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(TFSA) is a savings account that does not apply taxes on the earnings or original contributions when amounts are withdrawn from the account.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 The money contributed in RRSP is tax-free until it is withdrawn from the account.
|Eligibility||Individuals who earn income and have a valid Social Insurance Number can contribute to their RRSP until the age of 71
|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
|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.
|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 Gains within an RRSP are not taxable until they are withdrawn.||Withdrawals and gains from a TFSA are not taxable.|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 The CRA will charge 1% every month on the amount that exceeds the limit ($2,000) until it is withdrawn||The CRA will charge 1% every month on the amount that exceeds the limit (see “Limitation” above ) until it is withdrawn.|
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)