What are the similarities and differences between an RRSP and a TFSA?  For most students which would be a better investment vehicle?

Ashpreet Kaur

Common tax issues for students

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(TFSA) is a savings account that does not apply taxes on the earnings or original contributions when amounts are withdrawn from the account.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 The money contributed in RRSP is tax-free until it is withdrawn from the account.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	Individuals who are 18 years old or over and with a valid Social Insurance Number (SIN) can apply for a TFSA
Limitation	In 2024, individuals can contribute 18% of their earned income, up to $31,560	In 2024, individuals can contribute up to $7,000. Note the TFSA contribution room is cumulative. I.e. if you don’t contribute in year 1, you could contribute $14,000 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 Gains within an RRSP are not taxable until they are withdrawn.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 The CRA will charge 1% every month on the amount that exceeds the limit ($2,000) until it is withdrawn	The CRA will charge 1% every month on the amount that exceeds the limit (see “Limitation” above ) until it is withdrawn.

There is also the First Home Savings Account, introduced in 2023, which allows Canadian residents to save tax-free for the purchase of their first home. Here are the key limits and rules for 2024:

Annual Contribution Limit: You can contribute up to $8,000 per year. If you don’t use your full contribution room, you can carry forward unused amounts, but the maximum annual contribution in any given year cannot exceed $16,000 (including carryforward).
Lifetime Contribution Limit: The FHSA has a lifetime contribution limit of $40,000.
Tax Benefits: Contributions to an FHSA are tax-deductible, similar to an RRSP, and withdrawals to purchase a home are tax-free, similar to a TFSA. Investment growth inside the account is also tax-free.

These limits and benefits make the FHSA a powerful tool for first-time homebuyers in Canada