TFSA vs. RRSP: What’s The Difference?
When you first start earning an income, you often wonder what to do with your “newfound” money. You may want to put aside some money for the long-term (i.e. retirement) and also invest a portion of the money in the hopes of growing your savings for more immediate use. , The two most common savings/investment accounts you hear about are Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). Two very common questions about these are, “What’s the difference between a TFSA and an RRSP?” and, “Which account is right for me?”.
There are various factors that you should consider when deciding which account is best for you. You need to consider your reasons for saving if you plan to make withdrawals from the account, and your planned contribution amounts.
What is a TFSA?
A TFSA is an investment account for individuals 18 years of age and older with no tax implications and can be used for various saving purposes—both short-term and long-term financial planning. Money can be withdrawn from this account at any time, however, there is a maximum annual contribution limit across all your TFSA accounts combined which in 2023 is $6,500 and is not income dependent. Contribution limits are cumulative, so you do not need to make annual contributions.
What is an RRSP?
An RRSP is a Canadian investment account typically used to save money for your retirement, although, it can be used for other purposes such as the purchase of your first home (Home Buyers’ Plan)..
RRSPs are considered to have a tax advantage as they are exempt from being taxed in the years you make contributions which are likely your highest income earning years —meaning you could potentially reduce the amount of tax you will be subject to paying on your income tax return. The investment income you earn from investments held within the RRSP can grow tax-deferred until it’s withdrawn.
TFSA vs RRSP: The Comparison
At the end of the day, a TFSA and an RRSP both help you do the same thing—save and invest your money. However, they are both slightly different. In the chart below, you can see some of the key differences between both account types.
| TFSA | RRSP | |
| Primary Use | Typically used for any saving purpose. | Typically used for retirement savings. |
| Account Age Restrictions | Anyone over the age of 18, who is a Canadian resident with a valid S.I.N number is able to open a TFSA and make contributions for the rest of their lives. | You are able to open an RRSP once you earn an income and file your taxes. You can continue to make contributions until December 31st of the year you turn 71. |
| Annual Contribution Limits | For 2023, the dollar limit is $6,500. This number slightly varies from year to year. | For 2023, 18% of earned income you reported on your tax return in the previous year, up to a maximum of $31,560. This number slightly varies from year to year. |
| Contribution Deadline | You can make contributions at any time throughout the year, as long as you are within your limit. | March 1, 2023, was the last day to make RRSP contributions for the 2022 tax year. This date slightly varies from year to year depending on tax season deadlines. |
| Unused Contribution | Carried forward. | Carried forward. |
| Taxes | Tax-free withdrawals, but no tax-deductible contributions. | Tax-deductible contributions, but no tax-free withdrawals. Note: Withdrawals are taxed as income unless used for the purchase of your first home. |
| Spousal Contributions | No spousal contribution benefits. | You can make contributions in your spouse’s name and receive a tax benefit. |
Investing with Bloom Investment Counsel, Inc.
While savings accounts hold great benefits, investing has the potential to generate much higher long-term returns than savings accounts – and Bloom Investment Counsel can help.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.