RRSP vs TFSA: This in-depth guide has all you need to know

TFSA or RRSP? If your first reaction to that question is something like, “OMG”, this is the perfect article for you.  

We are here to break down everything you need to know about TFSA and RRSP contribution limits, taxes, withdrawals, and so much more. And, ultimately, which is the right account for your saving strategy. 

Whether you’re saving in general, or towards something specific like your mortgage downpayment, there’s never a bad reason to start saving. Let’s get started with getting to know the ins and outs of TFSAs and RRSPs.

RRSP vs TFSA: Understanding the differences

TFSAs and RRSPs are excellent tools that can both have a place in your financial mix, it’s not an either/or situation. In fact, both can be key to your savings strategy.

If you’re wondering about the finer difference between them, even after reading this article, that’s a question a credit union financial expert can help dig into. For now, let’s look at a few basic differences between the two.

TFSA vs RRSP: what’s the difference?

A Registered Retirement Savings Plan (or RRSP) is a savings plan designed to help you set aside money for retirement. Money contributed into an RRSP is tax deductible, and any interest or returns it earns is not taxed. You’re only taxed when you withdraw money from your plan.

A Tax-Free Savings Account (or TFSA) is an account that can be used as savings toward your short-, medium-, or long-term goals. While the money you put into your TFSA is not tax deductible, your contributions inside of the plan grow tax free, meaning any interest or returns earned are not taxed, even when they’re taken out.

Each has a contribution room (or limit). Think of this as the maximum room (or amount) you have (are allowed) to contribute, per year. This amount is determined differently for RRSPs and TFSAs. Read on below to learn more. 

Annual contributions and limits to TFSA vs RRSP

RRSP: Your annual allowable RRSP contribution room is one of the below numbers (whichever is the lesser amount):

• 18% of your earned income from the previous tax year; or 
• the annual maximum (or contribution room) set by Canada Revenue Agency (CRA). 

Contributions can be made until December 31 of the year you turn 71. There are lots of factors that can affect your RRSP contribution room, including if room remains from previous years. Room only remains if you contributed less than the maximum amount allowed. You can find your available contribution room on your most recent Notice of Assessment.

TFSA: 2024 contribution limit is $7,000, plus any unused contribution room from previous years (this room only remains if you contributed less than the maximum amount allowed). You can find your available contribution room on your most recent Notice of Assessment.

This also includes any amounts you have withdrawn in the previous calendar year. You must be 18 (19 in certain provinces) to open a TFSA. Outside of that, there are no age restrictions on contributions.

Company pension or Deferred Profit-Sharing Plan (DPSP)

RRSP: The amount you can contribute to your RRSP will be reduced by the total value of any pension amounts earned for the year.

TFSA: not applicable.

Contribution deadline

RRSP: The contribution deadline for the 2023 tax year was April 15, 2024. Contributions made after the deadline are accepted, but please note these are applied to the following tax year.

TFSA: None. Contributions to a TFSA are not tax-deductible. New contribution room maximums (along with any remaining room from previous years) begin January 1 and follow the calendar year.

Overcontributing to your plan

RRSP: It is not recommended to overcontribute to your RRSP, but there is some room to do so if wanted. Specifically, there is a $2,000 lifetime allowance for overcontributions.

TFSA: Any overcontributions to your TFSA will result in a penalty until they are removed or more contribution room becomes available. Charges are 1% per month of the amount you overcontributed by (e.g. if you overcontributed by $1,000, you would be charged a penalty of $10 per month).

Transfers

RRSP: Transfers between financial institutions or changes to your investments within your RRSP are not considered withdrawals. That means they are not subject to tax.

TFSA: Transfers between financial institutions or changes to your investments within your TFSA are not considered withdrawals and are not factored into your TFSA contribution room.

Carry-forward amounts

RRSP: You can carry forward all unused contribution room. Your contribution room available to carry forward is reflected in your Notice of Assessment.

TFSA: You can carry forward unused contribution room from previous years. Also, any withdrawn amounts are added back into your TFSA contribution room for the following year. Your contribution room available to carry forward reflected in your Notice of Assessment.

Making withdrawals

RRSP: Outside of certain fixed-term investments, you can withdraw from your RRSP at any time. But it’s important to note that when you do, you will be issued a tax slip and must claim any withdrawal you make as income on your next tax return.

Also, funds withdrawn from your RRSP are subject to a withholding tax (an amount the CRA withholds, or keeps, from your withdrawal) of between 10% to 30% depending on the amount withdrawn. The only withdrawals exempt from this withholding tax are funds placed in a Home Buyer’s Plan (HBP) and/or a Lifelong Learning Plan (LLP). 

Note: there are maximum amounts that can be withdrawn under these programs, and that any withdrawals typically need to be paid back over a 10-to-15-year period. Connect with your credit union to see if you qualify for these plans and their related exemptions.

TFSA: Outside of certain kinds of fixed-term investments, you can withdraw from your TFSA at any time without tax consequences. Note: withdrawn amounts cannot be recontributed until the following year.

Replacing withdrawals

RRSP: Once you make a withdrawal from your RRSP, you will never be able to recontribute that amount (except for the two exceptions mentioned above). This is why it’s recommended to avoid withdrawing from your RRSP until retirement. If you’re considering making an early withdrawal, connect with a credit union expert. They can help you determine whether making a withdrawal makes sense for you.

TFSA: Unlike an RRSP, amounts withdrawn from your TFSA will be added back to your TFSA contribution room at the beginning of the following calendar year. If any contribution room remains after your withdrawal, you can continue contributing to a TFSA in the same year you make a withdrawal.

Use our tools and start building your savings plan

Giving you refreshingly honest advice is what credit unions are here for. Check out our retirement savings calculator to figure out how much you might need to save to make sure your retirement dreams can come true.