According to the BMO Financial group,
40% of Canadians still don’t know the difference between a TFSA and RRSP.
This sounds like a high figure but in speaking to some of my peers, personal finance is not a topic most people enjoy to talk about.
The sample size was 1500 Canadians so it was not a large sample size based on the population.
I wanted to create a small table that compares the 2 popular Canadian savings vehicles.
Differences between TFSA and RRSP
- Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contribution room is carried forward and accumulates in future years.
- Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
- Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
- Contributions are not tax-deductible.
- The TFSA is useful for low-income seniors because these tax-free withdrawals won’t trigger clawbacks of Old Age Security (OAS) or the Guaranteed Income Supplement.
- If you are under the age of 69 and have earned income in the previous year, then you are eligible for an RRSP.
- Earned income accumulates tax-free.
- Earned income includes income from employment, and can also include supplementary unemployment benefits, alimony and maintenance payments, royalties, research grants, net business income, net rental income, and a few other miscellaneous types of income.
- Your maximum contribution limit is 18% of your previous year’s earned income up to the maximum level for that year.
- The eligible investments for an RRSP include: guaranteed investment certificates (GICs), shares of Canadian companies listed on a recognized Canadian stock exchange, bonds, treasury bills, strip coupons, mortgage backed securities, covered call options, warrants and rights issued by companies listed on a Canadian stock exchange, mutual funds, and eligible foreign investments.
- When money is withdrawn from the plan, after retirement, it will then be subject to income tax, that should be a lower rate.
Both have there positives and I believe each has a purpose. I personally believe your TFSA should be used for part emergency savings and a long-term savings plan. Also, if you have a pension plan from your employer, you may not need a heavy RRSP account.
Nice stuff.
I love the TFSA as a long-term savings vehicle. I think the best part is, the TFSA is not income-tested.
What’s NOT to love about this guy?
Will tweet.
Have a great weekend and stay in touch.
Mark
Thanks! I appreciate the kind words.
We are currently using our TFSA accounts (my wifes and my account) for saving up for a down payment on another property. It doesn’t make sense to pay down our mortgages at the moment (low rates).
I remember when I used to think that a RRSP was something specific that you bought, instead of it being a special type of account.