37 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(TFSA) is a savings account that does not apply taxes on the earnings or original contributions when amounts are withdrawn from the account.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 The money contributed in RRSP is tax-free until it is withdrawn from the account.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

 

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  Gains within an RRSP are not taxable until they are withdrawn.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 The CRA will charge 1% every month on the amount that exceeds the limit ($2,000) until it is withdrawn The CRA will charge 1% every month on the amount that exceeds the limit (see “Limitation” above ) until it is withdrawn.

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January 2020

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