Not sure whether to put your savings in an RRSP or a TFSA?

These charts from Sun Life can help you compare the two and decide what's right for you. And, contributing to both also has its benefits. Here’s what you need to know.

Not sure whether to put your savings in an RRSP or a TFSA?

These charts from Sun Life can help you compare the two and decide what's right for you. And, contributing to both also has its benefits. Here’s what you need to know.

RRSP & TFSA Basics: How it works

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:

  • buy your first home,
  • go back to school and
  • split your income with your spouse.

Find out how you can use an RRSP to achieve your financial goals.

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.

Find out how you can use a TFSA to achieve your financial goals.

Contributions towards an RRSP and a TFSA

Question RRSP TFSA
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.

Taxable benefits of an RRSP and a TFSA

Question RRSP TFSA
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.

Opening an RRSP and a TFSA & how it affects your government benefits

Question RRSP TFSA
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.

When might a RRSP or TFSA be right for you?

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. 

TFSA vs. RRSP: Which is right for you?

While the question is simple, arriving at the right answer for your situation can take a little thinking.

Let’s say you fall into this life bracket:

  • you’re in your 30s,
  • your investment generates a 5% annual investment return, and
  • you’re in a 30% tax bracket during your career.

In such a case, here’s a look at what could happen under a couple of different scenarios.

What happens if you invest money in a group RRSP?

If you invest the $1,000 into your group RRSP at work, you can contribute the full $1,000 pre-tax. That’s because RRSP contributions are tax-deductible. Plus, you can get this tax deduction up front when contributing to a plan such as a group RRSP.

What happens if you invest money in an individual RRSP?

If you want to invest in an RRSP outside of a group plan, you’d:

  • pay the 30% tax,
  • invest the remaining $700 and
  • top it back up to $1,000 with the tax refund you will receive.

What happens if you invest money in a TFSA?

If you choose to invest in a TFSA, the actual amount you’ll have to invest is $700 ($1,000 less 30% income tax). That's because you contribute to your TFSA using after-tax dollars.

To do the exact math, you’d multiply $1,000 by .30, which gives you $300. Then subtract $300 from $1,000, which leaves you with $700.

So, $700 would be the starting amount in your TFSA account. But the perk is that any investments (e.g. stocks, bonds, mutual funds, etc.) you have growing in a TFSA will be tax-free. 

What happens if you withdraw money from an RRSP or TFSA before you retire?

Let’s say you were hoping to save your contribution for retirement in your 60s. But financial pressures require you to withdraw all of your savings at age 50. Per the charts below:

  • Your $1,000 RRSP contribution has grown to $2,079. But because all withdrawals from an RRSP are taxable, and you’re in a 30% tax bracket. So you’re left with $1,455.30 after your withdrawal. (To do the exact math, multiply $2,079 by .30, which gives you $623.70. Then subtract $623.70 from $2,079, which leaves you with $1,455.30.)
  • Your $700 TFSA contribution has grown to almost exactly the same amount, $1,455, and you can withdraw the entire amount tax-free.

While what you have in your pocket is virtually identical in either case, the one advantage to a TFSA withdrawal is that you can recontribute the full amount any time starting with the next calendar year – and there’s no loss of TFSA contribution room.

With an RRSP, you don’t get your contribution room back when you make a withdrawal. If you want to recontribute in the future, you’ll need to use unused RRSP contribution room.

What happens if you withdraw money from an RRSP or a TFSA in retirement at age 65?

If you save and invest your initial contribution until retirement, here’s what you will have when you withdraw the full amount at age 65. Per the chart below:

  • Your $1,000 RRSP contribution has grown to $4,322.
    • If you’re in a lower tax bracket in retirement due to a lower income (say, 20%), you’re left with $3,457.60 after your withdrawal.
    • If you’re in the same 30% tax bracket, you’ll receive $3,025.40
    • If you’re in a higher tax bracket (say, 40%, perhaps because you sold your home and the proceeds of the sale have generated investment income, or you’ve inherited money that has generated income), you’ll only be left with $2,593.20.
  • Your $700 TFSA contribution has grown to $3,025, and you can withdraw the entire amount tax-free.
Let’s say you contribute $1,000* to an RRSP and it’s grown to $4,322
Your tax bracket & RRSP contribution How much will you have when you withdraw money? 
30% tax bracket, mid-career in your 30s & your RRSP has grown to $2,079. $1,455.30
40% tax bracket, retired in your 60s with a high income & your RRSP has grown to $4,322.  $2,593.20 
30% tax bracket, retired in your 60s & your RRSP has grown to $4,322. $3,025.40 
20% tax bracket, retired in your 60s with a lower income & your RRSP has grown to $4,322. $3,457.60
*Your initial contribution of $1,000 is before taxes. RRSPs are tax-deferred. This means you don’t have to pay taxes on any money growing in the account until you withdraw funds. 
Let’s say you contribute $700* to a TFSA 
Your tax bracket & RRSP contribution How much will you have when you withdraw money? 
30% tax bracket, mid-career in your 30s & your TFSA has grown to $1,455. $1,455
40% tax bracket, retired in your 60s with a high income & your TFSA has grown to $3,025. $3,025 
30% tax bracket, retired in your 60s & your TFSA has grown to $3,025. $3,025 
20% tax bracket, retired in your 60s with a lower income & your TFSA has grown to $3,025. $3,025
*In this case, your original contribution amount was $1,000. But since you contribute to a TFSA with after-tax dollars, your contribution of $1,000 becomes $700 after 30% income tax. 

Know your tax bracket before you withdraw from an RRSP or TFSA

In the end, the pros and cons of a TFSA vs. RRSP contribution may depend on whether your tax bracket in retirement is lower or higher than it was during your career when you made the initial contribution.

Another factor to consider is that because TFSA withdrawals are not considered taxable income, they don’t affect your eligibility for income-linked government benefits like Old Age Security (OAS). For example, in 2020, if someone age 65 had income over $75,910, some of their OAS benefit would have been clawed back by the government. And, the benefit would have completely disappeared at the $123,386 annual income level.

Many people use both RRSPs and TFSAs to save. But if you’re trying to decide which account to invest in when some extra money comes your way, consider the tax bracket you expect to be in when you hope to make your withdrawal.

You can also consider whether you’ll use key TFSA benefits such as being able to recontribute withdrawals, and not having withdrawals count as taxable income for government benefit purposes.

Need help getting started? An advisor can help put together a solid plan that suits your financial goals and needs. They can also answer questions you may have about TFSAs, RRSPs and your personal finances.

Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.

Want to learn more about RRSPs and TFSAs?

Here are some resources that can help answer additional questions you may have:

 

Need help figuring out what’s right for you?

An advisor can help put together a solid plan that suits your goals.