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
Tax-Free Savings Account (TFSA) is a savings account that does not apply taxes on the money that has been contributed to or withdrawn from the account. 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 The money contributed in RRSP is tax-free until it is withdrawn from the account.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 |
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 Gains within an RRSP are not taxable until they are withdrawn.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 The CRA will charge 1% every month on the amount that exceeds the limit ($2,000) until it is withdrawn | The CRA will charge 1% every month on the amount that exceeds the limit ($6,000) until it is withdrawn.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)
January 2020