TFSA vs RRSP — A Beginner’s Look
We’ve all likely heard of them before. Especially now that’s it’s tax time here in Canada. TFSA vs RRSP becomes the buzz on radios, in the news, and maybe at work. Now that it’s tax season in Canada, I feel like I hear both acronyms on an almost daily basis throughout my day (and bonus, I live in Montreal so I also get to hear the French equivalents CELI for TFSA, and REER for RRSP) But what are either of them, and more importantly, which one is right for you?
In an earlier post we had a basic overview of the tax-free savings account (TFSA — you can read that post here!), but I haven’t mentioned much about another flagship federal savings program called the Registered Retirement Savings Plan, or RRSP.
Both are tools that serve a common goal: long term saving and investment. However, they both differ quite a bit in how they work, and the rules governing contributions and withdrawals. Today, we’ll look at TFSA vs RRSP and their main differences. This will give you a better understanding of both.
Below, I’ve outlined the main differences between RRSPs and TFSAs for you:
As you can see, when we compare TFSA vs RRSP the first thing that stands out is the flexibility that TFSAs offer you. That’s what makes them so great to save for short or medium financial goals. For those just starting out to save, you can’t go wrong with TFSAs (read more about TFSAs here).
The main downside to TFSAs when comparing them to RRSPs? They aren’t tax deductible. Since you make your TFSA contributions after-tax, your contributions are non-tax deductible. RRSPs, on the other hand are tax deductible. If used correctly, they can be used to help offset the income tax you pay. This is why RRSPs are generally purchased during your peak earning years while you’re gainfully employed. The tax you’d normally pay isn’t charged until you withdraw it.
This is where the “Sort Of” comes into play for RRSPs. You see, when it comes to RRSPs it’s all about the taxes! Since your contributions are invested pre-tax into the fund, it means the tax is only due at the time you withdraw from the fund. Technically, you’re able to withdraw money from an RRSP any time you like, although the amount you withdraw is considered new income. With new income, comes new tax, so be careful here.
With a TFSA, of course, withdrawals are non-issues. The money in the fund earns interest tax free, and you’re free to withdraw as you please.
TFSA vs RRSP: Final Thoughts…
So, who is the victor in this battle of TFSA vs RRSP? Well, it’s tough to say — in the end, it really depends on your saving goals, abilities, and income levels! Like I mentioned before, those just starting out to save or people on more modest budgets might be interested in trying a TFSA at first.
After years of just having my childhood savings account, I opened a TFSA and it changed a lot in my savings habit. That being said, as we suggested early those with a higher income level or the ability to more aggressively save may opt for the RRSP. Since it’s designed to be more long-term / retirement in nature, it means those hard-to-access funds are earning a higher interest rate. The fact RRSP contributions are tax deductible makes them a great income tax-reducing tool too — I kind of like to think of it as “hiding” a part of your earnings from the tax man (at least until you withdraw them!).
TFSA vs RRSP — who’s the winner in your books? Do you make use of either as a savings strategy? Let us know in by replying in the comments below!
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