Tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) are both used to save money. The major appeal of these accounts is that any interest you earn on them will be tax-free.
But how do TFSAs and RRSPs work, who can open an account, and which one is right for you. Keep reading for a detailed TFSA vs RRSP comparison.
| Feature | TFSAs | RRSPs |
|---|---|---|
| What it’s used for | Saving money to reach any savings goal | Saving for retirement |
| Tax-free interest | Yes | Yes |
| Tax-free withdrawals | Yes | No. Tax is withheld at a rate between 10% and 30% (5-15% + provincial tax in Quebec) on withdrawals you make before retirement. RRSP withdrawals must also be included as part of your income on your tax return |
| Tax-deductible contributions | No | Yes |
| Holds other investments | Yes | Yes |
| Contribution limit | $7,000 per year (in 2024) or $95,000 total | 18% of earned income or up to $31,560 for 2024 |
| Eligibility |
|
|
| Expiry date | No | Must be converted to a registered retirement income fund (RRIF) at the age of 71 |
TFSAs and RRSPs are both government-registered plans that let you save and invest money while also paying less tax. The investment that’s best for you will depend on factors such as what you are saving for, your income and when you want to take your money out.
RRSPs are designed to help you save for retirement. The biggest benefit of these types of investments is that you can deduct the amount you put in each year from your taxable income. The downside is that you’ll need to pay tax on any money you withdraw, and you lose that contribution room when you make a withdrawal. This type of investment is a particularly good fit for high-income earners because it allows you to defer tax until retirement, when you could potentially be in a lower income tax bracket.
RRSPs can be used to hold a wide range of investments, including cash, stocks, ETFs, bonds, GICs and mutual funds.
Dive deeper: What is an RRSP and how does it work?
TFSAs can be a good choice if you want to save money in the long term, but you still want easy access to your funds in an emergency. The biggest benefit of these types of investments is that you can take your money out whenever you want without being penalized. The downside is that you won’t be able to claim any money you put in as a tax deduction. This type of investment is a particularly good fit for those who are in a lower tax bracket or don’t have much to invest.
Just like an RRSP, a TFSA can be used to hold investments such as cash, stocks, ETFs, bonds, GICs and mutual funds.
Dive deeper: What is a TFSA and how does it work?
The return you’ll earn with TFSAs vs RRSPs will depend less on which investment you choose and more on which financial institution you put your money with. The provider that offers the highest interest rate on your investment will typically net you the highest returns overall.
Your returns will also be influenced by your risk appetite and what type of investments you hold in your TFSA or RRSP. Both accounts are designed to hold a number of investments like stocks, bonds, mutual funds, guaranteed investment certificates and precious metals. You’ll likely earn a higher return if you mix and match these investments to create a balanced portfolio within your TFSA or RRSP.
TFSAs offer much more flexibility than RRSPs because they let you take your money out of your account whenever you want, without penalty. That said, you won’t be able to take advantage of special benefits like tax deductions which can help to bring down your taxable income and save you money at tax time.
RRSPs give you higher contribution amounts and your contributions are tax-deductible. But once your money is invested, if you make a withdrawal you’ll lose a big chunk of your savings to taxes.
The current rates of RRSP withholding tax are:
If you’re a resident of Quebec, provincial tax is also withheld.
There are only two exceptions that allow you to withdraw money from your RRSP for purposes other than retirement.
RRSPs let you contribute more over the lifetime of your investment, but the amount you can contribute each year depends on how much money you earn. Your RRSP contribution limit for 2024 is 18% of the earned income you reported on your tax return in the previous year, up to a maximum of $31,560.
TFSAs have smaller annual contribution limits. You can invest $7,000 per year (as of 2024) with up to $95,000 for the lifetime of your TFSA.
TFSAs and RRSPs both let you carry your unused contribution amounts forward into future years. For example, if you only contribute $5,000 to a TFSA instead of the maximum of $7,000, the $2,000 difference will be added to your contribution limit for the following year, allowing you to contribute up to $9,000. You’ll also incur penalties from the Canada Revenue Agency (CRA) if you exceed your maximum allowable contribution in any given year.
Yes, you can hold a TFSA and an RRSP at the same time and contribute to both. This could be a good solution for you if you want to save for retirement (with an RRSP), but you’d also like to stow away an emergency fund (with a TFSA) that you can use at any time without penalty.
You may even want to max out your contribution for both types of investments each year. This will let you take advantage of tax breaks while still earning the maximum amount of tax-free interest on your investments.
Should you invest in a TFSA or an RRSP? The answer depends on your financial situation and goals.
Ultimately, you may decide to open both types of accounts. This will allow you to save for shorter-term goals and build a rainy-day fund with a TFSA, while also investing for your retirement with an RRSP. If you’re not sure about the best approach to help you reach your financial goals, speak to a financial advisor.
RRSPs and TFSAs can both be used to save for the future and pay less tax. RRSPs may be the best fit for you if you want to take advantage of tax deductions and you won’t need to access your savings in the short term. TFSAs may be a more suitable choice if you’d prefer tax-free withdrawals or you want easy access to your savings. For the best of both worlds, you can also look at investing in both products at the same time.
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