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Comparing TFSAs and RSPs: How do they stack up?
Whether you’re saving for a rainy day, for retirement, for your future, or to send your kids to college, there is a savings vehicle for you. Take a few minutes to explore the key differences and benefits of the Tax-Free Savings Account (TFSA) and registered Retirement Savings Plan (RSP).
How does a TFSA compare to an RSP?
A TFSA shares some similarities with an RSP, however, there are several key differences. Your RBC Advisor can help you decide how to best achieve your short and long term goals, however, the chart below will help you better understand the differences and similarities between these registered plans.
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| TFSA
| RSP
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| New contribution room created each year |
$5,000* |
18% of previous year’s earned income, less any pension adjustment, up to the maximum annual RSP contribution limit for the year |
| Carry-forward of unused contribution room |
Unused contribution room carried forward indefinitely |
Unused contribution room carried forward until the year in which you turn 71 |
| Need earned income to contribute? |
No |
Yes |
| Ability to make contributions |
No maximum age |
Until the end of the year in which you turn 71 |
| Are contributions tax-deductible? |
No |
Yes, reduces taxable income |
| Do savings grow tax-free or tax-deferred? |
Tax-free (never taxed) |
Tax-deferred (not taxed until withdrawn) |
| Tax implications of withdrawals |
Withdrawals are tax-free |
Withdrawals are added to your taxable income in the same year the funds are withdrawn |
| Can I withdraw savings for any reason? |
Yes, at any time (depending on what you invest in) |
Yes, although the amount of withdrawal is considered earned income and taxes are withheld at the time of the withdrawal (unless participating in the Home Buyer’s Plan or Lifelong Learning Plan) |
| Do withdrawals affect contribution room? |
Amount of withdrawals are added to contribution room starting the following calendar year |
No, as contributions are based on previous year’s earned income |
| Do withdrawals affect government benefits? |
Income earned and withdrawals will not affect eligibility for income-tested government benefits and tax credits. |
Withdrawals could affect eligibility for income-tested federal government benefits and tax credits since withdrawals are considered taxable income |
| Are there over-contribution penalty tax? |
Yes; excess contributions subject to a penalty tax of 1% per month. |
Yes; excess contributions are subject to a penalty tax of 1% per month. Penalty tax only applies if you exceed the $2,000 lifetime over-contribution amount |
| Am I required to convert my plan at a certain age? |
No |
Yes — must convert an RSP to a maturity option such as a RIF or an annuity by the end of the year you turn age 71 or chose to close the plan. |
Why should I have an RSP—is the TFSA a better investment option?
While the TFSA is a great new investment vehicle to meet your short- and long-term goals, an RSP is still one of the most effective ways to save for retirement. Neither is better than the other, they both offer great ways to save, but fully benefiting from both will depend on how you intend to use your savings in the short and long run. An RBC advisor can help you maximize your short- and long- term investments by understanding these goals and helping you create a solid financial plan.
Contributions you make to your RSP are tax-deductible, meaning that they reduce your income tax. An RSP could allow you to stay more disciplined about saving since withdrawing the funds from your RSP early may result in paying more income tax, as withdrawals are added to your taxable income. If you’re focused on saving for retirement, consider minimizing your income tax with an RSP and using your TFSA as a second source of savings. If you’ve already retired or are not working and have no RSP contribution room available, the TFSA is a perfect tax-sheltered option to continue to save, since you can contribute up to $5,000 or more each year regardless of whether you are currently earning any income.
Contributions to your TFSA are not tax-deductible; however, the TFSA is a great way to save for the short or long term since you are not taxed on the investment earnings and can withdraw your money at any time (subject to any investment restrictions). This makes a TFSA a great option for saving and achieving your future goals: a dream vacation, a car, home renovations, or saving for emergencies and unforeseen events.
Example of a TFSA and RSP used together
Brian is unsure of the amounts he will be able to contribute to his RSP and TFSA accounts during the year. After speaking with his RBC advisor, he decides to contribute an amount to each plan coinciding with each pay day. He makes extra contributions during the year whenever the amount in his taxable savings accounts exceeds his needs. In December he may decide to transfer an amount from his TFSA to his RSP, knowing that this amount will be added to his TFSA contribution room in January, but does not transfer the amount needed for other savings goals. Before the end of February, he will decide whether to make a final RSP contribution for the prior year, but will avoid using his TFSA if not necessary, since a February withdrawal would not be added back to his TFSA contribution room until the following year.
How will a TFSA benefit me in the short/long term compared to an RSP?
A TFSA is an excellent choice to meet short-term savings goals. While you can borrow funds from your RSP to buy your first home, or to pay for full-time continuing education for yourself or your spouse, there are potential risks and sometimes penalties for doing so. A TFSA, however, allows you to save and grow your money tax-free and make tax-free withdrawals at ANY time (depending on what you invested in) for ANY reason. The tax-free compounding of your investment returns can even help you reach your goals sooner.
As for long-term savings goals, like an RSP, a TFSA is a smart choice. An RSP offers you short- and long-term tax advantages by reducing your taxable income each year you contribute and allowing you to grow your savings on a tax-deferred basis. Withdrawals might be taxable at a lower rate during your retirement years, and may increase your retirement income tax credit. Your TFSA can complement your RSP by giving you another way to shelter investment earnings for each taxation year. This is especially useful if you have exhausted your RSP contribution room or if you are retired and can no longer contribute to an RSP. The TFSA may also be preferable for those with minimal retirement income prospects who are concerned about losing the guaranteed income supplement or other government assistance that is based on household income.
Ready to learn more?
For more information on the Tax-Free Savings Account and to find out how RBC can help you reach your financial goals, visit your local branch or call us at 1 (800) 463-3863.
Information about the Tax-Free Savings Account is based on what is currently available from the Canadian government and can be subject to change.
* The age of majority is 19 for residents of certain provinces and territories which may delay the opening of a TFSA or RSP. However, you start to accumulate TFSA contribution room at age 18.
The material in this chart is intended as a general source of information only, and should not be construed as offering specific tax, legal, financial or investment advice. Every effort has been made to ensure that the material is correct at time of publication, but we cannot guarantee its accuracy or completeness. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change. Individuals should consult with their personal tax advisor, accountant or legal professional before taking any action based upon the information contained in this chart.
Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Wealth Management. Royal Mutual Funds Inc., RBC Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities, which are affiliated. Royal Mutual Funds Inc. is licensed as a financial services firm in the province of Quebec.
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