RRSP vs TFSA: Which is better?

Every time RRSP season rolls around, people ask me: which is better – RRSP or TFSA?

Fortunately, both Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) have lots to offer when it comes to saving for your retirement (or in the case of TFSAs, any other savings goal).

Here are some pros and cons for each to help you decide which is right for you.

RRSP: Pros

  • A great way to save for your retirement. An RRSP lets you invest while sheltering your growth.
  • With non-RRSP investments, you pay tax twice over. First on your initial income, and then on any income from your investments. When investing through an RRSP, you get an income tax break first on the amount you invest, then on the RRSP investment income that remains in the RRSP. The idea is that when you do finally withdraw from your RRSP you’ll be retired, and in a lower taxable income bracket. In the meantime, your gains are sheltered.
  • There are two instances where you can withdraw money early from an RRSP without incurring additional income tax. The first is when buying your first home as you can withdraw up to $25,000 without penalty or tax, and you have up to 15 years to repay the amount borrowed from your RRSP. The same exception applies when withdrawing from an RRSP to pay for post-secondary education.

RRSP: Cons

  • When withdrawing from your RRSP, the amount then becomes taxable income. If you’re withdrawing before retirement this means you would likely get taxed on your RRSP income at a higher rate than you would if you’d waited until you retired.
  • Withdrawing your RRSP before retirement can also mean getting bumped into a higher tax bracket. By withdrawing early, you lose the benefits you received from sheltering your income in the RRSP in the first place. Withdrawal fees also usually apply when withdrawing early.
  • When you withdraw funds you lose that RSP room and will not be able to add those funds back in unless it was a homebuyers or educational withdrawal.

TFSA: Pros

  • TFSAs also act as a tool through which you can invest in various products, but with TFSAs, the income from those investments is completely tax-free. Unlike with an RRSP, you can withdraw the funds from your TFSA at any time, and the amount won’t be added to your income tax.
  • There are no fees at the branch level when you withdraw your funds at a financial institution, although some accounts (such as accounts with investment advisors), may still have fees.
  • A TFSA can act like an estate tool passing funds tax free to the next generation.
  • A TFSA can be a better choice if you expect to remain in the same or higher taxable income bracket in retirement versus an RSP.

TFSA: Cons

  • One difference when investing in a TFSA instead of an RRSP is that you don’t receive any break on your income tax for the amount that you invest. For this reason, if you’re self-employed or someone who typically has an income tax bill at the end of the year—or if you’re investing for your retirement and just want to save on your income tax—an RRSP might be a better option.
  • Unlike an RRSP, there are no restrictions when you withdraw from your TFSA investments unless otherwise stipulated by certain TFSA investment products. For this reason, some people treat TFSAs as they would a regular checking or savings account, depositing and withdrawing money throughout the year. But there are legal limits to how much you are allowed to contribute.
  • It can be too easy to “borrow” funds from your long-term savings, making you lose the benefits of compound interest and potentially setting back your long-term savings goals.

RRSPs and TFSAs are both excellent tools for getting the most out of your investments, especially long-term. It’s just like feeling healthier and stronger after a workout knowing you are also bettering your health in the long-run (especially if you invest early and save regularly).

And now for a fun disclaimer:

This blog post provides general information only, and does not constitute financial, accounting, tax, legal or other professional advice. We encourage you to obtain personalized advice from qualified professionals regarding your particular circumstances. Please see our Terms of Use. 

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