is a valid Social Insurance Number (SIN).

RRSP vs TFSA: what’s the difference?

Although a tax-free savings account and registered retirement savings plan both work as a savings account, they still differ in many aspects. A few of them are:

Opening an account

When opening an RRSP account, you must file your income taxes from the previous fiscal year. Meanwhile, in a TFSA, what you need is a valid SIN (social insurance number). You would also need to be a Canadian resident to open a TFSA.

Age restrictions

To open a TFSA account, one would have to be at least 18 years. For an RRSP, anyone under 71 with earned income and filed tax returns can have an account.

Annual contribution limits

In an RRSP account, annual contributions are capped at 18% of the total income with a threshold of $30,780. For TFSA, it is maxed at $6,500.

Contribution deadline

TFSAs do not have any contribution deadline – contributions in this account are not deductible, For an RRSP, you only have 60 days after the end of the year to make your contributions.

Tax advantages

When you open a TFSA account, your money will grow tax free even during the time of your withdrawal. In RRSP, on the other hand, your contributions are tax deductible and can be delayed for the upcoming tax break.


Withdrawing funds from a TFSA can be done at any time of the day and for any purpose without paying tax.

With an RRSP, withdrawals can be done at any time, for any reason, just like a TFSA. But there’s a major difference: withdrawals are taxed as income. These tax payments are disregarded if you use your funds for your first home or for continuing education.

Can withdrawals be redeposited?

Many are wondering if withdrawals can be redeposited into the account. For TFSA, yes – the contribution room is adjusted and added again in the next contribution year.

On the other hand, when you have an RRSP account, you cannot redeposit your funds unless your transaction will be used for a Lifelong Learning Plan or a Home Buyers’ Plan.

RRSP vs TFSA: pros and cons

Yes, it is true that both tax free savings account and registered retirement savings plan help in achieving financial goals, but they work differently from each other which has been proven from the pointers above. Now, in this section you will know more about the pros and cons of RRSP vs TFSA:

RRSP vs TFSA: advantages of TFSAs

Tax-free compounding

Investments made in a TFSA grow tax-free, allowing funds to grow faster and earn more without worrying about taxes. But how much is the tax-free compounding worth? Well, it may reach up to $100,000.

Shareable contribution room with spouse

Since the contributions made in a TFSA have already been taxed, there should be no problems if you decide to make contributions to your spouse’s TFSA.

This means you can share the contribution room with your spouse and take full advantage of having a tax-sheltered space too.

Unchanging contribution room regardless of income

Whether you experience changes in your income, the contribution room for your TFSA will stay the same. This is great for those who are earning a low and moderate income.

Contribution room carried over the next year

Whenever you make withdrawals in your TFSA, the contribution room will reset every 1st of January. This will work well for short-term and medium-term goals.

No mandatory withdrawals

Unlike the RRSP that has forced withdrawal at age 71, TFSAs do not come with mandatory withdrawals.

Withdrawals do not affect government benefits

Withdrawals made from TFSAs will not be counted as income. No matter how many times you withdraw your funds, that will not affect your government benefits.

No tax upon death

Since TFSAs are tax-free, there are no tax payments even upon death. You can transfer your assets to your spouse, children or loved ones without impact from taxes.

RRSP vs TFSA: disadvantages of TFSA

TFSAs seem to be an ideal form of investment – is there a downside? The answer is yes, those imperfections include:

No barrier to withdrawals

Even though TFSAs do not have any mandatory withdrawals, this can also be a reason for drawbacks.

No income tax reduction

Another downside of TFSA is that you cannot decrease your income tax when contributing to this account.

No protection from creditors

The biggest setback when opening a TFSA is that they are not protected from creditors. If a TFSA account holder filed bankruptcy or got involved in any lawsuit, their account can be seized by creditors.



RRSP vs TFSA: advantages of RRSP

Certain withdrawals are tax-free

RRSP contributions can be withdrawn in two different ways, tax-free:

  • by purchasing a house under the Home Buyers’ Plan (HBP)
  • through continuing education via the Lifelong Learning Program (LLP)

These two programs have limitations on their withdrawals and may require that payments be made for 15 years.

Withdrawable at any age

Withdrawals can be made at any age, even before retirement.

Contributions are considered as tax deductions

The contributions in an RRSP account are considered tax deductions which can lower net income. What it can bring is higher income from government benefits.

Creditor protected

Unlike TFSAs, RRSPs are well protected from creditors in the face of bankruptcy or lawsuits.  

Tax free compounding

Investments made in RRSP accounts grow tax-free. Contributions grow much faster without being affected by annual taxes.

Lifetime low tax rate

Here’s another benefit that many investors consider when opening an RRSP account: contributions can be made during the high tax years and can be withdrawn in low tax years. As a result, this can lower the average lifetime tax rate.

RRSP vs TFSA: disadvantages of RRSP

Withdrawals are ordinary income

Compared to TFSAs, post-taxed RRSPs may turn all its gain into ordinary income. Income generated in these accounts gets taxed at a marginal tax rate.

Withdrawals impact income tested benefits

Whenever you withdraw your funds in an RRSP, it can highly affect government benefits. This is a considerable risk especially for low-income earners and families.

Contribution room disappears

When you withdraw your contributions in RRSP, your contribution room will never come back. There’s no chance of getting it back in the next fiscal year.

Income based contribution room

The contribution room that you can have in an RRSP is based on gross income. This can be offset, compared to a TFSA where contribution rooms stay the same no matter how big or small the income.

Contribution room cannot be shared with spouse

Few couples disregard RRSP as their investment tool because they cannot contribute to each other’s account.

Mandatory withdrawals at age 71

RRSPs are closed when the account holder turns 71. They have 3 options:

  • withdraw the funds in full, subject to withholding tax
  • use the funds to purchase an annuity
  • convert the account into a Registered Retirement Income Fund (RRIF)

With RRIF accounts, withdrawals should be made whether you need the funds or not.

Tax refunds get spent

The biggest disadvantage of an RRSP is that the tax returns are often spent. These returns may be more tempting to spend than to reinvest or save. But be careful: if you choose to spend your tax return, you might be spending more than its value because of the tax on withdrawals.

RRSP vs TFSA: which is better?

Well, both account types can serve and help Canadians in many ways. What’s important is deciding on a financial goal, then choosing whether the RRSP or TFSA serves that goal best.

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