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TFSAs and RRSPs: Which is the best way to save?

TFSAs and RRSPs: Which is the best way to save?

TFSAs and RRSPs are registered savings plans that allow you to save money tax-free.

The two plans complement each other because they meet different types of needs:

  • RRSPs are designed to help you save for retirement.
  • Non-taxable withdrawals make TFSAs a good tool to help you save for projects: buying a car, renovating your home, starting a business or taking a trip.

There may, however, be exceptions to these rules. For example:

  • TFSAs may be better than RRSPs to save for retirement.
  • Borrowing from your RRSP to buy a home is often a very effective strategy.
  • A TFSA may also be useful when you have contributed the maximum to your RRSP and are seeking an additional tax deduction.

TFSA and RRSP comparison chart

 

TFSA

RRSP

Contribution deadline January 1 to December 31 of current year February 29, 2012
Age limit None The year of your 71st birthday
Contribution amount Up to $5,000 per year since 2009 for everyone 18% of income earned the preceding year, up to $22,000 in 2010 and $22,450 in 2011.
Are contributions income tax deductible? No Yes
Withdrawals Non-taxable Taxable
Investment income Non-taxable Non-taxable
Unused contribution room The unused portion of your maximum allowable contributions since 2009 The unused portion of your maximum annual amount deductible since 1991
Excess contributions Not allowed Up to $2,000 above the maximum allowable annual contribution
Impact of withdrawals on benefits from social programs None Added to taxable income.
Do withdrawals increase contribution room? Yes, equal to the qualifying amount withdrawn* and added to the contribution room for the following year. No
Are spousal contributions allowed? No. However, money you give your spouse to contribute to a TFSA is not subject to attribution rules. Yes. The contributing spouse claims the tax deduction even if he or she not the beneficiary.
Taxable upon death? No. Amounts generated prior to death can be rolled over to the spouse tax-free. Yes, except if rolled over to spouse, or to minor or disabled child.
Can it be used as collateral for a loan? Yes No

TFSA- and RRSP-eligible investments

Choose from our wide range of savings products to invest in your TFSA and RRSP plans.

Type of investments TFSA RRSP
Regular Savings Account

Tax-Free Savings Account

Guaranteed fixed-rate investments

Market-linked guaranteed investments

* Following changes recommended by Finance Canada, withdrawals of overcontributions, non-qualified investments and amounts attributable to swap transactions, or of any related investment income, do not create additional TFSA contribution room. Some of this income will be taxed at 100%.

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