Is it better to put money in RRSP or TFSA?

Last Updated: 29-Nov-2022

Short Answer

Choosing between TFSA and RRSP depends on various factors such as your goals, time frame of investment, your marginal tax rate, age etc. Discover the similarities and differences between TFSA vs. RRSP Canada.

Detailed Answer

Investment Accounts in Canada: An Introduction

Once you have enough money to take care of your personal finances and emergencies, you look to invest your money into growth class assets like shares, ETFs, mutual funds, bonds and grow its value over time.

An investment account is one where you can buy these financial instruments.

Tax Free Savings Account or TFSA and Registered Retirement Savings Plan or RRSP are investment accounts that are registered with the federal government of Canada and can be accessed by the Canadian residents.

Comparison of TFSA and RRSP

** TFSA & RRSP - Year of Establishment:**

TFSA was established in 2009, whereas RRSP was established long ago in 1957.

TFSA & RRSP - Age limitations:

A person above 18 can open a TFSA whereas a person who is below age 71 can start a RRSP.

TFSA vs. RRSP -Contributions:

You can contribute up to $6,500 in TFSA in a particular year according to 2023 limits. As of 2023, you can contribute 18% of your earned income or $30,780 whichever is lesser into a RRSP. You can catch unused contribution room in both the accounts.

TFSA vs. RRSP - Tax advantages:

You do not have to pay tax on interest returns and capital growth within both TFSA and RRSP. In addition, your contributions within RRSP are tax deductible.

TFSA vs. RRSP - Tax implications: Your funds are taxed at withdrawal in RRSP.

Spouse account: You cannot contribute into a spouse’s TFSA, whereas you can contribute into your partner in law’s RRSP.

Is it better to put money in RRSP or TFSA?

The answer to this question depends on various factors:

  • If you are age 35 and you are saving for a short or a medium-term goal, say travel then it is better to put your money into TFSA as your money will not be taxed at withdrawal.
  • If your marginal tax rate is on a lower bracket, then you can go for RRSP, as it may nullify your taxes now and in future, your tax payable won’t be on a higher side when you withdraw the funds.
  • If you estimate you will be in a high tax bracket when you retire or withdraw the funds, then you can go for a TFSA as it will save you from paying high taxes on retirement.
  • If you are saving up for education or your first home, then it is wise to choose RRSP, as you can get deductions on contributions, plus your sum withdrawn for these purposes aren’t taxed.

TFSA vs. RRSP - Which is better?

Both TFSA and RRSP have their own pros and cons. If you have sufficient funds to save, then it might also be prudent to open and invest in a combination of both the plans.

What have you planned? Do you prefer a TFSA or RRSP or both? Feel free to discuss.

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