Which Is Better For Me RRSP or TFSA Canada? Choosing between TFSA and RRSP is easier than you think. Everyone should have both a TFSA and an RRSP, preferably in an investment account. The TFSA makes sense for almost everyone, but the RRSP is best for high-income earners or your TFSA is maxed out.
When it comes to budget cuts, the debate between the TFSA and the RRSP is always at the forefront. Many people are not sure whether to choose the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA) or a combination of both to save money for the future.
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Which Is Better For Me RRSP or TFSA Canada?
Regardless of whether you decide to use the RRSP or the TFSA (or both!), one of the best things you can do is invest consistently. For this reason, I recommend setting up a pre-authorized “set it and forget it” investment solution to pay for you first. Over time, you can gradually increase your contributions until you’ve exhausted both accounts.
| TFSA | RRSP | |
| Gross earned income | $1,000 | $1,000 |
| Income tax (30%) | $300 | $0 |
| Net contribution | $700 | $1,000 |
| Value after 30 years at 6% | $4,020 | $5,743 |
| Income tax at withdrawal (30%) | $0 | $1,723 |
| Net | $4,020 | $4,020 |
Please note that the table above contains some assumptions, namely that if you claim your RRSP contribution at the time of tax to receive a refund, you will put that refund in your RRSP. If you make RRSP contributions and claim them when filing your tax receipts, but don’t use the tax credit to further increase your investment, the calculations are not the same. Likewise, the calculations assume you know what your marginal tax rate will be when you retire, which is hard to predict if you’re in your 20s or 30s!
Comparison between TFSA and RRSP
Which Is Better For Me RRSP or TFSA Canada? Despite their names, neither the RRSP nor the TFSA needs to be a savings account. You can and should hold a variety of investments in your accounts, such as B. GICs, mutual funds, stocks, bonds, and ETFs. These two accounts should be better called “tax-free investment accounts” and “registered retirement plans” because investing is really the best way to unlock the power of these accounts.
The real difference between the RRSP and the TFSA is their contribution limits and withdrawal limits, as well as how and when you pay taxes on these events. Our table below summarizes some of the pros and cons of TFSAs and RRSPs.
Both the TFSA and the RRSP are investment vehicles that protect the taxes on your investment returns, but depending on your circumstances, one may be more bang for your buck than the other.
The TFSA is more flexible and offers a better tax benefit than the RRSP, but does not have as high a contribution margin. The RRSP will probably let you put more aside but has stricter rules about when you can withdraw your money and for what. Ultimately, everyone should strive to have both an RRSP and a TFSA and spread the savings across both accounts.
Key Difference Between RRSP and TFSA
Talking of which is better for me RRSP or TFSA Canada? The main difference between the RRSP and the TFSA is how your earnings are taxed when you deposit or withdraw from each account.
The RRSP is a tax-deferred account, meaning you contribute pre-tax dollars and pay your income taxes on your withdrawals.
The TFSA, on the other hand, is a tax-exempt account – that is, you contribute with after-tax income, so when you withdraw, you no longer pay income tax. Because of this tax structure, you should end up with the same amount whether you choose RRSP or TFSA, so don’t get too worked up about your decision between TFSA and RRSP.
For example, this is what happens when you compare which is better for me RRSP or TFSA Canada; your earned income in a TFSA to an RRSP:
| Flexible? | TFSA Can be withdrawn anytime and used for anything | RRSP Can’t take out money penalty-free except for buying your first home or under the Lifelong Learning Plan |
| Investment options: | You can choose your own investments | You can choose your own investments |
| Tax Rules: | Tax-sheltered growth on investments | Tax-sheltered growth on investments |
| Direct Contributions? | Can contribute directly (up to $81,500 total as of 2022) | Can contribute directly (18% of the previous year’s earned income up to $29,210 for 2022) |
| Tax Deduction? | No tax deduction for contributions | You can claim a tax deduction in the year you make a contribution or carry it forward to future years |
| Expiration? | No expiry | RRSP must be converted to a Registered Retirement Income Fund (RRIF) by Dec 31 of the year you turn 71. | |
| Contribution Limits: | Annual maximum: Varies year to year. Max of $6,000 for 2022. | Annual maximum: 18% of previous year’s earned income up to $29,210 (whichever is lower). | Lifetime maximum: As of 2022, $81,500 total for those who were 18 in 2009 |
The low point of the TFSA
The TFSA was introduced in 2009 to provide Canadians with a more flexible savings tool. Like the RRSP, the TFSA is best suited for retirement planning. But unlike the RRSP, the TFSA can be used for something else! Here are the top 5 things to remember about TFSAs:
It is a very flexible universal savings tool that allows you to easily deposit and withdraw money from a tax-deferred account without penalty.
You can open a TFSA as soon as you turn 18 and there is no expiration date.
You can withdraw tax-free money from your TFSA at any time and for any purpose. You can only replace the withdrawal amount in the same year if you have a TFSA contribution margin left (unless you want to pay a penalty). The contribution room is returned in the following calendar year.
When you retire and start withdrawing money from your RRSP and TFSA accounts, the government counts your RRSP withdrawals towards your “clawback” from your Old Age Security (OAS). However, that’s not the case when you retire from TFSA – a huge bonus.
Some employers only offer Pension Match premiums for RRSP premiums. If so, go for RRSP vs. TFSA!
The Basic Facts about The RRSP
To know which is better for me RRSP or TFSA Canada, we suggest you also read this basic facts about the RRSP; The RRSP was introduced in 1957 to help Canadians save for retirement. Here are the 6 key points about RRSPs to remember:
Because premiums are paid with pre-tax income, you can claim a tax deduction in the year in which the premium was paid. If you don’t reinvest your tax refund, you will lose the pre-tax benefits.
Unlike a TFSA, you have to pay taxes when you withdraw money. RRSP must be converted into a Registered Retirement Income Fund (RRIF) by December 31 of the year in which you turn 71.
The maximum RRSP contribution is 18% of your gross income or $29,210, whichever is lower. An unused contribution space can be carried over to the following year.
There are two exceptions that allow you to withdraw from your RRSP for purposes other than retirement. You must repay the amount:
- Home buyer plan (raise up to $35,000 for a down payment on your first home and pay it back over 15 years)
- Lifelong Learning Plan ($10,000 per year up to a maximum of $20,000 for school and payback over 10 years)
- Home buyer plan (raise up to $35,000 for a down payment on your first home and pay it back over 15 years)
- Lifelong Learning Plan ($10,000 per year up to a maximum of $20,000 for school and payback over 10 years)
RRSPs are a great place to park US stocks; RRSPs are especially beneficial to Canadians in a high tax bracket. If you don’t make a lot of money in a given year (for example, if you’re a student), there’s little point in chasing a big tax refund through an RRSP contribution. You won’t be taxed very heavily (if at all) anyway, so you won’t get much back from your taxes. Go for a TFSA!
Best TFSA and RRSP Account Comparison – Which Is Better For Me RRSP or TFSA Canada
It is always a good idea to invest in your TFSA or RRSP. However, if you need quick access to cash, keeping some savings in a high-yield TFSA or RRSP savings account to supplement your investments is a smart strategy.
But I can’t stress this enough: To really boost your RRSP or TFSA, make sure you open an investment account. Don’t be fooled by the word “savings” in either name – these are investment accounts!
The TFSA or RRSP is best used for investing, not saving. When you use the TFSA or RRSP to invest in long-term stocks, you can protect a significant amount of investment income. Would you rather protect the 2% you get in a high-yield savings account or the 7% to 8% that a balanced index ETF portfolio could hold you back?
Bottom Line: You should have both a TFSA and an RRSP, preferably in an investment account. The TFSA makes sense for just about everyone, but the RRSP becomes more relevant when you’re on a high income or your TFSA is depleted.
How to open a TFSA in Canada?
You can open a TFSA at any Canadian bank or financial institution. They’re generally easy to set up over the phone or online, and most banks will give you your personal plan representative to assist.
To contribute, money can be transferred directly from another account or given to you by cheque. How much you should put in a TFSA will depend on your finances and what you can manage. What’s important to note is that if you over-contribute to your TFSA (i.e., the total amount of contributions exceeds the maximum allowable limit), you’ll be subject to a penalty tax on excess contributions – 1% for each month the excess remains in the account.
How To Invest Your TFSA Or RRSP?
Investing in your TFSA or RRSP is very easy thanks to the internet. To open a TFSA or RRSP investment account, you have several options:
Robo Advisor
If you’re looking for growth, low costs, and investment advice, a Robo-advisor is a great option to invest in your TFSA or RRSP that follows the bank’s investment strategy. This is how it works:
When you sign up for a Robo-advisor, you answer a series of questions and then the computer algorithm suggests a portfolio that fits your financial goals and risk tolerance. Then set up pre-authorized contributions and let the robot advisor do the work to monitor and rebalance your portfolio – at a much lower fee than traditional financial advisors and mutual funds.
TFSA or RRSP savings account
Finally, if you want to put away some cash in the short term, you should open a TFSA or RRSP savings account with a bank that offers a high-interest rate.
FAQ – Which Is Better For Me RRSP or TFSA Canada
Which Is Better For Me RRSP or TFSA Canada for International Students
TFSA is better for International Students, Any non-resident of Canada who has a valid SIN and is 18 years of age or older is also eligible to open a TFSA. However, all contributions made as a non-resident are subject to a tax of 1% for each month the contribution remains in the account.
Is it better to contribute to TFSA or RRSP?
The main difference between RRSP and TFSA accounts is the tax implications. RRSPs offer a tax deduction when you deposit, but you must pay tax when you withdraw the money. TFSAs offer no upfront tax benefits, but you pay no tax on withdrawals, including growth.
What happens to my TFSA if I leave Canada?
If you hold a TFSA when you leave Canada, you can keep it and continue to benefit from Canada’s tax exemption on investment income and withdrawals. However, you cannot contribute to your TFSA if you are not a resident of Canada and your contribution margin will not be increased.
Is TFSA only for Canadian citizens?
Any non-resident of Canada who has a valid SIN and is 18 years of age or older is also eligible to open a TFSA. However, all contributions made as a non-resident are subject to a tax of 1% for each month the contribution remains in the account.
Is a TFSA worth it?
Yes, Wealthy Canadians who have exhausted their RRSPs and have additional investments that are otherwise taxable are good candidates for TFSAs. For the average Canadian, TFSAs can be a good resource for both short-term and long-term savings, depending on personal circumstances.
Can I withdraw TFSA at any time?
Making withdrawals will depend on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time. Withdrawing money from your TFSA will not reduce the total amount of contributions you have already made for the year.
Can International Students Use TFSA?
Any non-resident of Canada who has a valid SIN and is 18 years of age or older is also eligible to open a TFSA. However, all contributions made as a non-resident are subject to a tax of 1% for each month the contribution remains in the account.
Conclusion – Which Is Better For Me RRSP or TFSA Canada?
Which Is Better For Me RRSP or TFSA Canada? Ideally, you should spread your savings and contribute to both. Regardless of whether you choose the RRSP or the TFSA (or both), you will likely end up with the same amount of money because of the tax structure. The important thing is to start saving now and deposit regularly in a TFSA or RRSP. That way you know you’ve got all your bases covered when it comes time to retire.