What is the difference between an RRSP and TFSA? Which make the most sense for my savings plan?


The differences can be explained easily and the decision to choose depends on a few factors: your current tax rate, your reason for saving, and your future tax rate.


A registered retirement savings plan (RRSP) is primarily intended for retirement savings. Annual contributions are tax deductible and contribution limit is based on earned income. Starting at whatever age you begin working and filing a tax return your contribution room begins. It is based on 18% of your earned income in a year to a maximum of $24,270 for the year 2014. If you do not contribute to an RRSP your contribution room accumulates and you can contribute even larger amounts in the future.


A tax-free savings account (TFSA) was introduced for the first time by the federal government in 2009. Anyone 18 years of age or older was eligible to contribute and the maximum contribution room was a set amount of $5000. Again in 2010, 2011 and 2012 the room for each year was $5000. In 2013 that amount increased to $5500 and was the same for 2014 and expected to remain at that for the next few years. TFSA contribution room also accumulates if not used so anyone who was 18 or older in 2009 and has not contributed has $31,000 of room available.




How Do I Choose Between a TFSA and a RRSP?

With an RRSP, you can deduct the contribution from your income, which earns you a tax refund.  However, the money invested and its growth become fully taxable when you take it out.  The TFSA is the reverse.  You do not get a tax deduction now but you don’t pay tax on the withdrawals either.  Both investments serve as a tax shelter as no taxes are paid while the investment grows.  The ultimate question comes down to whether you want to pay the taxman now (no deduction with contribution) or pay later (taxable upon withdrawal).


Your tax rate should help you determine which option is best.  If you are currently in a higher tax bracket than you expect to be when you withdraw the funds, then it is better to purchase an RRSP.  Your original contribution will give you a substantial tax rebate now and there will be less tax to pay on withdrawal when you are in the lower bracket.  If you plan to take the money out soon while you are still in a high or even higher tax bracket then the choice should be a TFSA.


The Main Differences Between a Tax-Free Savings Account and a Registered Retirement Savings Plan





Annual contributions are tax deductible 


Contributions are not tax deductible


Withdrawals are taxed as earned income


Withdrawals are not taxed as earned income


Maximum contribution room in a year is 18% of earned income to a maximum of $24,270 for 2014


Maximum contributions in a year are now $5,500 no matter what your income is and you do not require an earned income to contribute


Unused contribution room can accumulate


Unused contribution room can accumulate


RRSPs must be converted to a registered retirement income fund or life annuity by age 71


TFSAs do not have to be converted into another investment form at any age


Upon death an RRSP can be rolled over tax-free to your spouse but when he/she dies what’s left will be taxed before going to your heirs


The TFSA rolls over tax-free to your spouse upon your death and continues to grow tax-free until their death




May be a better option for high income earners


May be the better option for lower-income earners


Can affect government benefits such as Old Age Security


Will not affect other government benefits such as Old Age Security



There are spousal RRSPs



There is no spousal plan




This is only a brief overview of the differences between a TFSA and RRSP.  For more information please visit O’Reilly Insurance and we will be happy to help you plan the best savings strategy for you.





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