TFSAs and RRSPs are important savings plans sponsored by the Government of Canada and generally one is not better than the other. They each have their own unique tax advantages and can work together to help maximize your savings.
TFSA key features:
- Unlike Registered Retirement Savings Plans (RRSPs), contributions are not deductible for tax purposes.
- Investments grow tax-free while inside the TFSA.
- Withdrawals can be made at any time for any purpose and are not subject to tax.
- Unused contribution room can be carried forward indefinitely.
- Withdrawals can be re-contributed but not in the same year the withdrawal was made.
- TFSAs can hold many of the same investments as an RRSP
The TFSA or RRSP decision:
- Choose an RRSP when pre-retirement income is expected to be higher than retirement income. Income during retirement may benefit from a lower tax rate.
- Choose either a TFSA or an RRSP when pre-retirement income is anticipated to be equal to retirement income. Income tax rates may be equal before and during retirement, so there is no advantage to one over the other.
- Choose a TFSA when pre-retirement income is expected to be lower than retirement income. Income during retirement may be withdrawn tax-free from a TFSA.