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Comparing TFSAs and RRSPs: How do they stack up?
At RBC Insurance®, we can help you understand and make the most of your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP).
- Contributing to an RRSP? An advisor can show you how a TFSA can complement your current plan.
- Close to retirement? We can help you take the right steps to protect and continue growing your nest egg.
- Already retired? Let us show you how you can use a TFSA to enjoy tax-free income.
Whatever your situation, take a few minutes to explore the key differences, similarities and benefits of TFSAs and RRSPs. Contact an advisor today to get started on your personal plan!
How does a TFSA compare to an RRSP?
A TFSA shares some similarities with an RRSP, however, there are several key differences:
|
TFSA |
RRSP |
| Primary purpose? |
To save for any purpose |
To save for retirement (Can also be used to save for a first home or full-time continuing education) |
| Contribution allowed per year? |
Up to $5,000 |
Up to 18% of previous year's earned income, less any pension adjustment ($20,000 limit for 2008) |
| Need earned income to contribute? |
No |
Yes |
| Age eligibility to contribute? |
Age 18† and up |
Up until the end of the year in which you turn 71 |
| Contributions tax-deductible? |
No |
Yes, resulting in an income tax refund |
| Savings grow tax-free or tax-deferred? |
Tax-free |
Tax-deferred |
| Withdrawals tax-free? |
Yes, with no tax payable on interest, dividends or capital gains accumulated |
No, withdrawals are considered taxable income in the same year |
| Withdraw savings for any reason? |
Yes, at any time |
No, not without being included in taxable income (unless participating in the Home Buyer's Plan or Lifelong Learning Plan) |
| Withdrawals affect contribution room? |
No, withdrawals do not reduce contribution room—they are added to unused contribution room the following year |
Yes, withdrawals affect contribution room and you must generate more contribution room to re-contribute |
| Carry-forward allowed? |
Yes, you can carry forward unused contribution room indefinitely |
| Investment options? |
RBC Guaranteed Investment Funds (through RBC Insurance) are one of many options for both |
| Does account/plan affect government benefits? |
Income earned and withdrawals will not affect eligibility for Federal income-tested government benefits and credits such as Old Age Security (OAS) |
Withdrawals could affect eligibility for income-tested government benefits and credits since withdrawals are considered taxable income |
| Over-contribution penalty tax? |
Yes, the Canada Revenue Agency (CRA) will assess 1% per month on your excess contribution (for RRSPs, the penalty only applies if you exceed the $2,000 lifetime over-contribution amount) |
| Required to convert account/plan at certain age? |
No |
Yes—you must cash out your RRSP or convert to a RRIF, annuity or other eligible savings vehicle by the end of the year you turn age 71 |
Why should I have an RRSP—is the TFSA a better investment option?
While the TFSA is a great new investment vehicle for both your short- and long-term goals, an RRSP is still one of the most effective ways to save for retirement. Neither is better than the other—they both offer great ways to save, but fully benefiting from both will depend on how you intend to use your savings in the short and long run. Your advisor can help you maximize your short- and long-term investments by understanding these goals and helping you create a solid financial plan.
The contributions you make to your RRSP are tax-deductible, meaning that any contributions reduce your taxable income for that year—resulting in a potential tax refund. An RRSP could allow you to stay more disciplined about saving since withdrawing the funds from an RRSP early may result in paying more income tax, as withdrawals are added to your taxable income. If you're focused on saving for retirement, be sure to consider maximizing your RRSP and using your TFSA as a second source of tax-advantaged savings. If you've already retired or are not working and have no RRSP contribution room, the TFSA is a perfect tax-sheltered option to continue to save, as you are able to contribute $5,000 annually regardless of whether you are currently earning an income.
Contributions to your TFSA are not tax-deductible, however, the TFSA is a great way to save for the short or long term as you are not taxed on the earnings and can withdraw your money at any time. This makes a TFSA a great option for saving for a wide variety of your future goals: a dream vacation, a car, home renovations, or saving for emergencies and unforeseen events*.
*Please note: when investing in RBC Guaranteed Investment Funds, withdrawals may be subject to fees and will proportionately reduce your principal guarantees. Please speak to your advisor for more information.
† Canadian residents age 18 and older. The age of majority is 19 in certain provinces and territories.
Information about the Tax-Free Savings Account is based on what is currently available from the Canadian government.
This information is being provided for general information purposes only and the contents should not be relied upon as containing specific financial, investment, tax or related advice. Clients must seek their own independent advice.
Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. RBC Guaranteed Investment Funds are segregated funds and are referred to as individual variable annuity contracts. RBC Life Insurance Company is the sole issuer and guarantor of the guarantee provisions contained in these contracts. The underlying mutual funds and portfolios available in these contracts are managed by RBC Global Asset Management Inc. When clients deposit money into a RBC Guaranteed Investment Funds contract, they are not buying units of the RBC Global Asset Management Inc. mutual fund or portfolio and therefore do not possess any of the rights and privileges of the unitholders of such funds.
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