Alphil J. Guilaran
Alphil J. Guilaran
February 11, 2019

If you are looking for tax-efficient ways to save, TFSAs and RRSPs maybe effective options to help achieve your savings goals. TFSAs and RRSPs have distinct differences, advantages, and disadvantages -let’s look at their key features:

  • While a TFSA can be used for any type of savings, an RRSP is used exclusively for retirement savings.
  • You can enjoy tax free withdrawals from your TFSA due to the fact that you make your contributions after you have paid tax, whereas the opposite is true for withdrawals from your RRSP (except in the case of lifelong learning plan and home buyers’ plan)
  • TFSA contributions aren’t tax deductible whereas RRSP contributions are i.e. with an RRSP, you can deduct the contributions that you make from your income when you file your tax return.
  • It is required that you use earned income to contribute towards your RRSP but this is not the case for your TFSA.
  • You can continue to contribute towards your TFSA for as long as you like, whereas you must close your RRSP and stop contributing towards it when you turn 71 and purchase an annuity or convert it to a RRIF with the savings that you have made within the plan.
  • You are able to specify your spouse as your beneficiary with both your TFSA and your RRSP, however there is a key difference with how your savings are treated upon your spouse’s death. With an RRSP, there will be taxes payable upon the monies left in the plan by your children who inherit it, whereas with a TFSA, tax is only paid on the increase in the value of the plan since the date of death in the year that it is inherited by your children. What’s more, no tax is payable if the value that they receive is less than the value of the TFSA at the time of death.

 

TFSA RRSP
Used for any type of savings Used exclusively for retirement savings
Tax free withdrawals since TFSA contributions are made after you have paid taxes Withdrawals are not tax free
(except in the case of the lifelong learning plan and home buyers’ plan)
TFSA contributions are not tax deductible RRSP contributions are tax deductible - with an RRSP, you can deduct the contributions that you make from your income when you file your tax return
Not required to use earned income to make contributions towards your TFSA Required that you use earned income to make contribution towards your RRSP
You can make contributions towards your TFSA for as long as you like You must close your RRSP and stop making contributions when you turn 71 and purchase an annuity or convert it to a RRIF with the savings that you have made within the plan
You are able to specify your spouse as your beneficiary. Upon your spouse’s,death, tax is only paid on the increase in the value of the plan since the,date of death in the year that it is inherited by your children. No tax is,payable if the value that they receive is less than the value of the TFSA,at the time of death. You are able to specify your spouse as your beneficiary. Upon your spouse’s death, there will be taxes payable upon the monies left in the plan by your children who inherit it.

 

 In summary, your individual circumstances will dictate which plan is the most appropriate for you, depending on your tax position and withdrawal intentions. The primary difference between both plans is the timing of the taxes payable, i.e., if you want to defer the payment of your taxes, particularly if your marginal tax rate will be lower in retirement, an RRSP may be more beneficial for you. Alternatively, if your marginal tax rate will be higher when you plan to make withdrawals, a TFSA may suit you better.

Contact us and we can help you determine what suits your unique situation best.