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.
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 You’ll only pay income tax on this money when it’s withdrawn from your RRSP at a later date, which is typically when you retire.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.
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
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, such as pension adjustments. Check with the Canada Revenue Agency (CRA) for more details.
The RRSP contribution deadline for the 2018 tax year is March 1, 2019. Contributions made after this date will result in a tax receipt for 2019.
You can contribute a maximum amount of $6,00 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.
At what age can you contribute?
- You must be earning an income2
- Maximum age to contribute is 71
- You must convert your RRSP into an income annuity or a registered retirement income fund (RRIF) by Dec. 31 of the year you turn 71
- Must be 18 or older, have a valid social insurance number and be a resident of Canada
- You can contribute every year, regardless of age
What’s best for me?
There’s no hard and fast rule, but consider these factors:
- If you’ll need to withdraw money soon, a TFSA may be better
- 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
- Contact an investment representative if you need help
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.
2Earned income can be more than just your salary. For RRSP purposes, earned income is the annual total of: employment income, net rental income, net income from self-employment, royalties, research grants, alimony or maintenance payments, disability payments from CPP or QPP and supplementary UIC payments. Your investment representative can help you determine what this means for you.
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.