When saving your hard-earned cash for a big purchase, emergency, or your future, you have two options to minimize your taxes. The federal government offers two types of accounts designed to help you get the most out of your savings: a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). Both accounts are excellent financial tools that allow you to save money and reduce your taxes, but is a TFSA or RRSP better for your financial goals?
Frequently Asked Questions
Yes, the TFSA and RRSP are both registered accounts, which means that when you open a TFSA or an RRSP at a Canadian financial institution, it will have tax-sheltered or tax-deferred status. In the TFSA’s case, interest earned in this account is tax-free. In the RRSP’s case, you’ll only pay tax when you withdraw money.
Interest earned in these accounts is not taxed in the same way as interest earned in non-registered accounts. Other examples of registered accounts in Canada include RESPs and RRIFs.
Both TFSAs and RRSPs limit how much you can contribute, and overcontribution will result in penalties. Your TFSA has an annual contribution limit of $6,000 per year, and this limit is cumulative. That means if you were over 18 when the TFSA was introduced in 2009, your total contribution limit is $75,500. Your RRSP’s contribution limit is 18% of your annual income and is also cumulative.
If you aren’t sure how much contribution room you have, you can check by logging into the Canada Revenue Agency’s My Account portal.
IYou can save for a house down payment in both an RRSP and a TFSA. If you save in a TFSA, you can deposit money up to your contribution limit and it will grow tax-free. In addition, you can withdraw money from your TFSA at any time with no penalties.
If you are a first-time homebuyer, your RRSP can also be used to save for a home down payment, and your contributions will generate tax deductions, which you can use to lower your taxable income. First-time homebuyers can withdraw up to $35,000 from their RRSP without having to pay tax on that amount, but you’ll need to pay that withdrawal back over 15 years.