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One of the most common questions new investors have is: Should I invest with an RRSP or a TFSA? Let’s get one thing clear first - you can absolutely have both. It’s a great way to save for different goals at the same time.

But if you just want one to start with, or if you already have an RRSP and a TFSA and you’re wondering which to contribute to first, understanding their differences is key to getting the most out of your money.


The main differences between an RRSP and TFSA

 

RRSP

TFSA

Contribution limit

As of 2019, the annual limit is 18% of the previous year's earned income, up to a maximum of $26,500. Unused contribution room is carried forward from previous years.

As of 2019, the annual limit is $6,000. Unused contribution room is carried forward from previous years.

You don't pay tax on

  • Direct contributions

  • Interest, dividends, or capital gains your investments earn

  • Money you withdraw from your account

  • Interest, dividends, or capital gains your investments earn

You do pay tax on

Money you withdraw from your account.

Direct contributions to your account.

Withdrawals

You can withdraw as much as you want, any time, but it’s subject to income tax.

There are some exceptions to this. For example, if you’re holding GICs in your RRSP and you withdraw funds before they mature, you may pay a penalty.

You can withdraw as much as you want, any time, and it’s exempt from tax.

There may be some exceptions to this. For example, if you’re holding GICs in your TFSA and you withdraw funds before they mature, you may pay a penalty.

Expiration

You must cash out your RRSP when you turn 71.

Never expires.


When to invest in an RRSP

The money you add to your RRSP is tax-deductible. This means that for every dollar you place into an RRSP, you can take a deduction against that year’s income. This means you could get a higher tax refund that you can invest right back into your RRSP. So to get the most out of your RRSP, contribute to it when your income is higher and withdraw from it when your income is lower (like when you’re retired).

Good reasons to invest in an RRSP:

  • You’re investing to build savings for retirement and you’re currently in a higher tax bracket (if you’re making more than $50,000 a year, for example).

  • You’re investing to build savings for your first home and you plan to use your RRSP as part of the Canadian government’s Home Buyers’ Plan (HBP)

  • You’re investing to build savings for your own education and you want to use your RRSP as part of the Canadian government’s Lifelong Learning Plan (LLP)

Learn more about RRSP options from Meridian



When to invest in a TFSA

A TFSA is a great choice if you’re saving for a goal earlier than retirement. In some cases, you can use it for retirement savings too. A TFSA doesn’t have the same tax benefits as an RRSP, but it’s more flexible because you can withdraw money any time without paying tax on it and the money you invest is growing tax-free. With a regular non-registered savings account, you’d be taxed on whatever interest you earn.

Good reasons to invest in a TFSA:

  • You’re investing to save for a goal that’s earlier than retirement – like a wedding, down payment on a new home, new car, etc.

  • You’re investing for retirement and you’re in a lower tax bracket (if you’re making less than $50,000 a year, for example).

  • You’re investing for retirement, you expect your salary to go up significantly soon, and you want to use your TFSA contribution room now so you have more room to contribute to an RRSP later, when you want to take advantage of greater tax benefits.

  • You usually max out your RRSP contribution room and you want another option for tax-sheltered savings.

Learn more about TFSA options from Meridian