38 What are the similarities and differences between an RRSP and a TFSA? For most students which would be a better investment vehicle?
Ashpreet Kaur
A Tax-Free Savings Account (TFSA) is a savings account that does not apply taxes on the earnings or original contributions when amounts are withdrawn from the account. A Registered Retirement Savings Plan (RRSP) is a retirement savings account for people employed in Canada. The money contributed in RRSP is tax-free until it is withdrawn from the account.
| RRSP | TFSA | |
| Eligibility | Individuals who earn income and have a valid Social Insurance Number can contribute to their RRSP until the age of 71
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Individuals who are 18 years old or over and with a valid Social Insurance Number (SIN) can apply for a TFSA |
| Limitation | In 2020, individuals can contribute 18% of their earned income, up to $27,230
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In 2020, individuals can contribute up to $6,000. Note the TFSA contribution room is cumulative. I.e. if you don’t contribute in year 1, you could contribute $12,000 in year 2. Here is a CRA link to some TFSA contribution examples |
| Deposits | Deposits in an RRSP are deductible (see ITA for specific calculations) when calculating an individual’s Net Income For Tax Purposes.
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Any deposits in TFSA are not deductible for income tax purposes. |
| Withdrawals | Withdrawals from an RRSP will be fully taxed. Gains within an RRSP are not taxable until they are withdrawn. | Withdrawals and gains from a TFSA are not taxable. |
| Penalty | Individuals can overcontribute up to $2,000. The CRA will charge 1% every month on the amount that exceeds the limit ($2,000) until it is withdrawn | The CRA will charge 1% every month on the amount that exceeds the limit (see “Limitation” above ) until it is withdrawn. |
Professor’s Comments – There is also a new financial vehicle called the “First Home Savings Account” (FHSA) that will likely be available for contributions in 2022. The FHSA seems to blend the best parts of a TFSA and an RRSP. This might be the best young person/student savings mechanism around. Here is a link to a finance blog that I follow with a 2-part article on the FHSA: Part I, Part II.
Interactive content (Author: Paramjot Kaur, January 2020)
Interactive content (Author: Thomas Lee, February 2020)
References and Resources:
- Article – “MP, DB, RRSP, DPSP, and TFSA limits and the YMPE” (Author: Government of Canada)
- Article – “Tax-Free Savings Account” (Author: Government of Canada)
- Article – “Registered Retirement Savings Plan (RRSP)” (Author: Government of Canada)
January 2020
