Canadian Registered Retirement Savings Plans vs. Tax-Free Savings Accounts

Registered Retirement Savings Plans

Registered Retirement Savings Plans (RRSPs) are retirement accounts registered with the Canadian government. RRSPs are tax-deferred accounts, meaning that taxes are deferred for contributions made to or earnings gleaned from the accounts for the period in which they are held. Taxes are paid when money is withdrawn from the account. Any Canadian can open an RRSP account, and there is no age limit to starting one prior to the age of 71 (see below). Most people living in Canada who earn T4 income are eligible to open an RRSP account in their name and benefit from making tax-deductible contributions.

Tax-Free Savings Accounts

Like RRSPs, tax-free savings accounts (TFSAs) are registered with the Canadian government and used to save money. No tax is paid on the interest or investment income gained from the money placed in a TFSA.  While you can withdraw from a TFSA any time, you may benefit from getting funds from another account, such as a high-interest savings account, for short-term needs.  If your primary objective is planning for retirement, you will likely want to leave the money in the TFSA to earn tax-free funds from the savings and returns on investments.

What’s Different and What’s the Same? ¹

• Both can be used for retirement income, but the Canada Revenue Agency only has rules for regulating RRSPs.
• TFSAs are only open to Canadians over the age of 18. RRSPs only require you to pay taxes and earn an income (not necessarily through employment).
• Contribution limits for an RRSP include 18% of your earned income for the prior year (a maximum is set each year) and unused contributions from previous years.
• Contribution limits for a TFSA change periodically. In 2021, the contribution limit was $6,000, along with any unused contributions from prior years.
• Unused contributions refer to any years you did not contribute the maximum amount, and your unused contribution amount carries forward. This is true for both RRSPs and TFSAs.
• Withdrawals work differently when it comes to contribution limits.¹
• Since you can withdraw from a TFSA at any time, the contribution room comes back the following year.
• In contrast, you lose the contribution room with an RRSP. For this reason alone, not to mention the potential for growth you would lose, it’s best to avoid withdrawing from RRSPs unless it is planned and necessary. While both accounts have advantages where taxes are concerned, they have different rules.¹
• RRSPs are not only tax-deferred but also tax-deductible. This means you reduce the amount of tax you pay in the years you contribute.
• TFSAs are not tax-deductible, but withdrawals are tax-free. (Withdrawals from an RRSP are taxable at your annual marginal tax rate, which is not as advantageous for day-to-day withdrawals.)

You Don’t Have to Choose.

There are many advantages to using both an RRSP and a TFSA when it comes to your retirement strategy. Both are versatile and have aspects that will prove handy, both today and in the future. 

The latest for contributing to your RRSP is the last day of your 71st birthday year. Then, any remaining RRSPs are converted into a Registered Retirement Income Fund that pays out in an annuity or one-time lump sum. TFSAs don’t have any requirement for minimum withdrawals at any age, and you can continue to use them throughout your retirement.¹