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Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) can be significant savings vehicles. To help you understand how to make the most of them in 2022, we’ll compare the differences within the following areas:
  • Deposits

    • Contribution Room
    • Carry Forward
    • Contributions and Tax Deductibility
    • Tax Treatment of Growth
  • Withdrawals

    • Conversion Requirements
    • Tax Treatment
    • Government Benefits
    • Contribution Room

Deposits

How much contribution room do I have?

If you have not yet opened a TFSA, you can contribute up to $81,500 today. The TFSA contribution limit can change each year. The contribution amount allowed for each year since TFSAs were introduced in 2009 are as follows:

Alternatively, the RRSP contribution limit is always 18% of your pre-tax earnings from the previous year, up to the maximum contribution limit for that taxation year. For example, if you earned $60,000 in 2021, your contribution limit for 2022 would be $10,800 (18% x $60,000). If you earned over $162,277, your contribution limit would be capped at the maximum of $29,210.

How much contribution room can I carry forward?

If you choose not to contribute to your TFSA at all 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. In addition, if you make a withdrawal, the amount you withdrew is added to your annual contribution room for the following 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 a Registered Retirement Income Fund (RRIF). If you make a withdrawal from your RRSP, it does not open up any additional contribution room.

Contributions and Tax Deductibility

TFSA contributions are not tax-deductible and are made with after-tax dollars, while RRSP contributions are tax-deductible and are made with pre-tax dollars.

Tax Treatment of Growth

One of the reasons it is essential to make both RRSP and TFSA contributions is that investment value growth is treated differently.

A TFSA is more suitable for short-term objectives like saving for a vacation or down-payment on a house because the investment value growth is tax-free. In addition, when you make a withdrawal from your TFSA, you will not have to pay income tax on the amount withdrawn.

The growth in an RRSP is tax-deferred, meaning you will not pay any taxes on your RRSP gains until you withdraw money from your future RRIF account; the account you convert your RRSP into at age 71. As a result, RRSPs are better suited for long-term objectives, like retirement. In addition, since you will have a lower income in retirement than when you are working, you will be in a lower tax bracket and pay less tax on your RRIF income.

Withdrawals

Conversion Requirements

For a TFSA, there are never any conversion requirements as there is no maximum age for account holders.

However, if you have an RRSP, you must convert it to a RRIF by December 31st of the year in which you turn 71.

Tax Treatment of Withdrawals

One of the most attractive things about the TFSA is that all your withdrawals are tax-free! This ability to withdraw funds tax-free is why TFSAs are advantageous 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 before converting it to a RRIF, it will be taxed as income except in two cases:

  1. The Home Buyers Plan lets you withdraw up to $35,000 tax-free, but you must pay it back within fifteen years.

  2. 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 withdrawing from your TFSA or RRSP, it is essential to know how your withdrawals can impact 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 following calendar year. However, if you withdraw money from your RRSP, you do not open up additional contribution room.

The Takeaway

The RRSP and TFSA are both great savings vehicles. Understanding the differences between these two types of tax-advantaged accounts can help you better plan for future purchases and your eventual retirement. Get in touch with us if you would like to learn more about maximizing your savings plan.

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