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A registered retirement savings plan (RSSP) is a tax-sheltered way to save for retirement and cut your tax bill. RRSPs can hold investments like bonds, stocks, mutual funds and exchange-traded funds.
Any money or contributions within your deduction limit that you put into an RRSP are deductible on your annual tax return. Along with the tax-sheltering, RRSPs provide a tax deferral - this means that you're only taxed when you make a withdrawal.
While RRSPs are a great tool for retirement planning, you can also use them to do things like:
A tax-free savings account (TFSA) can help you save and grow money for any need. TFSAs also hold investments like bonds, stocks, mutual funds and exchange-trade funds.
Money or contributions you put into a TFSA are made with after-tax dollars. This means you’ve already paid income tax on the money you put in your TFSA. So you won’t have to pay tax when you take money out.
Plus, you won’t be taxed on any investment growth in your TFSA. Not even when you take the money out of your TFSA.
You can withdraw funds from your TFSA for any reason, whether it’s for a wedding, a dream vacation, a new home or providing financial aid to your family members.
|What’s the contribution limit?||Your RRSP contribution limit is calculated each year and will appear on the Notice of Assessment you receive after filing your prior year’s taxes. You can also find your exact contribution limit by logging on to your My Account on Canada.ca.||For 2020, the limit is $6,000. You can find your exact contribution limit by logging into your My Account on Canada.ca.|
|Can you carry forward unused contribution room?||Yes.||Yes.|
|Can you regain contribution room after you make a withdrawal?||No (with certain exceptions).||Yes. The amount withdrawn will be added back to your contribution room in the following year.|
|Is a maximum age limit for making contributions?||Yes, you can contribute until December 31 of the year you turn 71.||No.|
|When can I contribute?||You can contribute at any time, as long as you have contribution room. CRA allows contributions made in the first 60 days of the calendar year to be used as a deduction for the prior tax year.||You can contribute at any time, as long as you have contribution room. Again, note that withdrawn amounts will not be added to contribution room until the following calendar year.|
|Are contributions tax deductible?||Yes.||No.|
|Are withdrawals taxable?||Yes.||No.|
|Do withdrawals count as part of my taxable income?||Yes.||No.|
|Is investment growth taxable?||No. Investment growth is tax-sheltered while in the account, but once you withdraw your funds, they are taxable.||No.|
|Is there an opening age limit?||No. You can contribute as soon as you have available RRSP contribution room.||You typically have to be at least 18 to open a TFSA.|
|Do my savings need to be converted into income?||Yes, by the end of the year you turn 71.||No.|
|Can RRSPs and TFSAs affect government benefits like Old Age Security (OAS) or Employment Insurance (EI)?||Yes, the CRA will typically consider funds you withdraw from your RRSP as income. This may impact how much you’ll get for OAS or EI.||No, your government benefits will not be reduced due to the income you earn in your TFSA or the amount you withdraw from your TFSA.|
You may want to save and grow your money in an RRSP and use it in your retired years. You’ll still have to pay the tax further down the road. But by that time, you may not have other financial obligations, like paying off a mortgage, student loans or your child’s education. You may even be in a lower tax bracket at that age, which means you may pay less income tax.
Or, for example in the interim, you may be looking to buy your first home. In this case, you can borrow from your RRSP for the down payment. Learn more about how the RRSP Home Buyers Plan can help you.
You can also use an RRSP to fund you or your spouse’s education under the Lifelong Learning Plan. For more information, visit the Lifelong Learning Plan website.
For short-term goals like buying a car or making a down payment on a house, you may want to consider a TFSA. A TFSA offers tax-free investment growth and lets you withdraw funds at any time, for any reason.
Keep in mind, you don’t have to choose between an RRSP and a TFSA. You can have both.
Need help figuring out what’s right for you?
An advisor can help put together a solid plan that suits your goals.