TFSA vs. RRSP: Choosing Between the Two (2024)

FAQs

How do I choose between RRSP and TFSA? ›

Comparing account features

Primary Use - RRSPs are typically used to save for retirement. TFSAs are typically used to save for any purpose. Eligibility - You can contribute to an RRSP after you start earning income from employment or certain other sources.

If you're lucky enough to have the means, it's actually a stellar idea to max out your contributions to both an RRSP and a TFSA. Why not get the most out of tax-advantaged accounts before stuffing money into accounts that aren't tax-advantaged? Otherwise, you're effectively turning down free government money.

RELATED: Find out how much TFSA contribution room you have

Withdrawing from your RRSP to contribute to a TFSA is likely to make sense only if you're currently in the lowest tax bracket. In most provinces, that means a total income of no more than $35,000 to $45,000, including the amount you plan to withdraw.

The tax exemption provided for in the Convention between Canada and the United States for RRSPs and RRIFs is rather exceptional and not found in any other tax treaty signed by Canada. Therefore, for tax purposes, it will generally always be better to hold US investments in RRSPs rather than TFSAs.

Despite the name, it's better not to think of the TFSA as a “savings account.” To enjoy the tax savings of a TFSA, your investments need to have meaningful growth. If instead your TFSA mostly holds cash and other low-interest-bearing investments, you erode the main benefit of investing in a TFSA.

At any time in the year, if you contribute more than your available TFSA contribution room you will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount stays in your account.

Transfer from your RRSP

If you transfer an investment from your RRSP to your TFSA, you will be considered to have withdrawn the investment from the RRSP at its FMV . That amount will be reported as an RRSP withdrawal and must be included in your income in that year.

What is the downfall of a TFSA? ›

Holding a volatile investment in a TFSA can be risky for a couple of reasons: First, if a capital loss is realized, that loss cannot be used to reduce other taxable capital gains you may have. Second, only the amount withdrawn can be added back to TFSA contribution limit the following year.

TFSA contribution rules

Central to managing your TFSA is understanding your contribution room. For 2023, the TFSA limit is $6,500. This means you can contribute $6,500 to your TFSA in 2023, and the income earned on that $6,500 will be tax-free.

Let's recap for a second: Basically, a TFSA makes more sense if you find yourself in a situation where your income is on the lower side, while an RRSP makes more sense if your income is on the higher side and you expect to be in a lower tax bracket during retirement.

Depending on your income level, maximizing both your RRSP and TFSA could mean a savings rate of 20%, or 25%, or 30% or even 35%+ at lower income levels. That's a high savings rate!

Our response: There is no direct way to transfer funds in a Registered Retirement Savings Plan (RRSP) to a Tax-Free Savings Account (TFSA). In order to contribute funds to a TFSA from an RRSP, you must withdraw the funds, and pay any applicable withholding tax, plus any additional taxes at tax time.

Your financial institution will advise you on the types of RRSP and the investments they can contain. You may want to set up a self-directed RRSP if you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments.

The TFSA is one of the safest options for saving money for both short and long-term financial plans. They have non-tax-deductible features which make the amount in your TFSA safe and secure from taxation. The TFSA is one of the best options for all Canadians to make for a safe and secure way to save.