RRSP

RRSP vs. TFSA

As a rule of thumb taxpayers earning approximately $35,000 or less should favour the TFSA, while higher-income earners are likely to benefit more from contributing to an RRSP.

Other factors to consider are years remaining to retirement, income level before retirement, expected reliance on the different programs in retirement, level of expected income in retirement, and of course life expectancy.

But keep in mind that this rule of thumb only applies to the first $ 5,500 contribution.  For taxpayers who can save more than $ 5,500 and who are in the middle-income bracket the differences between the two accounts are modest but benefit slightly by maxing out their TFSA and putting the rest in their RRSP. For high income earners, the reverse is true, max out your RRSPs contributions and use a TFSA for additional savings.

The table below provides a comparison between the two accounts:

TFSA vs. RRSP
TFSA RRSP
Age minimum No minimum though you must have earned income 18 years old or older
Contriution limit The lesser of 18 per cent of your earned income or $25,370 for the 2016 tax year A maximum of $5,500 for the 2016 tax year (see above for other tax years)
Carry forward Until plan is wound up Indefinitely
Tax deductibility of contributions Yes No
Consequence of withdrawal Taxed at marginal rate No tax
Tax implications in retirement withdrawals are considered income regardless of how the income was earned (in the form of interest, dividends, or capital gains) and taxed at your marginal tax rate at the time of withdrawal. This may result in clawback from other programs such as Old Age Security Withdrawals are not considered income and do not result in clawbacks from other programs.
Spousal contributions If you contribute to your spouses plan, your contribution room will be affected. If you contribute to your spouses plan, their contribution room will be affected.
Year-End End of Feb or March 1 Dec 31
Eligible investment Stocks, Bonds, Mutual Funds, GICs, ETFs Same as RRSP

What you need to know about TFSA

Since its introduction in 2009, Tax Free Savings Account has been getting a lot of attention and for good reason too.  When earned in a TFSA investment income (including capital gains and dividends) are not taxed even when withdrawn. The downside is that unlike Registered Retirement Savings Plans (RRSP), contributions made to a TFSA are not deductible for income tax purposes.
Moreover, the name is slightly misleading as it suggests that contributions must be cash in a savings account. Just like RRSPs, TFSA may contain other investments such as mutual funds, stocks (with some restrictions), bonds, or even Guaranteed Investment Certificates (GICs).

The table below captures the many changes to the TFSA contribution room since 2009:

TFSA Contribution limits
Years TFSA Annual Cumulative
2009-2012 $5,000 $20,000
2013 5,500 25,500
2014 5,500 31,000
2015 10,000 41,000
2016 5,500 46,500
2017 5,500 52,000

 

When is TFSA more advantageous than RRSP?

  • You expect to be a high earner in retirement
  • You expect to earn a considerable pension. In such a case the income from your pensions and your RRSP or RRIF withdrawals in retirement can place you in a higher tax bracket than when you were working.
  • You earn less than approximately $ 35,000 a year. If you are a low-earner, you benefit from forgoing RRSPs altogether. In retirement, withdrawals from RRSPs and RRIFs can result in Old Age Security and Guaranteed Income Supplement clawbacks.