The Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) are two savings products that each have their own objectives and advantages. 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 Tax on earnings is deferred until the funds are withdrawn from the plan, generally at retirement age. This is an excellent way to defer a portion of your salary in order to make up for any shortfall in your income after you retire. Also, RRSP contributions can be deducted from your taxable income, which may lead to tax refunds.
RRSPs are especially beneficial if the amount withdrawn is taxed at a lower rate than the rate in effect when the amount was initially deposited. This is the case for most people because their income at retirement is usually lower than when they were working. RRSPs also open the door to other related programs, such as the Home Buyer’s Plan (HBP).
When should you choose a TFSA?
The TFSA will allow you to invest up to $5,500 in 2015 for various projects, without being taxed on the investment income earned. As with an RRSP, when funds are withdrawn from the account, the capital and income are not taxed. The difference, however, is that TFSA contributions are not deductible from taxable income.
TFSAs can be advantageous for a number of short-term or medium-term projects, and are ideal for setting aside an emergency fund. 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 age 71 or older who can no longer contribute to an RRSP
- low-income earners, such as 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 room1||2015: $24,930
(up to 18% of income earned)
(no matter the income earned)(indexed according to the CPI and rounded to the nearest $500)
|Unused contribution room carried forward||Annually||Annually|
|Creation of new contribution room if withdrawal||No||Yes, effective the following year|
|Tax on income||No||No|
|Tax on withdrawals||Yes||No|
|Plan maturity||The year of the 71st birthday of the contributor||None|
Although you cannot contribute to your spouse’s TFSA, funds can be transferred to him/her so he/she can contribute to his/her account, and the income generated will not be subject to the income attribution rules.2
|Use as collateral||No||Yes|
|Mandatory minimum withdrawal||Yes (once the RRSP has been transformed into a RRIF*)||No|
*RRIF: Registered Retirement Income Fund
Get in touch with your dedicated Business Development Manager, who will be pleased to refer you to an expert for advice adapted to your situation and your projects.
- For RRSPs and TFSAs, certain penalties may apply if you exceed the eligible contribution limit.
- Attribution rules are a tax mechanism whereby an individual who transfers assets to a third party must include the income earned from these assets in his or her own income.
The information in this article is not exhaustive and is for information purposes only. For financial advice or any question concerning your investment options, please consult your National Bank advisor or a professional (accountant, tax specialist, lawyer, etc.).
© 2015 National Bank of Canada. All rights reserved. Any reproduction in whole or in part is strictly forbidden without prior written consent from National Bank of Canada.