{"id":31029,"date":"2022-04-20T12:06:47","date_gmt":"2022-04-20T16:06:47","guid":{"rendered":"https:\/\/wealthica.com\/blog\/?p=31029"},"modified":"2022-04-20T12:06:48","modified_gmt":"2022-04-20T16:06:48","slug":"tfsa-vs-rrsp","status":"publish","type":"post","link":"https:\/\/wealthica.com\/blog\/tfsa-vs-rrsp\/","title":{"rendered":"TFSA vs RRSP: What&#8217;s the Difference?"},"content":{"rendered":"\n<p>As a Canadian, you are probably torn between going with a TFSA and RRSP account for savings. Both are government-registered account types that allow you to save money in a tax-efficient way but they differ as to \u201chow\u201d.<\/p>\n\n\n\n<p><strong>Understanding the differences between them will make your decision much easier.<\/strong> That\u2019s why in this post, I will outline them for you and help you choose the account that best fits your needs. Let&#8217;s end the TFSA vs RRSP debate once and for all&#8230;<\/p>\n\n\n\n<div id=\"rtoc-mokuji-wrapper\" class=\"rtoc-mokuji-content frame2 preset1 animation-fade rtoc_open default\" data-id=\"31029\" data-theme=\"Kicker Child\">\n\t\t\t<div id=\"rtoc-mokuji-title\" class=\" rtoc_left\">\n\t\t\t<button class=\"rtoc_open_close rtoc_open\"><\/button>\n\t\t\t<span>Contents<\/span>\n\t\t\t<\/div><ol class=\"rtoc-mokuji decimal_ol level-1\"><li class=\"rtoc-item\"><a href=\"#rtoc-1\">TFSA vs RRSP: Comparison Table<\/a><\/li><li class=\"rtoc-item\"><a href=\"#rtoc-2\">TFSA Explained<\/a><\/li><li class=\"rtoc-item\"><a href=\"#rtoc-3\">RRSP Explained<\/a><\/li><li class=\"rtoc-item\"><a href=\"#rtoc-4\">TFSA vs RRSP: Head to head<\/a><\/li><li class=\"rtoc-item\"><a href=\"#rtoc-5\">Should You Have Both a TFSA and RRSP Account?<\/a><\/li><li class=\"rtoc-item\"><a href=\"#rtoc-6\">Do All Banks Offer TFSA and RRSP accounts?<\/a><\/li><\/ol><\/div><h2 id=\"rtoc-1\"  class=\"wp-block-heading\">TFSA vs RRSP: Comparison Table<\/h2>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><\/td><td><strong>TFSA<\/strong><\/td><td><strong>RRSP<\/strong><\/td><\/tr><tr><td><strong>Ideal for<\/strong><\/td><td>Short-term goals<\/td><td>Long-term goals<\/td><\/tr><tr><td><strong>Tax Benefit<\/strong><\/td><td>Tax-free dividends\/Withdrawals<\/td><td>Tax-deductible contributions<\/td><\/tr><tr><td><strong>Contribution Limit<\/strong><\/td><td>$6,000 (2021)<\/td><td>18% of last year&#8217;s income or $27,830 (2021)<\/td><\/tr><tr><td><strong>Contribution Room<\/strong><\/td><td>Unused limits and withdrawals are carried forward<\/td><td>Unused limits are carried forward, but not withdrawals<\/td><\/tr><tr><td><strong>Expiration<\/strong><\/td><td>Can be used indefinitely<\/td><td>You must withdraw or convert the account to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71<\/td><\/tr><tr><td><strong>Over-Contribution Penalty<\/strong><\/td><td>1% tax on the excess funds per month<\/td><td>1% tax on the excess funds per month<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 id=\"rtoc-2\"  class=\"wp-block-heading\">TFSA Explained<\/h2>\n\n\n\n<p>The most important advantage <a href=\"https:\/\/www.investopedia.com\/terms\/t\/tax-free-savings-account-tfsa.asp\" rel=\"noopener\">TFSA<\/a> accounts have is that they allow your savings to grow <strong>tax-free<\/strong>. You won\u2019t have to pay taxes on dividends\/withdrawals and you will, therefore, enjoy more liquidity than the usual retirement accounts offer.<\/p>\n\n\n\n<p>You can use TFSA to save up to <a href=\"https:\/\/www.canada.ca\/en\/revenue-agency\/services\/tax\/individuals\/topics\/tax-free-savings-account\/contributions.html\" rel=\"noopener\"><strong>$6,000 per year<\/strong> (as of 2021)<\/a>. If you don\u2019t max out your limit, the unused contribution room will be carried forward even if you withdraw some money.<\/p>\n\n\n\n<p>For instance, if you have contributed $5,000 but you later withdrew $1,000 during a year, your contribution limit for the next year will be $8,000 (contribution room: $6,000 &#8211; $5,000 + $1,000 = $2,000 for the first year + $6,000 for the second)<\/p>\n\n\n\n<p>By the way, an easy way to keep track of your contributions is to use <strong>Wealthica\u2019s Registered Contributions widget<\/strong>. If you earn dividends, Wealthica has an add-on to track them as well<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh6.googleusercontent.com\/ER2u1dVz9UBRa2R4NONovK_b1G2sxLDCVhN5V8NuIr_sA8NWRYbXUnCKk-07tLRt1_q9ZVxVxyP5QfZbQTTWGXDX8PfeZlu_JPCuHUK40qHYkz1z2cQ4KqtGM92itO6Mu0L_pDdb\" alt=\"TFSA vs RRSP: What\u2019s the Difference?\"\/><\/figure>\n\n\n\n<p><a href=\"https:\/\/app.wealthica.com\/sign-up\">Sign up to Wealthica for free<\/a> to get started!<\/p>\n\n\n\n<p><br>Another great advantage over many account types is that you can use the TFSA for as long as you like. You\u2019ll never be forced to stop contributing and start withdrawing.<\/p>\n\n\n\n<h2 id=\"rtoc-3\"  class=\"wp-block-heading\">RRSP Explained<\/h2>\n\n\n\n<p>The main advantage that <a href=\"https:\/\/www.rbcroyalbank.com\/investments\/rrsp.html\" rel=\"noopener\">RRSP<\/a> accounts enjoy is <strong>tax-deductive contributions<\/strong>. In other words, you can subtract the amount of your RRSP contributions each year from your taxable income.<\/p>\n\n\n\n<p>As for the contribution limit, it is <a href=\"https:\/\/www.moneysense.ca\/save\/investing\/rrsp\/rrsp-contribution-limit\/\" rel=\"noopener\"><strong>$27,830 per year<\/strong><\/a><strong> <\/strong>(as of 2021). Just bear in mind that you can\u2019t contribute more than <strong>18% of your previous-year annual income<\/strong>.<\/p>\n\n\n\n<p>Contribution rooms of unused limits are also carried forward, but withdrawn amounts aren\u2019t.<br><\/p>\n\n\n\n<p>Now, you cannot use an RRSP indefinitely, but up until December 31 of the year you turn 71.<\/p>\n\n\n\n<p>However, you will have two options then. First, you can convert it into a <a href=\"https:\/\/www.sunlife.ca\/en\/explore-products\/investments\/rrif-and-lif\/registered-retirement-income-fund-rrif\/\" rel=\"noopener\">Registered Retirement Income Fund (RRIF)<\/a> which allows you to receive periodic payments. Second, you can withdraw your fund as a lump sum.<\/p>\n\n\n\n<h2 id=\"rtoc-4\"  class=\"wp-block-heading\">TFSA vs RRSP: Head to head<\/h2>\n\n\n\n<p><strong>TFSA is a relatively new short-term savings account type.<\/strong> It will serve you best for saving money to reach short-term goals such as buying a new house or a car.<\/p>\n\n\n\n<p><strong>RRSP is a much older and more long-term-oriented account type.<\/strong> It\u2019s ideal for retirement savings and long-term goals.<\/p>\n\n\n\n<p>That\u2019s because of their taxation\/contribution structures we outlined above.<\/p>\n\n\n\n<p>Since with a TFSA you won\u2019t have to pay taxes on withdrawals, it\u2019s ideal for short-term savings goals. RRSP doesn\u2019t have that feature but a high-income earner will benefit from it more as it has a greater contribution-room and contributions will be tax-deductible.<\/p>\n\n\n\n<h2 id=\"rtoc-5\"  class=\"wp-block-heading\">Should You Have Both a TFSA and RRSP Account?<\/h2>\n\n\n\n<p>You can absolutely choose \u201coption C\u201d and go with both TFSA and RRSP. This will give you the best of both worlds; liquidity <em>and<\/em> retirement. But most importantly, it will allow you to contribute much more towards retirement.<\/p>\n\n\n\n<p>A combination is also ideal for entrepreneurs and business owners who have unpredictable incomes. <strong>The idea is that it will allow you to contribute to your RRSP in a high tax-bracket year and to a TFSA in a low-income year.<\/strong><\/p>\n\n\n\n<p>This way, you enjoy both the benefit of paying less in taxes when your income is high <em>and<\/em> the advantage of having your contributions grow tax-free when it\u2019s low.<\/p>\n\n\n\n<h2 id=\"rtoc-6\"  class=\"wp-block-heading\">Do All Banks Offer TFSA and RRSP accounts?<\/h2>\n\n\n\n<p>The most prominent Canadian banks offer TFSA and RRSP accounts. Just make sure that you take <a href=\"https:\/\/moving2canada.com\/best-bank-in-canada\/\" rel=\"noopener\">more factors<\/a> into consideration before you go with any of them; such as banking fees, cheques, ATM charges, debit cards, etc.<\/p>\n\n\n\n<p>And to make your financial life easier, consider adding your account to Wealthica and track your net worth more effectively. <strong>Wealthica supports big Canadian banks like RBC, NBC, and Wealthsimple, which all offer TFSA and RRSP accounts.<\/strong><\/p>\n\n\n\n<p>The information you provide is bank-level encrypted and SOC 2 compliant. And it\u2019s also completely free to use!<\/p>\n\n\n\n<p><a href=\"https:\/\/app.wealthica.com\/sign-up\">Sign up to Wealthica<\/a> and get a hold of your finances today\u2026<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Are you torn between choosing a TFSA and RRSP account? Worry not. In this article we will end the TFSA vs RRSP debate once and for all&#8230;<\/p>\n","protected":false},"author":13,"featured_media":31031,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14],"tags":[2410,2406],"class_list":["post-31029","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-accounts-2","tag-retirement"],"acf":[],"_links":{"self":[{"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/posts\/31029","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/comments?post=31029"}],"version-history":[{"count":1,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/posts\/31029\/revisions"}],"predecessor-version":[{"id":31032,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/posts\/31029\/revisions\/31032"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/media\/31031"}],"wp:attachment":[{"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/media?parent=31029"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/categories?post=31029"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/wealthica.com\/blog\/wp-json\/wp\/v2\/tags?post=31029"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}