RRSP vs TFSA: what’s the difference?

If you want to save money—and minimize your taxes—you have options, including registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). RRSPs and TFSAs are both great choices, but have different goals and limits. We’ll help you understand what can work best for you. 

RRSPs  and TFSAs  are both registered savings accounts that can help you save for your financial goals. Although both have limits on how much you can contribute to them, the money you earn within the account (from investments or interest, for example) isn't taxed. 

In general, an RRSP is meant for your retirement, and because you don’t pay taxes when you put the money into the account, you do pay taxes when you take money out. A TFSA can help you save for retirement and other goals, as it allows you to withdraw money whenever you need it, making it a great choice for big purchases like a home or a car.

The biggest difference is that an RRSP contributions are tax-deductible and can reduce your taxable income when you’re contributing to it. For example, if you earn $65,000 per year and you add $5,000 to your RRSPs, your income becomes $60,000, and you’ll pay income taxes based on that amount (not the $65,000). However, if you make a withdrawal, you will be taxed and the amount will be added to your income during tax time. That’s why it’s meant for use during retirement, when your taxes are generally lower than during your working years.

With TFSAs, you contribute after-tax dollars, so there’s no reduction in your taxable income and no direct benefit to your yearly taxes. On the positive side, the money you earn within your TFSA isn’t taxed, and you don’t need to wait until retirement to take money out.

You can contribute 18% of your income to your RRSPs, up to a certain dollar amount each year. You can contribute more if you have contribution room—meaning you didn’t add the maximum amount from previous years. You can find your personal total on the most recent Notice of Assessment you got when you filed your taxes. With TFSAs, the amount you can contribute changes each year, and you’ll find that limit on the assessment as well. Just like RRSPs, you can carry over unused contribution room and add more to your account when you want.

Yes, you can have both accounts at the same time. Contributions to one do not affect the other. Consider adding to both to support both retirement and shorter-term goals.

You can take money out of your TFSA at any time. When you withdraw from your account, you can recontribute the amount the next year. With RRSPs, you lose the contribution room forever. For example, if you take out $10,000, you cannot add that amount again, even if years have passed. Plus, the amount will be added to your taxable income and you’ll pay tax while taking the money out.

There are a few ways to withdraw from your RRSPs without penalty. If you're buying your first home, you can take out up to $60,000 toward the cost without paying tax through the Home buyers' plan (HBP). You just have to repay the amount within 15 years, starting on the second year of the withdrawal.

If you’re going back to school, you can take out up to $20,000 over a four-year period towards full-time education fees and pay it back within 10 years with the Lifelong learning plan (LLP). There are a number of rules for these options, so be sure to check the Government of Canada website for full details.  

According to the Canada Revenue Agency (CRA), you have to close or convert your RRSPs by the end of the year you turn 71. You can take all the money out (you’ll pay tax on the full amount), convert to a Registered Retirement Income Fund (RRIF) or buy an annuity. You can keep using your TFSA even when you retire. Taking out money will stay tax-free and there won’t be impacts to your Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). 

Both an RRSP and a TFSA are great options for saving for the future. Some Canadians have both types of accounts to help plan for retirement and other financial goals, like an emergency or big purchase. A number of younger workers add more to their TFSA with the plan of leveraging their RRSP in a few years as their income grows and they can better benefit from the tax benefits. However, about one in five contribute equally to both types of accounts. 

Saving and planning for the future is personal. If you’re not sure where to start—you’re not alone. Reviewing online resources, trying out interactive calculators, and speaking to a financial advisor are just a few ways you can get started. It’s important to remember that there’s no wrong way to save money, you just need to start.