The difference between RRSPs and TFSAs

Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are both popular ways to hold mutual fund investments. Each is government registered and provides tax advantages.

Tax impact

RRSP

If you put money into an RRSP, you’ll receive a tax receipt for your contribution amount which can offset your income when filing your annual income taxes.

Any gains in the value of RRSP investments are tax deferred. You’ll only pay income tax on this money when it’s withdrawn from your RRSP at a later date, which is typically when you retire.

If you wait to withdraw money from your RRSP until retirement, you’ll likely pay lower taxes because your annual income may be less than when you were working.

TFSA

TFSAs don’t have an upfront tax benefit. Any increase in TFSA value is tax free. You pay no tax on money you withdraw later.

Contribution limits and deadlines

RRSP

You can contribute up to 18% of your income from the previous year, or the annual RRSP limit, whichever is less.

There are other factors that affect your contribution limit.

The RRSP contribution deadline is usually in early March. Check with the Canada Revenue Agency (CRA) for more details.

TFSA

You can contribute a maximum amount of $5,500 for the current tax year. There’s no deadline for contributions to a TFSA.

Unused contribution room

You can carry forward RRSP contribution room until you’re 71. 

With a TFSA, you can carry forward contribution room indefinitely. You get more TFSA contribution room on Jan. 1 of each year. This way, you can make a contribution for the new tax year, and catch up on unused room from the past.¹

For example, if you haven’t contributed to a TFSA, you may have $52,000 of contribution space as of 2017.

What’s best for me?

If you’ll need to withdraw money soon, a TFSA may be better. However, if you expect your income to increase, contribute to a TFSA now, when you’re paying less income tax. Contributing to an RRSP later when you’re earning a higher income may give you a bigger upfront tax receipt at that time.

The sooner you start contributing to an RRSP or TFSA, the greater the growth potential.

¹How much unused contribution room do you have? For RRSPs refer to your notice of (re)assessment from Canada Revenue Agency or Revenu Québec (listed as ‘Your RRSP deduction limit’). Your current year’s limit will appear on your notice from the previous year. For TFSA’s call the Tax Information Phone Service (TIPS) at 1-800-267-6999 or online via the Canada Revenue Agency My Account.  

This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional.

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