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 Apart from this, it can be withdrawn tax free.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:
|Gross earned income||$1000||$1000|
|Income tax (30%)||$300||$0|
|Value after 30 years at 6%||$4020||$5743|
|Income tax at withdrawal||$0||$1723|
Facts about 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|Flexibility||Can be withdrawn anytime and used for anything||Can’t take out money penalty-free except for buying your first home or under the lifelong learning plan|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|
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.