Every year, Canadians contribute to Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).1 But according to one survey by TD Bank, one in four of us doesn’t know the differences between them.2 If you’re confused, don’t feel embarrassed! While the two registered plans share some similarities — both are designed to offer tax advantages to help you grow your money — there are also big differences. If you are managing to save money at this time and are wondering how you can make those savings grow, the questions and answers below may help you decide which plan can benefit you best.
How much can I contribute?
Your annual contribution limit is related to how much you earn. For 2022, the RRSP contribution limit is 18% of your previous year’s earned income, up to a maximum amount of $29,210 (a number set each year by the government), plus previous unused contribution room less any pension adjustments.
The annual contribution limit is set by the government and is the same for everyone: For 2022, the maximum is $6,000. Keep in mind that unused contribution room gets carried forward every year. For example, if you were at least 18 years old and were eligible when TFSAs were introduced in 2009, and have never contributed to a TFSA, you would have $81,500 in contribution room by 2022.
Do I get tax deductions on my contributions?
Yes. RRSP contributions are tax-deductible. This means any contributions you make may reduce the amount of tax you pay on your income.
No. Contributions to your TFSA are not tax-deductible. Rather than a deduction, a TFSA allows your investments to grow tax-free inside the account.
Will I pay tax when I withdraw the funds?
In most cases yes. (Exceptions include the Home Buyers' Plan and Lifelong Learning Plan. More on those below.) When you withdraw funds from your RRSP, it gets taxed as income. That’s why it may make sense to wait until retirement to begin withdrawals, when your income and tax rate may be lower.
No. The investments within your account grow tax-free and you won't need to pay tax on any investment income earned or when you withdraw the funds.
What kind of investments are eligible?
You can invest your savings into a wide range of qualified investments including guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), stocks and bonds among others.
Your TFSA can hold the same types of qualified investments your RRSP can hold: GICs, mutual funds, ETFs, stocks and bonds, etc.
Can I make withdrawals when I want to?
You can withdraw funds at any time (subject to any restrictions in the investments chosen). But, since the money will be taxed on withdrawal, usually it's best to wait until you retire when your income may be lower.
You can withdraw funds at any time (subject to any restrictions in the investments chosen). This can make it a flexible option for important life goals like major purchases, renovations or vacations.
Can I keep contributing after I'm retired?
Yes, but only up to the end of the year you turn 71. At that point, there are several options available to you, including a Registered Retirement Income Fund (RRIF). If you convert your RRSP into a RRIF, you are required to withdraw a certain percentage of that RRIF annually.
Yes. There is no upper age limit for contributions to a TFSA. You may make your maximum annual contribution every year without any tax consequences.
Are there any other key features of these registered plans I should know about?
The Home Buyers' Plan (HBP) allows you to withdraw up to $35,000 towards the purchase of your first home without triggering additional taxes. Likewise, you may withdraw up to $20,000 for education purposes under the Lifelong Learning Plan (LLP). Both these plans have eligibility requirements, conditions, and come with strict schedules for payback into the RRSP.
You can never lose your contribution room. If you don't contribute for several years, you can make up those contributions at any time in the future. If you withdraw some funds one year, that amount is added back to your contribution room the next year.
Where can I see how my contributions might grow?
You can see how your RRSP savings might grow using TD's Retirement Calculator.
You can see how your TFSA savings could grow using TD's TFSA Calculator.
So…which one is best for me?
If you are able, you can maximize your contributions for both. Generally, RRSPs are ideally suited for retirement saving and may be beneficial for individuals with a high income. On the other hand, TFSAs offer more flexibility when withdrawing funds which can be helpful when saving for long- and medium-term goals. But everyone’s situation is different: A chat with a financial advisor may help determine which choice may be the best for you.
- Household contribution rates for selected registered savings accounts, Government of Canada, Sept. 13, 2017, accessed Dec. 1, 2020, www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016013/98-200-x2016013-eng.cfm ↩
- TD Survey Finds Half of Canadians Know RRSPs and TFSAs are Critical to their Savings Strategy, But One in Four Don’t Understand the Differences, TD Bank, Jan. 27, 2020, accessed Dec. 1, 2020, td.mediaroom.com/2020-01-27-TD-Survey-Finds-Half-of-Canadians-Know-RRSPs-and-TFSAs-are-Critical-to-their-Savings-Strategy-But-One-in-Four-Dont-Understand-the-Differences ↩