One of the most common questions when it comes to saving long term is whether to invest in a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). Both will help you save, and save on taxes, but each works in different ways. Understanding the difference between the two will help you know when to use one or the other, and when you can use both.


What is a TFSA?

Introduced to Canadians in 2009, the (TFSA) has become very popular. The gains you make from any investments and savings in the account are tax-free. It’s a great incentive for saving, and for maximizing any earnings you may get. And since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.

TFSA also has very few withdrawal rules, You’re free to withdraw at any time without penalty, but there are government-mandated limits to how much you can contribute every year.

 Each year since inception an additional contribution limit was provided (I.e. of $6,000 in 2021) available for your TFSA, which means that you can put that amount away, plus any rollover from previous years. If you were 18 years or older in 2009, your contribution limit in 2021 totals $75,500.

What is a RRSP?

A registered retirement savings plan, or (RRSP), is also a government-sponsored retirement plan with significant tax benefits. An RRSP is a tax-advantaged account that allows you to defer your taxes while saving for retirement.

Instead of your earnings being tax-free (such as with TFSA), any money you contribute to an RRSP will be exempt from income taxes the year you make the deposit, The main difference from the TFSA is that you will pay tax on this money once you withdraw it. Also, you invest after-tax earnings into your TFSA, whereas you invest in an RRSP to reduce your taxes payable in the contribution year. The logic is that, because you will be retired, you will be in a lower tax bracket than during your high-earning years, and thus will pay less tax overall because you invested in an RRSP. 

What is the difference?

The crucial difference between the (RRSP) and (TFSA) comes down to their contribution limits and withdrawal restrictions, as well as how and when you pay taxes on the money saved. Our chart below summarizes some of the pros and cons of (TFSA)s and (RRSP)s.

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Which one is better for you?

Your income determines your tax bracket (the amount of income tax you have to pay) and these factors will strongly influence which investments work best for you. As a simple rule of thumb:

  • RRSP if you make over $50,000

  • TFSA if you make under $50,000

What do I do next?

At Planulife we have experienced Advisors that can help with all your RRSP and TFSA requirements. Call us today at 1(855)-600-9020