6 Key Differences Between TFSA and RRSP

6 Key Differences Between TFSA and RRSP

#1 – The primary purpose of an RRSP is to save for retirement. TFSAs can be used to save for any purpose.

#2 – RRSP contributions are tax-deductible, not when they are made, but when they are withdrawn when your income is low.

However, if you plan to withdraw early (before retirement or when your earnings are in a higher tax bracket), you must pay the tax based on your previous year’s tax bracket. If you invest within your contribution limit, your TFSA contributions are not tax deductible (Login to your CRA account to know your contribution limit, you might have accumulated some amount from the previous years if you have not contributed much to date).

#3 – Because you made pre-tax contributions, you’ll have to pay taxes on your RRSP withdrawals. TFSA withdrawals, on the other hand, are tax-free because you made the contributions with after-tax dollars.

#4 – You can contribute to your RRSP account until you reach the age of 71, at which point you must close it due to a mandate. Then you must invest your RRSP savings in an RRIF or an annuity plan. You can contribute to a TFSA for as long as you want; there is no age limit.

#5 – To contribute to an RRSP, you must have income (earnings from the previous fiscal year) from a source, but there is no such requirement for the TFSA.

#6 – You can name your spouse as a beneficiary of either the TFSA or the RRSP. In the event of your death, the money will be transferred to them. However, there is a catch with RRSP investments: after your spouse’s death, taxes will be due on the money remaining in the RRSP account.

In that case, when your children inherit the money, they will only receive the portion that remains after taxes have been paid. However, with the TFSA, taxes are only levied on the increase in the TFSA’s value since the day of demise when your children receive it.

The best part is that no tax is due if the amount your children receive is less than the value of the TFSA at the time of death.

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