RRSP Vs TFSA – What is the difference?

by | Jun 16, 2021

What is a TFSA and RRSP?

The TFSA is a tax-free account that you contribute to based on after-tax income. On the contrary, a RRSP account is a tax-deferred account that is contributed to with pre-tax dollars. You will pay taxes when money is withdrawn from the account. Depending on your tax rate, one option may offer more tax savings for you.


Now let’s take a look at some differences between a TFSA and RRSP. The first difference comes in the form of flexibility. A TSFA can be withdrawn anytime and can be used for anything while a RRSP doesn’t allow you to take out money without incurring penalties, except when buying a first home under the Lifelong Learning Plan. This could be a deciding factor based on when you think you will need the money. Moreover, when you take out of your TFSA, it’s tax-free and you can only replace the amount of the withdrawal the same year if you have TFSA contribution room. On the other hand, you will need to pay taxes on the RRSP when you withdraw funds. Since the TFSA is tax-free, you can’t take any tax deductions for the contributions, but you can claim a tax deduction for the RRSP contributions. A RRSP allows you to carry forward tax deductions to future years.

CRA Regulations with TFSA’s and RRSP’s

Now that the withdrawal information has been laid out, let’s take a look at the contribution regulations. Both options allow you to contribute directly to the funds. However, a TFSA only allows you to contribute up to $75,500 over your lifetime while a RRSP only allows you to contribute 18% of the previous year’s earned income or $27,830 for 2021. The annual maximum for a TFSA is $6,000 per year, which is lower than the RRSP contribution room.

Additionally, a TFSA does not expire, but a RRSP must be converted to a Registered Retirement Income Fund by Dec 31 of the year you turn 71. Not sure what a Registered Retirement Income Fund is?

Even though both a TFSA and RRSP have differences in withdrawal and contribution rules, they do have some similarities. Both a TFSA and RRSP have tax-sheltered growth on investments and both allow you to choose your own investments. Having an advisor work with you on the investment options is critical in order to maximize investment growth. Odds are they know more about the future investment predictions than you do, making them an asset to have on your side.

Deciding between a TFSA and RRSP is a tough decision, especially because both have advantages and disadvantages. All of the differences need to be considered to make an informed decision that is most beneficial to you.