TFSA vs. RRSP: A Guide to Tax Saving and Investing in Canada (2024)

Aug 08, 2024

TFSA vs. RRSP: A Guide to Tax Saving and Investing in Canada (2024)

Introduction

When we start talking about tax benefits and retirement, the first thought that comes to mind is the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).

Any person, a new career beginner, or a senior near retirement will look for a bright financial future with tax savings and retirement investments. Here, we discuss the importance and differences of both the RRSP and TFSA accounts.

Key Takeaways

Account Type	Purpose	Contribution Limit	Tax Treatment	Withdrawal Rules
TFSA	Flexible Savings	Up to $7,000 annually	Tax-free growth	No tax on withdrawals
RRSP	Retirement Planning	18% of earned income (up to a maximum)	Tax-deductible contributions	Taxed upon withdrawal

Tax-Free Savings Account vs. Registered Retirement Savings Plan
TFSA (Tax-Free Savings Account)

· In 2009 Government of Canada introduced TFSA services. The purpose was to help people save and invest their money while making them tax-free throughout their lifetime.

· The tax-free account is all in one where you can set money separately for several purposes. The purpose could be education, retirement, purchasing a home, or saving for an emergency situation.

Key points:

· Tax-Free: Any fund in your TFSA is devoid of any tax.

· Your control over the account: You can add and withdraw funds whenever you want, and it is without penalties.

· Available Contribution Possibility: You can contribute only when there is an available contribution room/ space.

· Eligibility for a TFSA account: All residents of CANADA are eligible if they are of legal age(18 or 19 years as per province rules ) according to province rules.

Contribution Limits:

· According to Canada 2024 rules, you can contribute up to $7,000 maximum a year.

· It creates a contribution space every year. So, you can put your funds in your TFSA account every year.

· If you have not used your space ($6,500 contribution) for the previous year, the contribution space will accumulate next year.

Year	Annual TFSA Limit
2021	$6,000
2022	$6,000
2023	$6,500
2024	$7,000

· Example:

· Leon started her TFSA in 2023 when she was 18th.

· She can put money in TFSA when she turns 19^th (province eligibility rule) in 2024.

· So, Leon had a contribution limit of $13,500 on January 1, 2024 ($6,500 vacant space from 2023 + contribution limit of $7,000 for 2024).

Investment Options:

· As the name suggests, TFSA is not just for saving your money. You can choose to invest in this account for your future financial requirements.

· You can carry your money and choose a variety of investments in your TFSA.

· That includes,

· Savings accounts

· Exchange-traded funds (ETFs)

· Guaranteed investment certificates (GICs)

· Stocks (equities) and bonds

· Foreign investments

· Mutual funds

RRSP (Registered Retirement Savings Plan)

Registered Retirement Savings Plan (RRSP) is to help every single resident in Canada save for their retirement.

Tax Advantages:

· Tax Savvy: Think of your RRSP account, and you add some money to this account this year from your income (18% of your income). So, you will get a deduction for this amount from your taxable income. Finally, you will pay less tax and save more for this year.

· Growth: All the money you set into your RRSP account will grow and remain tax-free until your retirement.

· Withdrawals: When you add funds to this account, it is tax-free. On retirement, when you remove this money from the account, it is taxable at a minimal rate.

How Does an RRSP Work?

· Pretend you earn $75,000 yearly. Now you want to add 18% of your income to your RRSP account every year which is $13,500.

· Now you are receiving an extra $58,200 on withdrawal after subtracting your RRSP contribution. The Canada Revenue Agency (CRA) will treat this income as your earnings.

· This tax difference is not covered under tax-free rules. So, you will pay taxes for this difference when you withdraw your RRSP fund during retirement. By this time, your overall income will be small, and this will lower your tax rate.

Largest RRSP Contribution:

This Maximum of 18% contribution has limits for input and is as below for the last 5 years.

Year	Annual RRSP Limit
2020	$27,230
2021	$27,830
2022	$29,210
2023	$30,780
2024	$31,560

Opening an RRSP:

· You can open your separate RRSP as well as your employer can offer you a group RRSP.

· Your group RRSP will be deducted by your employer or with a paycheque. You can invest your RRSP funds in real estate, stocks, bonds, etc.

Withdrawal Rules:

RRSP withdrawals are primarily for retirement but there are some exceptions.

· Home Buyers’ Plan (HBP) allows you to buy your first home using RRSP funds.

· Lifelong Learning Plan (LLP) allows you to use your RRSP fund for education.

Conclusion

You will find both RRSP and TFSA important in financial planning and saving for future aspects. So, by focusing on your goals and expected expense requirements for the goal, you can choose how to save and invest your money for a strong future.
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Disclaimer:
The information provided in this blog is intended for general guidance and informational purposes only and should not be considered as professional accounting, audit, or assurance advice. Please consult with a certified professional for specific advice tailored to your situation.