How much, why, and how you save your money can be deeply personal. Choosing from the variety of saving and investment products available depends on understanding your financial goals and options, both now and for the future.
A savings strategy for someone who is close to retirement may look different compared to someone who’s just entering the workforce. Likewise, if your main goal is buying your first home or saving for a wedding, you may need to make different financial choices than an entrepreneur who is looking to start or build their business.
The important thing is to save your money where it’s going to work best for you.
If you’re thinking of starting to save – or want to improve your current savings plan – you may want to consider a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), or a combination of the two. Both can be great options for saving.
A deeper look at the differences between TFSAs and RRSPs
Eligible contributions to an RRSP provide a tax deduction so that the amount you contribute could lower your taxable income. Your money can grow tax-deferred within the RRSP by purchasing qualified investments, but you will pay taxes when you withdraw funds from the account. Within an RRSP, you can save or invest your money through a range of options, which depending on where you hold your RRSP account, and can include mutual funds, stocks, bonds, guaranteed investment certificates (GICs), exchange-traded funds (ETFs), index funds, cash, and income trusts.
An RRSP is primarily designed to help Canadians save for retirement, but funds can be accessed at anytime, however there are penalties to withdrawing early. In some situations funds can be accessed early without penalty, such as through the Home Buyers' Plan or the Lifelong Learning Plan, which are both subject to eligibility requirements and conditions.
A TFSA is also a registered plan. However, it’s not "just" a savings account; within a TFSA, just like an RRSP, you can save or invest your money in a number of options depending on where you hold your TFSA.
TFSAs allow you to grow your money tax-free within the account, meaning you aren't taxed on interest earned, dividends or capital gains from qualified investments. That means that when you withdraw funds from your TFSA, you will not need to pay taxes on the earned income.
A TFSA is designed to help you save money for any goal, including big-ticket items like a new home, vehicle, travel plans, a wedding, or longer-term planning for retirement.
How and if contributions grow depend on the investments you hold within the RRSP or TFSA.
Key differences between TFSAs and RRSPs at a glance:
An RRSP and a TFSA are both registered plans for saving. There are differences between the two options, including the following:
1. Contributions
Eligible contributions to an RRSP can reduce your taxable income by providing deductions on the contributed amount, which in turn may reduce the amount of tax that you pay.
Eligible contributions to a TFSA are made with after-tax funds and, therefore, do not impact your taxable income. However, your contributions to the account can grow tax-free.
2. Withdrawals
Withdrawals from an RRSP are taxed. The idea with an RRSP is that if you start withdrawing after you retire, you may be in a lower income bracket, meaning you would pay less tax on those dollars than you would have when you earned them.
Withdrawals from a TFSA are not taxed, as you already paid tax on the money you contributed, and income from qualified investments is tax-free. Both your contributions as well as the income earned are tax free.
Contribution limits for TFSAs and RRSPs
Canadians can contribute to both an RRSP and a TFSA. However, it's critical to remember that there are contribution limits for both.
Contributing to an RRSP
For the 2024 tax year, the RRSP contribution limit is 18% of your previous year’s earned income, up to the maximum amount of $31,560. Any unused contribution room from previous years is also carried forward, so your personal contribution limit could be more. Pension adjustments may also impact the contribution limit.
As an example, let’s assume your RRSP contribution limit was $30,780 for the 2023 tax year, but you didn’t contribute any money into an RRSP. You would automatically carry that contribution room forward into the next year. So, if, in the 2024 tax year, your contribution limit is $31,560 (the maximum amount), combined with the amount you carried forward from 2023, you could contribute up to $62,340. Don’t forget, if you participate in an employer pension plan, those contributions may reduce your RRSP contribution limit.
There’s no limit to the number of RRSPs you can have – just the amount you can contribute. So, if you have multiple RRSPs, you might want to talk to an advisor about whether consolidating your plans makes more sense for you.
Over-contributions to an RRSP will be penalized. Generally, the CRA gives a bit of "wiggle room," but, if you’re over by more than $2,000, be prepared to pay a 1% tax per month on the excess amount. For more information about what happens if you go over your RRSP contribution limit, visit the CRA website.
Contributing to a TFSA
Annual maximum limits for contribution are determined every year by the federal government. For 2023, the maximum contribution amount was $6,500. For 2024, it's $7,000.
The current lifetime contribution limit (from 2009 to 2024) adds up to $95,000 (for Canadians who have been 18 years old and residents of Canada for all eligible years and have made no contributions up to now). Previous annual contribution limits can be found on the CRA website.
Just like RRSPs, you can have more than one TFSA. However, your total contribution limit doesn’t change. Contributing too much money to a TFSA can be too much of a good thing – and it will cost you. The difference between your limit and your contribution amount is subject to a monthly 1% penalty tax. More information on over-contributing can be found on the Canada Revenue Agency's website.
Contributions to a spousal RRSP
If you have a spouse or common-law partner, a Spousal RRSP may be an option for you. Within a Spousal RRSP the Contributor benefits by receiving the tax deduction and will need to have the RRSP contribution room available. The Spousal RRSP account owner will receive the benefits from tax-deferred growth and has full ownership of the funds.
Making TFSA or RRSP withdrawals
Both plans allow you to take out money when you need it (subject to any restrictions in the investments chosen), but again, there are considerations.
With a TFSA, you are not taxed on qualified withdrawals (because you've already paid tax on the money you deposited) and the withdrawal amount is added back to your contribution room at the start of the following year.
Withdrawals from an RRSP are taxable. When you withdraw money from your RRSP (outside of the Home Buyer's Plan or Lifelong Learning Plan), two things will occur. First, when funds are withdrawn from an RRSP a portion will be withheld for taxes. The rate for the amount to be withheld is dependent on residency and the amount of the withdrawal. You may also have to pay additional income taxes if the withheld amount was not enough.
The second thing that will occur is that you will lose your contribution room. When you withdraw funds from an RRSP, you permanently lose the contribution room you originally used to make your contribution.
While withdrawals from an RRSP are generally subject to tax, different rules apply to withdrawals under the Home Buyer's Plan or the Lifelong Learning Plan. For example, under the Home Buyers' Plan, first-time homebuyers can withdraw up to $35,000 (or up to $70,000 total for a couple withdrawing $35,000 each from their respective RRSPs) to finance a down payment, subject to eligibility and conditions. The withdrawal is tax-free but must be paid back into your RRSP within 15 years, starting two years after your withdrawal.
Remember that once you turn 71, any money in your RRSP must be withdrawn, converted to a retirement income fund, or used to purchase an annuity no later than December 31 of that calendar year.
More information on RRSP withdrawals at maturity is available on the TD website.
Death and taxes
As the saying goes, both are unavoidable, making it extra important to understand the ramifications of both when it comes to your finances. You can name a "beneficiary" on your RRSP, who will receive the proceeds of the plan on your death. There may be an opportunity to pay less taxes by taxing the funds in the hands of a qualified beneficiary rather than the deceased.
A qualified beneficiary for this purpose generally includes a spouse or common-law partner, financially dependent children or grandchildren under the age of 18, and disabled children or grandchildren of any age. In some cases, such as where the beneficiary is a spouse or common-law partner, it may also be possible for the qualified beneficiary to contribute the amount received into their own RRSP, effectively deferring tax on the entire RRSP balance until the amount is withdrawn by the beneficiary.
Because a TFSA is funded with after-tax dollars, there are no taxes for eligible withdrawals; however, you may want to talk to a tax advisor about what happens to your TFSA after your death to understand the potential implications, such as the potential application of probate taxes.
Generally, there are two options for the distribution of a TFSA: you can name a "beneficiary" (spouse/common-law partner/anyone else) or a "successor holder" (spouse or common-law partner). A "successor holder" means that, instead of having all the assets liquidated and transferred, they take over the existing TFSA. A beneficiary receives the TFSA funds tax-free, but there is tax payable if the account rises in value from the date of death to the date that the funds are transferred.
The key differences between an RRSP and a TFSA mainly come down to contribution limits, withdrawal implications, and how and when you pay taxes on the funds.*
Questions?
To get started, you can reach out to us online, in person or by phone. We can work with you to help you reach your savings goals.
You can book an appointment online to speak to us in person. Or give us a call (1-888-568-0951) and we can help answer your questions.
For more information:
The Canada Revenue Agency offers lots of information about registered plans on its website.
You’ll also find more information about savings and investing at TD on our website.