Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are both registered accounts offered to Canadian residents who are above the age of majority that allow their savings to grow and compound with tax benefits. It is important to know the benefits and differences of both accounts to ensure you are using them to your advantage.
What is an RRSP?
An RRSP is an account designed to help Canadians save and plan for their retirement by deferring taxes on investment earnings. By contributing to an RRSP within your contribution allowance, you will receive a tax deduction for the total amount of your contribution. It allows your contributions to grow tax-free as long as the funds remain in your RRSP account. When you begin to withdraw money from your RRSP, the withdrawals will be taxed at source and be added to taxable income for the year of the withdrawal.
Contributing to an RRSP when you have a high income is beneficial because the tax deductions you receive at the time of your contribution will help reduce the amount of taxes you are paying while you are in a higher tax bracket. When you begin to withdraw money from your RRSP, you will likely be retired with a lower income and you will therefore be in a lower tax bracket. This will result in you paying less tax on your withdrawals.
Once you turn 71, you must convert your RRSP to a Registered Retirement Income Fund (RRIF). Once it is converted to a RRIF, you must start withdrawing the established minimum payments annually.
In addition to saving for your retirement, you can also borrow money from your RRSP to go to school or to buy your first home without penalty as long as it is repaid within the required time. It is important to note that when you repay the withdrawals you will not receive another tax deduction. If you make a withdrawal outside of the home buyers plan or lifelong learning plan, you will not get the contribution room back.
RRSP Contribution Limit
The RRSP annual contribution limit is 18% of your prior year’s earned income to a maximum of:
$30,780 for 2023 – deadline March 1, 2024
$29,210 for 2022 – deadline March 1, 2023
The annual maximum contribution limit is established by CRA on an annual basis. If you do not contribute the maximum amount annually, your contribution room will be carried forward until the age of 71.
What is a TFSA?
A Tax-Free Savings Account allows your contributions to grow completely tax-free. Any income (including capital gains) earned in a TFSA is exempt from tax.
You can also make tax-free withdrawals at any time, for any reason although it is highly encouraged to not touch your TFSA investments for as long as possible to allow your savings to continue compounding tax-free. If you make a withdrawal from your TFSA, the withdrawal amount is added to your contribution room in the following year.
Unlike RRSP contributions, contributions to a TFSA are not tax-deductible. This is because you are contributing after-tax income to the account and have the ability to withdraw funds tax-free.
We cannot stress the importance of a Tax Free Savings Account enough and the power it provides in compounding tax-free growth.
TFSA Contribution Limit
Starting in 2009 or in the calendar year you are 18 years of age, your TFSA contribution room accumulates every year based on the annual contribution limits. If you do not contribute the full annual contribution amount, the contribution room will be carried forward until life expectancy.
| TFSA Contribution Room | ||
| Years | Annual Limit | Cumulative Total |
| 2009-2012 | $5,000 | $20,000 |
| 2013-2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016-2018 | $5,500 | $57,500 |
| 2019-2022 | $6,000 | $81,500 |
| 2023 | $6,500 | $88,000 |
As of January 1st, 2023, the total cumulative contribution amount since 2009 is $88,000. The annual contribution limit for 2023 is $6,500.
Which account is best to contribute to?
Although both RRSPs and TFSAs are very valuable, there are situations where it might make more sense to prioritize contributing to one account type over the other.
It makes a lot of sense to contribute to your RRSP during your working years in which you have a high income. Contributing to the RRSP will provide you with the tax deduction and will help you to reduce the amount of taxes you pay on your savings for retirement. If you have a high income and are able to contribute the maximum allowance annually to both your RRSP and TFSA, we would highly encourage it because both of the accounts provide amazing benefits.
If you have a low income (i.e. under $50,000 before taxes) and would not benefit greatly from a tax deduction, you should prioritize contributing to your TFSA.
What is the difference between RRSPs and TFSAs?
Below we have summarized and highlighted the key differences between the two accounts:
| Feature | TFSA | RRSP |
| Are contributions tax-deductible? | No | Yes |
| Do my savings grow tax-free or tax-deferred? | Tax-free (never taxed) | Tax-deferred (taxed when you take the money out) |
| Are withdrawals taxed? | Tax-free (never taxed) | Taxes are withheld at source. In addition, amounts withdrawn are added to taxable income for the year of withdrawal. |
| Is there an over-contribution penalty tax? | Yes, 1% per month on excess contributions | Yes, 1% per month on excess contributions (if you exceed your deduction limit by $2000) |
| Can I carry forward unused contribution room? | Yes, indefinitely | Yes, until the year you turn 71 |
| Do I have to have earned income to contribute? | No | Yes |
| Can I contribute after age 71? | Yes | No, you must convert your RRSP to a RRIF to receive a steady stream of income. |
| If I withdraw money, do I get my contribution room back? | Yes, withdrawal amounts are added to contribution room the following year | No, withdrawals have no bearing on your deduction limit or contribution room. |
| Do withdrawals affect government benefits? | No | Possibly. Withdrawals increase your income for the year in which they are made. This could impact income government benefits like Old Age Security (OAS) |
If you would like to further discuss RRSPs and TFSAs and what makes the most sense for your situation, please do not hesitate to contact us!
For more detailed information on the topics we have discussed above, please take a look at the following articles:
Registered Retirement Savings Plan (RRSP)
Tax-Free Savings Account (TFSA)
“How will you replace your current income in retirement?”™ – Jim Seyers