Which investment is better—RRSP or TFSA? This article will highlight some important differences, flexibilities, and restrictions.
Registered Retirement Savings Plan (RRSP)
- Eligibility: Any Canadian residents with earned income.
- Contribution Limit: 18% of earned income to an annual maximum ($21,000 for year 2009; $22,000 for year 2010); unused contribution room is carried forward and accumulates in future years.
- Tax Deductible: Contributions are tax-deductible and reduce taxable income.
- Earnings: tax deferred till withdrawn.
- Withdrawals: Withdrawals are added to taxable income and subject to tax; furthermore, withdrawals can not be put back into RRSP in future years unless they are for Home Buyers Plan (HBP) or Lifelong Learning Plan (LLP).
- Additional Notes: RRSP must be converted to a retirement income vehicle at age 71.
Tax Free Savings Account (TFSA)
- Eligibility: Canadian residents age 18 or older.
- Contribution Limit: $5,000 yearly (does not depend on earned income); unused contribution room is carried forward and accumulates in future years.
- Tax Deductible: Contributions are not tax-deductible; ie, you pay tax on the amount you put into TFSA.
- Earnings: Investment income earned in a TFSA is tax-free.
- Withdrawals: tax free; withdrawals made in the previous year will be added to your contribution limit for the current year.
- Transferability: There is no TFSA spousal plan.
Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room.
TFSA assets can generally be transferred to a spouse or common-law partner upon death.
- Additional Notes: Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit (CCTB), the GST Credit, the Age Credit, Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits.
Reference: TFSA