For years Canadians have utilized Retirement Savings Plans (RSPs) as the primary investment vehicle for retirement savings.  With the introduction of Tax-Free Savings Account (TFSA), there has been great debate over where to invest: RSP or TFSA? Although the two account types share some common traits, there are some key differences.

 

RSP

TFSA

Primary purpose

Mainly meets retirement needs

Meets savings needs throughout your life
and retirement

Annual limit contribution

18% of earned income (subject to the annual contribution limit)

$6,000 per year*

Unused contribution room

Carried forward from year to year

Carried forward from year to year

Taxation on growth

Growth is tax-deferred, meaning you only pay tax on the growth when the money is withdrawn.

The growth accumulates tax-free. You never are required to pay tax on the growth.

Tax deductions

Deposits reduce your income tax for the year. Most people receive a tax refund equal to the deposit multiplied by their marginal tax rate.

No tax deduction. TFSA contributions are
made with after-tax dollars.

Withdrawals

Withdrawals do not increase your contribution room the following year. You are charged withholding tax on the amount withdrawn and the amount is reported as taxable income. The income may affect eligibility for government sponsored retirement income programs.

Withdrawals increase your contribution
room the following year. Withdrawals
are not considered "income", they are
not taxed, and they do not affect
eligibility for government sponsored
retirement income programs.

Maturity date

Must be fully withdrawn or transferred to a RRIF or annuity by December 31st of end
of the year in which you turn 71

At Equitable Life a TFSA matures
at age 105

* Annual  limit is set by Canada  Revenue Agency (CRA) guidelines, currently $6,000 per year.

Both account types offer significant advantages.  While an RSP offers an immediate refund and tax deferral, a TFSA offers flexibility and tax-free growth. Depending on your current income and your expected income during retirement, a balanced retirement plan may include both an RSP and a TFSA. Speak to your advisor if you have any questions about a Tax-Free Savings Account. 

This information does not constitute legal, tax or other professional advice. Information is believed to be accurate, but accuracy is not guaranteed.