Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.
Lesson RRSPs 101
TFSA or RRSP: what's the right way for you to save?
Understand the different benefits of TFSAs and RRSPs.
- Key differences between a TFSA and an RRSP
- Determine which account best suits your needs
- How to get started with either account
So you’ve started thinking about investing for your future, but you’re not sure where to start. With so many different options out there, it can be easy to get overwhelmed by all the acronyms and percentages being thrown your way.
Most financial institutions offer two very popular options for saving: TFSAs (tax-free savings account) and RRSPs (registered retirement savings plan). Getting started with either of the two is a great decision, but each account comes with its own pros, cons, and details worth knowing.
Depending on your current needs and goals, one account may suit you better than the other right now. With that, let’s delve into each one so you know where to put your dollars first.
What’s the difference between a TFSA and RRSP?
While they both offer valuable saving opportunities, TFSAs and RRSPs can also hold a variety of investments alongside your cash. That being said, these two accounts still have a few notable differences between them. We’ll cut to the chase with some of the keywords you might be looking for:
| TFSA | RRSP | |
|---|---|---|
|
Withdrawals:
|
Can be made tax-free at any time without penalties.
|
Withdrawal will be added to your taxable income for the year, and you’ll pay taxes on that amount unless it’s going towards a Home Buyer’s Plan or Lifelong Learning Plan (see below for details).
|
|
Tax deductions:
|
Contributions made to a TFSA are not eligible for income tax deductions.
|
RRSP contributions can be written off your taxable income for the year.
|
|
Growth:
|
Can earn capital gains and dividends tax-free* on investments like stocks, ETFs, etc.
|
No taxes on investment profits until you make a withdrawal.
|
|
Contributions:
|
Once you turn 18, you start receiving a yearly limit of how much you can contribute to your TFSA. You can learn more about a TFSA’s contribution room here.
|
Can contribute up to 18% of your earned income from the previous year. Can make contributions until the end of the year you turn 71. Unused contribution room carries into the following calendar year.
|
*U.S. dividends will be subject to a withholding tax.
Withholding tax is a tax placed on cash dividends paid to Canadian investors for tax purposes. While it doesn’t apply to RRSPs, TFSAs have a 15% withholding tax on U.S. company dividends, as required by the IRS.
Which account is right for me?
As previously mentioned, investing in either account is a great call for your future. But depending on where you are right now financially, one might be a better fit than the other.
If you’re looking to tuck money away but can acknowledge that you may need to dip into your savings from time to time (life loves to throw pricey curve balls sometimes), you’d probably be best off with a TFSA. It’s also a great option if you want to save for short-term goals, like taking a trip or putting a down payment on a car. It gives you the opportunity to save and invest, meaning your money can potentially grow on its own without being locked in.
On the other hand, if you’re in a financial position to put money away for a long-term period, an RRSP may suit you better. Depending on your yearly income, the tax deductions that come with RRSP contributions could prove to be very beneficial in the short-term. Plus, an RRSP grants you access to the Lifelong Learning Plan and Home Buyer’s Plan, which respectively allow you to make tax-free withdrawals for going to school or a down payment on your first home up to a maximum amount.
Want more insight on choosing the right account for your investments? Take an in-depth dive with our blog to see which account will best suit your needs. If you want a bit more info on TFSAs and RRSPs, we’re happy to provide you with it through the links below:
How do I get started?
Whichever account you choose, Questrade is here to support you along the way. You can open an account entirely online, and it only takes a few minutes to get started. Whenever you’re ready to jump in, we’re happy to help you invest.
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