TFSA vs RRSP: The Ultimate Quick Guide
Tax-efficient investing made easy, but which one is better suited for you?
TFSA vs RRSP – one of the most puzzling topics for investors in Canada.
Short answer: both are truly great and essential for investing. If you can, you should contribute to both.
Long answer: ultimately, it depends on your goals. But, if we had to pick one that you should maximize first, it would be the TFSA.
This is our ultimate quick guide for TFSA vs RRSP. Let’s break down the main features of TFSA vs RRSP.
TFSA (Tax-Free Savings Account) Features:
You won’t get taxed! All your investment returns (capital gains, dividends and interest income) will grow tax-free, even if you choose to withdraw your money.
You can contribute up to $6,000 a year. Contribution room is retroactive, meaning if you’ve never contributed to a TFSA and have been eligible since its introduction in 2009, you can contribute up to $75,500 in 2021.
You can invest your money in a range of securities, including mutual funds, exchange-traded funds, stocks, bonds and GICs.
Better suited for individuals earning less than $50,000 a year, and is intended for all kinds of savings goals.
You can continue to contribute indefinitely.
RRSP (Registered Retirement Savings Plan) Features:
You won’t get taxed! All your investment returns will grow tax-free. But, you will get taxed if you choose to withdraw your money (unless this withdrawn money is applied towards the Home Buyer’s Plan).
You can contribute up to 18% of the earned income you reported on your most recent tax return, up to a maximum of $27,830 in 2021.
RRSP contributions can be claimed as a deduction on your tax return, as a way to lower your income taxes. Plus, if your income is lower in one year, you can carry forward the deduction for your contribution to a future year when your income may be higher. That way, your tax savings are greater when you’re in a higher tax bracket.
You can invest your money in a range of securities, including mutual funds, exchange-traded funds, stocks, bonds and GICs.
Better suited for individuals earning more than $50,000 a year, and is intended for retirement savings.
You can continue to contribute until the age of 71. Then, you may withdraw your money in a tax-efficient manner using a RRIF (Registered Retirement Income Fund).
Helpful Tips
If you work full-time for a company that provides Group RRSP to their employees, and your company matches employee contributions towards their RRSP, take advantage of this and make sure that you enroll in their Group RRSP. This is basically free money.
For example: let’s say your company matches all employee contributions towards their RRSP, up to 5% of their earnings. If your monthly paycheck is $5,000 and you contribute 5% of this amount ($250) towards your RRSP, your company will match this amount and contribute 5%, or $250 towards your RRSP. That’s an extra $250 that you get for just contributing to your RRSP.
TFSAs and RRSPs can be personally managed by you (self-directed) or managed professionally by someone else (such as a Portfolio Manager or a robo-advisor). Most financial institutions, such as banks and investment dealers offer TFSAs and RRSPs.
If you are considering opening up your own self-directed TFSA or RRSP, we recommend Wealthsimple Trade, a commission-free trading platform with millions of Canadian users. Sign up here and get $10 to start investing for free.
Major Takeaways
Both TFSA and RRSP are essential and will help reduce your taxes.
Most investors would benefit greatly from prioritizing contributions to their TFSA.
Both TFSA and RRSP can hold a variety of different assets, such as stocks, bonds, mutual funds and exchange-traded funds.
We hope this helps you become more financially independent.
As always, feel free to reach out to us if you have any questions. We are more than happy to help.
View all our articles here.