TFSA vs RRSP – What you need to know!

TFSA – Tax Free Savings Account –

It is an account that does not apply taxes on any contributions, interest earned, dividends, or capital gains. Apart from this, it can be withdrawn tax free.

RRSP – Registered Retirement Savings Plan –

It is a retirement savings plan established by you and it is registered by CRA to which you or your spouse or common-law partner contributes. You can use Deduction RRSP contributions to reduce your tax.
How your income is taxed when you contribute or withdraw from each account- These are the main difference between the RRSP and TFSA.
RRSP is a tax-deferred account, which means you give to it with pre-tax incomes and you’ll pay your income taxes on your withdrawals.

TFSA is a tax-free account –

In this category, you contribute to it with after-tax income, so you’ll pay no more income taxes when you make a withdrawal. Because of this tax structure, you come up with the same amount of money whether you choose the RRSP or TFSA. This is a reason that why you should not think about your TFSA vs RRSP decision.
For example, here’s what happens when you compare putting your earned income in a TFSA vs RRSP:

TFSA RRSP
Gross earned income $1000 $1000
Income tax (30%) $300 $0
Net contribution $700 $1000
Value after 30 years at 6% $4020 $5743
Income tax at withdrawal $0 $1723
Net $4020 $4020

Facts about TFSA & RRSP

TFSA RRSP
Flexibility  Can be withdrawn anytime and used for anything  Can’t take out money penalty-free except for buying your first home or under the lifelong learning plan
Tax Rules Tax-Sheltered growth on investments Tax-Sheltered growth on investments
Direct Contribution Can contribute directly (up to $63,500 total as of 2019) Can contribute directly (10% of pervious year’s income earned up to $26500 for 2019)
Tax Deductions No tax deduction for contributions You get a tax deduction in the year you make a contribution
 Withdrawal Rules Withdraw any amount at any time without paying income tax Withdraw any amount at any time, subject to income tax
Net

In the end, we would like to suggest you that if you are a high-income(i.e in highest tax bracket) earner, then you can contribute to your RRSP and get the maximum tax deduction on your personal tax return.

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