If you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can provide significant tax savings. To help you understand the differences, we compare:
TFSA versus RRSP – Differences in deposits
TFSA versus RRSP – Differences in withdrawals
1) TFSA versus RRSP – Difference in deposits
There are several areas to focus on when comparing differences in deposits for 2021:
● Contribution Room
● Carry Forward
● Contribution and Tax Deductibility
● Tax Treatment of Growth
How much contribution room do I have?
If you have never contributed to a TFSA before, you can contribute up to $75,500 today. This table outlines the contribution amount you are allowed each year since TFSAs were created, including this year:
For RRSPs, the deduction limit is always 18% of your previous year’s pre-tax earnings to a maximum of $27,830. For example, if you earned $60,000 in 2020 then your deduction limit for 2021 would be $10,800 (18% x $60,000). If you earned $200,000, your deduction limit would be capped at the maximum of $27,830.
How much contribution room can I carry forward?
If you choose not to contribute to your TFSA at all one year or do not contribute the maximum amount in a year, you can indefinitely carry forward your unused contribution room. The only restrictions on this are that you must be a Canadian resident, older than 18, and have a valid social insurance number. If you make a withdrawal, then the amount you withdrew is added on top of your annual contribution room for the next calendar year.
For an RRSP, you can carry forward your unused contribution room until the age of 71. When you turn 71, you must convert your RRSP into an RRIF. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.
Contributions and Tax Deductibility
Your TFSA contributions are not tax-deductible and are made with after-tax dollars.
Your RRSP contributions are tax-deductible and made with pre-tax dollars.
Tax Treatment of Growth
One of the reasons it’s essential to make both RRSP and TFSA contributions is that any growth in them is treated differently.
A TFSA is more suitable for short-term objectives like saving for a house down payment or a vacation – because all of the growth in it is tax-free. When you make a withdrawal from your TFSA, you won’t have to pay income tax on the amount withdrawn.
The growth in an RRSP is tax-deferred. This means you won’t pay any taxes on your RRSP gains until age 71, at which time, you convert RRSP into a RRIF and begin withdrawing money. RRSPs are better suited for long-term objectives, like retirement. Since you will have a lower income in retirement than when you are working, you will be in a lower tax bracket and, thus, not pay as much tax on your RRIF income.
TFSA versus RRSP – Differences in withdrawals
There are several areas to focus on when comparing differences in withdrawal for 2021:
For a TFSA, there are never any conversion requirements as there is no maximum age for a TFSA.
For an RRSP, you must convert it to a Registered Retirement Income Fund (RRIF) if you turn 71 by December 31st of 2021.
Tax Treatment of withdrawals
One of the most attractive things about a TFSA is that all your withdrawals are tax-free! This is why they are recommended for short-term goals; you don’t have to worry about taxes when you take money out to pay for a house or a dream vacation.
With an RRSP, if you make a withdrawal, it will be taxed as income except in two cases:
The Home Buyers Plan lets you withdraw up to $35,000 tax-free, but you must pay it back within fifteen years.
The Lifelong Learning Plan lets you withdraw up to $20,000 ($10,000 maximum per year) tax-free, but you must pay it back within ten years.
How will my government benefits be impacted?
If you are making a withdrawal from your TFSA or RRSP, it’s essential to know how that will affect any benefits you receive from the government.
Since TFSA withdrawals are not considered taxable income, they will not impact your eligibility for income-tested government benefits.
RRSP withdrawals are considered taxable income and can affect the following:
Income-tested tax credits such as Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit, and the Age Credit.
Government benefits including Old Age Security, Guaranteed Income Supplement and Employment Insurance.
How will a withdrawal impact my contribution room?
If you make a withdrawal from your TFSA, then the amount you withdrew will be added on top of your annual contribution room for the next calendar year. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.
RRSPs and TFSAs can both be great savings vehicles. However, there are significant differences between them which can affect your finances. If you need help navigating these differences, please do not hesitate to contact us. We’re here to help.
If you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can both be effective options for you to achieve your savings goals more quickly. However, each plan does have distinct differences and advantages / disadvantages. We’ve separated our comparisons into 2 different infographics: deposits and withdrawals.
In the Deposit phase, we look at:
Tax Treatment of Growth
TFSA : $6,000 for 2021. If you never opened a TFSA, you can contribute up to $75,500 today.
$5,000 for each year from 2009 to 2012;
$5,500 for each of 2013 and 2014;
$10,000 for 2015;
$5,500 for each of 2016, 2017 and 2018
$6,000 for each of 2019, 2020 and 2021
RRSP : 18% of your 2020 pre-tax earned income or $27,830. So for example if you earned $60,000, then your deduction limit would be $10,800 (18% x $60,000). If you earned $200,000, then your deduction limit would be capped at the max limit of $27,830.
TFSA : You can carry forward your unused contribution room indefinitely, as long as your a Canadian resident, older than age 18 with a valid social insurance number. Withdrawals will usually result in new contribution room.
RRSP : You can carry forward your unused contribution room until the age of 71 when you have to convert your RRSP to a RRIF. Any withdrawals made from your RRSP will not result in new contribution room.
TFSA : You are contributing to your TFSA with After-tax dollars.
RRSP : You are contributing to your RRSP with Pre-tax dollars.
TFSA : Contributions are not tax deductible.
RRSP : Contributions are tax deductible.
Tax Treatment of Growth
TFSA : The growth inside a TFSA is tax free therefore it’s a great savings vehicle for immediate objectives such as a down payment for a home.
RRSP : The growth inside an RRSP is tax deferred, which means at withdrawal, you will need to pay tax, therefore it’s a good choice for long term goals such as retirement.
In the Withdrawals phase, we look at:
TFSA : With a TFSA, there’s no conversion.
RRSP : You must convert your RRSP to a Registered Retirement Income Fund by December 31st of the year you turn 71.
TFSA : You can make tax-free withdrawals.
RRSP : Your withdrawals are taxed as income except for withdrawals under the Home Buyers Plan, which you can withdraw up to $35,000 providing you pay within 15 years or Lifelong Learning Plan, which you can withdraw up to $20,000 ($10,000 per year) providing that the money is paid back within 10 years.
TFSA : Your withdrawals doesn’t affect eligibility for income tested government benefit because TFSA withdrawals aren’t included as taxable income.
RRSP : RRSP withdrawals are treated as taxable income therefore withdrawals may affect income tested tax credits such as Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit. Withdrawals may also affect government benefits you receive including Old Age Security, Guaranteed Income Supplement and Employment Insurance benefits.
TFSA : You can carry forward your unused contribution room indefinitely, as long as your a Canadian resident, older than age 18 with a valid social insurance number. Withdrawals will usually result in new contribution room to the following year’s contribution.
RRSP : Contribution room is based on your previous year’s earned income. You can carry forward your unused contribution room until the age of 71 when you have to convert your RRSP to a RRIF. Any withdrawals made from your RRSP will not result in new contribution room.
An additional different to note is that:
You are able to specify your spouse as your beneficiary with both your TFSA and your RRSP, however there is a key difference with how your savings are treated upon your spouse’s death. With an RRSP, there will be taxes payable upon the monies left in the plan by your children who inherit it, whereas with a TFSA, tax is only paid on the increase in the value of the plan since the date of death in the year that it is inherited by your children. What’s more, no tax is payable if the value that they receive is less than the value of the TFSA at the time of death.
In summary, your unique financial needs will provide information on what makes the most sense for you.
We’ve put together a financial calendar for 2021. It contains all the dates you need to know to make the most of your government benefits and investment options. Whether you want to bookmark this or print it out and post it somewhere prominent, you’ll have everything you need to know in one place!
We’ve provided information on:
The dates when the government distributes payments for the Canada Child Benefit, the Canada Pension Plan (CPP) and Old Age Security (OAS).
When GST/HST credit payments are issued – usually on the fifth day of January, April, July and October.
All the dates the Bank of Canada makes an interest rate announcement. A change in this interest rate (up or down) can impact a bank’s prime interest rates. This can then affect anything from the interest rate charged on your mortgage and line of credit to how much the Canadian dollar is worth against other currencies.
When you can start contributing to your Tax Free Savings Account (TFSA) for 2021, the contribution limit for 2021 is $6,000.
March 1st is the last day for your 2020 Registered Retirement Savings Plan (RRSP).
December 31st , 2021 is the last day for 2021 charitable contributions.
December 31st is the deadlines for various investment savings vehicle contributions, including your Registered Disability Savings Plan (RDSP) and Registered Education Savings Plan (RESP), as well as your RRSP if you turned 71 in 2021.
Tax filing deadlines for personal income tax, terminal tax returns for someone who died in 2020, self-employed individuals
Knowing all of this information here can help you keep on top of your finances if you’re expecting any government benefits. It can also make sure you don’t miss any critical tax or investment deadlines!
Tax packages will be available starting February 2021 – reach out to your accountant to get started on your taxes!
If you have any questions on how we can help with your 2021 finances, please contact us.