Is it possible to save for the future and reach your investment goals? Yes! Accounts like Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) allow you to take control of your financial future. However, making a choice between the two can be really tough, especially when you have to think about the benefits of TFSA vs. RRSP.
But don’t worry; we’ve got you covered. In this blog, we will take a closer look at the top differences between TFSA vs. RRSP and help you choose the right account. So buckle up and get ready to make an informed decision.
Differences Between TFSA and RRSP
TFSAs and RRSPs offer many benefits to investors, but there are some key differences between the two that you need to be aware of. Let’s explore the top features of these saving accounts:
|Registered Retirement Savings Plans (RRSPs)||Tax-Free Savings Accounts (TFSAs)|
|An RRSP account can be opened by anybody up to the age of 71 who has earned money and filed their taxes.||Anyone who’s over 18 can open a TFSA.|
|It is a good option for high-income earners to save money for their retirement.||It is a general saving account for people with low income.|
|For 2023, the RRSP contribution limit is 18% of the earned income (up to $30,780) reported on your tax return in the previous year.||The annual contribution limit for TFSA is $6500.|
|To withdraw money from your account, you will have to pay an income tax, except in situations like taking out your money to buy a home or for the Lifelong Learning Plan.||You can withdraw money from your TFSA anytime without paying the tax.|
|Contributions to RRSPs are tax deductible. The money growth is tax-sheltered with taxes deferred.||There is no tax deduction for contributions made to TFSA, and your money grows tax-free.|
|Tax penalties are imposed on contributions that exceed $2,000 per year.||There is a 1% penalty on any amount of over-contribution.|
|Contribution to Spouse Account|
|With an RRSP, it is possible to contribute to your spouse’s account and enjoy the benefit of paying less income tax as a couple.||There is no option to contribute to your spouse’s account with a TFSA, as it is for individuals only.|
|You need to convert your RRSP account to a Registered Retirement Income Fund (RRIF) once you turn 71.||TFSAs stay open for life.|
RRSP vs. TFSA: Which is Better?
As an investor, you must be thinking about whether the best way forward is to contribute to TFSA or RRSP. Well, it all comes down to your goals and financial situation, but here are a few things you should consider before investing in each:
- If you earn more than $50,000, invest in RRSPs since the money creates a tax deduction that helps lowers your income tax.
- However, the tax deduction will be less if your income is less than $50,000. This is because you won’t be paying much income tax after claiming the basic tax credits. In such situations, investing in a TFSA would be a better choice.
Defining your saving goals before investing is a wise decision.
- For your long-term goals like retirement RRSP works best.
- Whereas for short-term goals like buying a car, planning a vacation, renovating your home, etc., a TFSA account would be more suitable.
Contributing to RRSP is a smart move if you want to buy a home or fund your education. This will give you the opportunity to avail the: Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP).
- Through the HBP, you can withdraw up to $35,000 (tax-free) from your RRSP, which must be repaid within 15 years.
- Similarly, the LLP allows you to use your RRSP savings (up to $20,000) for full-time education that can be repaid within ten years.
What is an FHSA & How is it Different from TFSA and RRSP?
The Tax-Free First Home Savings Account (FHSA) is a savings account for home purchases. Thanks to this account, first-time home buyers can save up to $40,000 tax-free. Here are some of the important features you may need to know about FHSA:
- You can move your savings into an RRSP or RRIF tax-free if you decide not to use your FHSA contributions to buy a home. In any other case, the withdrawal from FHSA will be taxed as taxable income.
- It is possible to have all three saving accounts: FHSA, TFSA, and RRSP at the same time. But, if you are planning to use the FSHA to buy a home, you won’t be able to apply for the RRSP Home Buyer’s Plan simultaneously.
The First Home Savings Account (FHSA) combines certain features of TFSA and RRSP. However, there are certain differences between these savings accounts, such as:
- To open an FHSA account, you must be at least 18 years or older and a first-time home buyer.
- The yearly contribution limit for this account is $8000.
- Through FHSA, you can reduce your tax and carry forward undeducted contributions.
- Contributions made to this account within a certain tax year are deductible from income, while withdrawals are tax-free.
Achieve Your Saving Goals Faster
Both TFSA and RRSP are excellent options to achieve your saving goals. Selecting either one will offer you tax benefits and growth opportunities. If you want to learn more about saving accounts, check out “Get Smarter About Money” for amazing tips.
And, if you are searching for ways to increase your returns and get exciting benefits, RealAlt®– an RRSP and TFSA eligible fund, can help you with that.
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Frequently Asked Questions
When to use TFSA vs. RRSP?
A TFSA is a good choice if your RRSP contributions have reached the maximum limit. It can help you save more money and get the benefits of tax-free withdrawals and growth. On the other hand, if you want to save money for retirement, then an RRSP should be your go-to option.
Why is TFSA better than RRSP?
TFSA is better than RRSP as:
- There is no tax on your earnings.
- You can withdraw your money without any penalties.
Is it possible to have multiple RRSP and TFSA accounts?
Yes, it is possible to have multiple RRSP and TFSA accounts. But there is a yearly contribution limit across all your accounts. In addition, you can only deposit money if you have an unused contribution room. You can log in to your CRA account to check your available contribution room.