Savings Account (TFSA) are two savings vehicles that each have their own objectives and advantages. However, which one is best for you?
When should you choose an RRSP?
The RRSP is most often used to build savings, tax free, for use at retirement. Tax on earnings is deferred until the funds are withdrawn from the plan, generally at retirement age. The RRSP is an excellent way to defer a portion of your salary in order to make up for any shortfalls in your income after you retire. Also, RRSP contributions can be deducted from your taxable income, which could lead to potential tax refunds.
RRSPs are especially beneficial when the applicable tax rate for withdrawals is lower than the income tax rate when the funds were contributed. This is the case for most people because their income at retirement is usually lower than when they were working. Also, RRSPs open the door to other related programs, such as the Home Buyer’s Plan (HBP).
When should you opt for a TFSA?
The TFSA gives the account holder the chance to invest up to $5,000 each year for various projects, without being taxed on the investment income earned. When funds are withdrawn from the account, the capital and income are not taxed. However, TFSA contributions are not deductible from taxable income.
TFSAs can be advantageous for a number of short-term or medium-term projects. It is also an ideal account for setting aside funds for emergencies. The TFSA can also be beneficial in the long term for:
- people who expect their tax rate to be higher when they withdraw funds from an RRSP than when they contribute to an RRSP;
- people who have already maximized their RRSP contributions and still have funds to invest outside a registered plan;
- retirees aged 71 or more who can no longer contribute to an RRSP;
- even low-income earners, for example students (18 or older) and people who have access to Guaranteed Income Supplements (GIS), who manage to save some money.
Both RRSPs and TFSAs allow investors to choose from a wide range of financial products. The following table will give you a quick overview of their distinguishing features.
|Contribution limit||2013 : $23,820
2012 : $22,970
2011 : $22,450
(up to 18% of earned income)
|2012 : $5,000
2011 : $5,000
(no matter the earned income)
|Unused contribution room carried forward||From year to year||From year to year|
|Creation of new contribution room if withdrawal||No||Yes, starting the following year|
|Tax on income||No||No|
|Tax on withdrawals||Yes||No|
|Impact on social programs (OAS, GIS)*||Yes||No|
|Plan maturity||The year of the 71st birthday of the contributor||None|
|Possibility to contribute to spouse’s account||Yes||No (but funds can be transferred to the spouse so he/she can contribute to his/her account)|
|Use as collateral||No||Yes|
|Mandatory minimum withdrawal||Yes (once the RRSP has been transformed into a RRIF**)||No|
* OAS: Old Age Security, GIS: Guaranteed Income Supplement
** RRIF: Registered Retirement Income Fund
Still not sure?
Just get in touch with your advisor. He or she will help you clarify any concern you may have based on your situation and your projects.
 For both the RRSP and TFSA, some penalties may apply if you exceed eligible contribution limits.