RRSP or TFSA: Which Should You Invest In?

Most individuals we meet with have an idea what a registered retirement savings plan (RRSP) is…At least generally speaking. Many Canadians contribute on a monthly basis into an RRSP to utilize the tax deduction benefit as well as to grow their money in a tax-deferred or sheltered manner until they reach retirement age. As a supplement to the RRSP savings vehicle, the Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009. Within the TFSA savings vehicle, whatever growth is generated in the account is tax-free, as are any withdrawals made.

So which is the best investment choice?

It is important to remember that each savings vehicle is valuable in its own right. There are benefits to investing in RRSP’s as well as in TFSA’s. The key is to have a clear goal, then utilize either or both vehicles to achieve that goal. The table below outlines some of the features of RRSP’s and TFSA’s.

FeatureTFSARRSP
Tax-deductible contributionNoYes
Contribution carry forwardYesYes
Min/Max age for contributionsMinimum age for contribution is 18 years. No maximum age.No minimum age, as long as income was earned in the previous year and individual has a social insurance number (SIN). Maximum age is 71.
Over-contribution penalty1% per month on the over-contribution1% per month if you exceed the $2,000 lifetime over-contribution amount
Spousal contributions allowedYesYes
ConversionNo requirement to retire or convertMust convert plan to a RRIF or annuity by the end of the year in which you turn 71
Impact on government benefitsNo impact as TFSA withdrawals are not considered income for tax purposesRRSP withdrawals are considered income, so the added income may reduce the amount you receive from income-tested benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS).

Got more questions? Reach out directly and we can help you determine how best to make use of these two savings vehicles based on your tax bracket as well as your financial goals.