TFSA or RRSP - Which one should you choose? 

Two of the most common investment questions are: “What’s the difference between an RRSP and TFSA?” and “Which one should I choose?”

The differences between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) are outlined below. Which one you should choose depends on a few factors: your current tax rate, your reason for saving, and your future tax rate.

TFSA vs. RRSP

An RRSP is mainly intended for retirement savings.

  • Annual contributions are tax deductible.
  • Your contribution limit is based on earned income.
  • Your contribution room begins at whatever age you begin working and filing a tax return.
  • You can contribute 18% of your earned income per year, up to a maximum of $26,010 for 2017.
  • If you don’t contribute to an RRSP, your contribution room accumulates and you can contribute even larger amounts in the future.

The TFSA was introduced by the federal government in 2009, as a way for anyone 18 or older to set money aside tax-free throughout their lifetime.

Annual contribution limits amounts have varied over the years.

  • In 2009, 2010, 2011 and 2012, the room for each year was $5,000.
  • In 2013 and 2014, the contribution amount increased to $5,500 for each year.
  • In 2015, the contribution amount increased again to $10,000.
  • The maximum contribution room for 2016 was reduced to $5,500.

TFSA contributions are not tax deductible and contribution room accumulates if unused. Anyone who was 18 or older in 2009, and has not yet contributed, will have $52,000 of contribution room available in 2017.

The chart below shows how different tax rates during your working years and retirement years can affect your decision to invest in an RRSP or a TFSA today, and the after-tax value after 20 years.

 

 Same tax rate today as in retirementHigher tax rate today than in retirementLower tax rate today than in retirement
Marginal tax rate (contribution/retirement)40% / 40%40% / 30%30% / 40%
 RRSPTFSARRSPTFSARRSPTFSA
Contribution (before tax) $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Tax payable $0 $400 $0 $400 $0 $300
Net contribution $1,000 $600 $1,000 $600 $1,000 $700
Investment Income $2,207 $1,324 $2,207 $1,324 $2,207 $1,545
Market Value* $3,207 $1,924 $3,207 $1,924 $3,207 $2,245
Tax Payable $1,283 $0 $962 $0 $1,283 $0
Account value (after-tax) $1,924 $1,924 $2,245 $1,924 $1,924 $2,245
*Assumes annual 6% return over 20 years.

 

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