Do you know what the difference is between TFSA and RRSP?

According to the BMO Financial group,

[quote]40% of Canadians still don’t know the difference between a TFSA and RRSP.[/quote]

This sounds like a high figure but in speaking to some of my peers, personal finance is not a topic most people enjoy to talk about.

The sample size was 1500 Canadians so it was not a large sample size based on the population.

I wanted to create a small table that compares the 2 popular Canadian savings vehicles.

  • Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA.
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
  • Contributions are not tax-deductible.
  • The TFSA is useful for low-income seniors because these tax-free withdrawals won’t trigger clawbacks of Old Age Security (OAS) or the Guaranteed Income Supplement.
  • If you are under the age of 69 and have earned income in the previous year, then you are eligible for an RRSP.
  • Earned income accumulates tax-free.
  • Earned income includes income from employment, and can also include supplementary unemployment benefits, alimony and maintenance payments, royalties, research grants, net business income, net rental income, and a few other miscellaneous types of income.
  • Your maximum contribution limit is 18% of your previous year’s earned income up to the maximum level for that year.
  • The eligible investments for an RRSP include: guaranteed investment certificates (GICs), shares of Canadian companies listed on a recognized Canadian stock exchange, bonds, treasury bills, strip coupons, mortgage backed securities, covered call options, warrants and rights issued by companies listed on a Canadian stock exchange, mutual funds, and eligible foreign investments.
  • When money is withdrawn from the plan, after retirement, it will then be subject to income tax, that should be a lower rate.

Both have there positives and I believe each has a purpose. I personally believe your TFSA should be used for part emergency savings and a long-term savings plan. Also, if you have a pension plan from your employer, you may not need a heavy RRSP account.

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