RRSP vs TFSA: what's the difference?
The registered retirement savings plan (RRSP) and the tax-free savings account (TFSA) are registered accounts with distinct features and benefits. Both are great vehicles for saving money to achieve your financial goals, and both can hold a wide range of investments, including stocks, exchange-traded funds (ETFs), mutual funds, bonds, GICs, and cash.
The best way to leverage these two options depends on your particular objectives and priorities. To help equip yourself to make sound decisions, consider these definitions and guidelines:
TFSA
A TFSA is a general-purpose investing account that allows you to earn tax-free investment income.
- Annual contribution limit is $7,000
- Investments within the account can grow and earn income tax-free, and withdrawals are not taxable
- Unused contribution room can be carried forward indefinitely
- If you withdraw funds from your TFSA, your contribution room is re-established in the following year
- The minimum contribution age is 18
- You can maintain a TFSA for as long as you live
RRSP
An RRSP account is designed to help you invest for retirement.
- Contributions are tax deductible up to the deduction limit found on your most recent Notice of Assessment from Canada Revenue Agency.
- Investments within the account can grow and earn income on a tax-deferred basis, as long as the funds remain in the plan
- Tax is payable only when you withdraw funds from your plan
- There is no minimum contribution age, but you must have earned income
- You must close your RRSP by the end of the year in which you turn 71
What are you investing for?
How a TFSA or an RRSP might be part of your solution:
| Investment purpose | RRSP | TFSA |
|---|---|---|
| Real estate purchase | Under the Home Buyers' Plan (HBP), if you are a first-time home buyer, you can borrow up to $60,000 individually ($120,000 per couple) from your RRSP. The borrowed amount must be paid back within 15 years. | Savings are easily accessible. Withdrawals from your TFSA are tax-free and can be re-contributed later. |
| Education | Under the Lifelong Learning Plan (LLP), you can borrow up to $10,000 per year (up to a maximum $20,000) from your RRSP to support your or your spouse's (but not your children's) qualifying full-time education program, based on specific criteria. The borrowed amount must be repaid within 10 years. | Can help provide additional funding for education for you or anyone else. You can gift withdrawals to your children, with no tax consequences, to supplement savings from a registered education savings plan. |
| Retirement planning | RRSPs are a popular retirement savings vehicle due to the preferential tax treatment and related account features. | Typically used to complement your funded RRSP. |
| Big ticket item or vacation | Since withdrawals are part of your taxable income, using RRSP assets for big-ticket purchases is not ideal. | Ideal for saving for purchase goals, since withdrawals are tax-free. |
To learn more about RRSPs and TFSAs, read RRSP vs. TFSA: Find the right balance.
If you transfer assets from another institution to your Qtrade Direct Investing account, we will cover your transfer-out fees up to $150. For terms and conditions of that offer, and for help with your transfer, visit our Account Transfer page.