RRSP vs TFSA

Definition of RRSP

A Registered Retirement Savings Plan (RRSP) is specifically designed to help you save for retirement. Contributions to an RRSP are tax deductible and grow tax-free while held within your account. RRSPs can hold a range of investment products like stocks, bonds, mutual funds and Guaranteed Investment Certificates (GICs). You’ll pay income tax on future withdrawals, but that’s okay. If you’re in a lower tax bracket when you retire, you’ll end up paying less income tax overall. Millions of Canadians use RRSPs to save for and fund their retirement plans.

Definition of TFSA

Compared to RRSPs, Tax-Free Savings Accounts (TFSAs) are a relatively new way to save. TFSAs can be used to save for long-term goals like retirement and short-term goals as well. TFSA contributions are not tax deductible, but funds can be withdrawn from a TFSA tax-free. Like RRSPs, savings within a TFSA can be held as cash, or invested. But unlike an RRSP, funds can be withdrawn from a TFSA at any time, and for any reason, without paying any penalties or fees. The flexibility, and taxable benefits, provided by TFSAs make them an increasingly popular savings tool.

TFSAs and RRSPs provide different benefits. Which one is best for you will depend on your specific needs. In many cases, it can be ideal to use both. 

Income – High vs Low

Income can be an important factor when choosing between RRSPs and TFSAs.

RRSPs can be more advantageous for people earning a higher income. RRSP contributions are tax-deductible and can help lower the total amount of income tax you pay. While you’ll pay taxes on future withdrawals, most people will be in a lower tax bracket when they retire than when they are working. People in a lower-income bracket don’t stand to benefit as much from an RRSP, making TFSAs more appealing. If you’re somewhere in the middle, it may not make a significant difference either way. 

Purpose

Are you saving for the long-term or the short-term? Your answer can help determine whether an RRSP or TFSA is right for you.

• Saving for retirement: RRSPs were specifically created to help people save for retirement. Contributing to an RRSP lets you defer paying tax during your peak earning years. You can also optimize your savings by reinvesting your tax rebate back into your RRSP. You’ll pay tax on future withdrawals, but usually at a lower marginal tax rate considering you will be in lower tax bracket in your retirement years. With TFSAs, all your savings and income earned within the account grow tax free, which means there are no tax implications on your tax return even if you received dividend income. That's the reason many people also consider TFSA to help boost their retirement income.
• Saving for a home: The RRSP Homebuyers’ Plan (HBP) lets first time home buyers withdraw up to $35,000 from their RRSPs to use toward a new home. Withdrawals under the HBP aren’t taxed provided they are paid back within 15 years. Spouses and common law partners can each withdraw up to $35,000 for a total down payment of $70,000. Funds held within a TFSA can also be used to buy a new home. TFSA withdrawals are tax free and don’t need to be repaid. In addition, funds from a TFSA can be used to purchase any kind of home regardless of whether it’s your first home, second home, or an income property.
• Saving for education: The Lifelong Learning Plan (LLP) lets you withdraw up to $10,000 a year, or $20,000 over four years, for eligible training or education programs. You can use the funds yourself or give them to a spouse or your common-law partner. You won’t pay tax on any funds withdrawn provided you pay the money back within 10 years. Funds from TFSAs can also be used to pay for an education tax free and don’t need to be repaid.
• Short-term savings goals: The flexibility provided by TFSAs can make them better for short-term savings goals. Funds can be withdrawn from a TFSA at any time and for any reason. In addition, TFSA withdrawals aren’t taxed and don’t need to be repaid. Funds held within a TFSA can be invested into a range of eligible investment products and any income earned from those investments are tax-free as well. Just be sure to think about when you’ll need the money when deciding whether to invest in higher or lower risk products.

RRSPs and TFSAs can be opened at any bank or financial institution. You can even choose between a regular or self-directed account. Eligible investments with regular TFSAs and RRSPs are limited to the investment products offered by your bank and usually include GICs and Mutual Funds. Self-directed accounts usually offer a wide range of additional investment options including stocks, bonds and Exchange-Traded Funds (ETFs). TD Direct Investing’s self-directed accounts give you full control over your investments and let you trade on major Canadian and U.S. stock markets including the TSX (Toronto Stock Exchange), NASDAQ (National Association of Securities Dealers Automated Quotations), and NYSE (New York Stock Exchange).

TD Direct Investing makes it easy to open a self-directed RRSP or TFSA. Accounts can be opened online, over the phone or in person. 

RRSPs or TFSAs can help you achieve your financial goals. Both accounts provide certain tax benefits and help you invest and grow your savings. Either can be used for long-term savings goals like retirement with TFSAs being better for shorter-term goals. They can also be used together to help you reach your savings goals sooner.

In most cases, which account you choose may be less important than when you decided to start saving. Talk to a TD advisor today to learn more about the benefits of RRSPs and TFSAs and how they can be used to help you reach your financial goals.