RRSP or TFSA
On average, Canadians are living longer than ever. The life expectancy for a 65 year-old is age 84 for men and age 87 for women. These numbers point to longer retirements for many Canadians.
A longer retirement, however, presents an interesting planning challenge - saving enough to generate a sustainable income during your retirement years.
RRSPs and TFSAs
Registered Retirement Savings Plans (RRSPs) are among the most popular investment plans in Canada. With the dual benefits of tax deductions and tax-deferred growth, it’s easy to see why Canadians choose RRSPs as their primary retirement savings vehicle.
Introduced in 2009, Tax-Free Savings Accounts (TFSAs) are a newer plan type that offer tax-free growth and significant flexibility. As TFSAs mature and contribution room grows, people are beginning to see the long-term benefits of incorporating TFSAs into their investment plan as soon as possible.
Which Option is Best?
- There are certain guidelines you can follow to decide whether to contribute to an RRSP or TFSA. Please keep in mind that some or none may apply to you. The best approach is to consult with your financial advisor to decide on the most appropriate option. Your financial advisor can also help you estimate how much money you’ll need in retirement, and what savings and investment strategies will help you generate the necessary income.
Additional Information
RRSPs May Be Better When You:
- Expect to have a lower income in retirement
- Earn a significant income
TFSAs May Be the Better Option When You:
- Expect to be in a higher tax bracket in retirement (for example, if you know you will have a significant pension)
- Earn a relatively lower income (because RRSP/ RRIF withdrawals may trigger a clawing back of certain government benefits)
- Plan on withdrawing money before you retire
Conclusion
Whether you invest in an RRSP or a TFSA usually depends on your current and future financial situation, and your long-term goals. Consult with your financial advisor to determine the option for you.
| RRSP | TFSA | |
| Annual contribution limit | 18% of your income from previous year, up to a maximum of $30,780 for 2023 ($29,210 for 2022) | 2009-2012: $5,000 2015: $10,000 2013-2014: $5,500 2016-2018: $5,500, 2019-2022: $6,000 2023: $6,500 |
| Contributions | Tax deductible | Not tax deductible |
| Growth | Tax deferred | Tax free |
| Withdrawals | Taxable: may affect your government benefits such as Old Age Security | Tax free: do not affect your government benefits |
| Withdrawal amounts | Contribution room is lost for the amounts you withdraw | Added to future contribution room |
| Unused contribution room | Carried forward | Carried forward |
| Spousal plan | You can contribute to a spousal RRSP | No spousal plans. You can, however, give money to your spouse for his or her TFSA. |
| Plan termination | End of calendar year that you turn 71 years old. Assets are transferred to a registered retirement income fund (RRIF) or annuity. | No age limit for contributions |
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