retirement

Do you know what the difference is between TFSA and RRSP?

According to the BMO Financial group,

[quote]40% of Canadians still don’t know the difference between a TFSA and RRSP.[/quote]

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.

[tabs style=”boxed” title=”Differences between TFSA and RRSP”]

[tab title=”TFSA”]

  • 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.

[/tab]

[tab title=”RRSP”]

  • 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  • When money is withdrawn from the plan, after retirement, it will then be subject to income tax, that should be a lower rate.

[/tab]

[/tabs]

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.

Anything I missed about the differences between TFSA and RRSP?

7 thoughts on “Do you know what the difference is between TFSA and RRSP?”

  1. 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

    1. 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).

  2. It is no surprise that such a high percentage of Canadians are unsure of the difference between a TFSA and RRSP. While a TFSA is relatively new, there are still a huge percentage of Canadians who are unsure of how an RRSP actually works.

    Even more disturbing is many Canadians who contribute to an TFSA are unaware that they can actually INVEST rather than simply toss money into a low interest bearing account. Banks are not very good at informing their clients of this option, when it could be used as a great investment vehicle!

  3. I think that everything published made a great deal of sense.
    However, think about this, what if you were to create a awesome headline?

    I ain’t saying your information is not good., however suppose you added a post title
    that grabbed a person’s attention? I mean Do you know
    what the difference is between TFSA and RRSP?
    | Canadian Personal Finance is a little boring.

    You might look at Yahoo’s home page and watch how they
    create news titles to get people interested. You might try adding
    a video or a related picture or two to grab readers interested about everything’ve got to say.
    Just my opinion, it could bring your website a little
    livelier.
    Kindra recently posted…KindraMy Profile

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge