Save with the Tax-Free Savings Account

Save with the Tax-Free Savings Account

How Is a TFSA Different From a Registered Retirement Savings Plan?

Both an RRSP and TFSA offer tax advantages by allowing you to accumulate investment income tax-free within the plan or the account, but they have key differences.

• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings contributions are not deductible.
• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account are not included in your income—they are tax-free.

What are some of the differences between a TFSA and an RRSP?

An RRSP is primarily intended for retirement savings. Tax assistance provided by a TFSA complements that provided through RRSPs.

RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed at regular rates. 

TFSA contributions are not tax-deductible but the contributions and the investment earnings are exempt from tax upon withdrawal.

Unlike an RRSP, which must be converted to a retirement income vehicle at age 71, a TFSA does not have any minimum withdrawal requirement.

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, and the income earned on the contributed amount is generally not attributed back to the spouse or partner who provided the funds.

Consider consulting your bank, credit union or other financial service provider before deciding whether to place money in an RRSP or a TFSA or to find out the combination of contributions that is best for your situation.

 

An Effective Vehicle for Your Lifetime Savings Needs

Robert withdraws $10,000 tax-free from his TFSA to renovate his home. Robert will be able to re-contribute the $10,000 to his TFSA in future years without affecting his other available contribution room. Had he used his RRSP savings, he would have needed to withdraw up to $18,000 to pay taxes and cover the cost of the renovation, and this contribution room would have been lost.

Benefits of Saving in a TFSA

Because capital gains and other investment income earned in a TFSA are not taxed – even when withdrawn (either as they accrue or when they are withdrawn), a person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to saving in an unregistered account.