When it comes to saving for retirement, what’s the difference between a TFSA and RRSP? This infographic tracks the journey of $1,000 saved using each and demonstrates how they work and are taxed.
If you’re wondering how to decide between a TFSA and RRSP when it comes to your own savings, see our rundown of the TFSA and RRSP math here (but do check below our infographic for some bonus tips).
Got all the info you need about the TFSA vs RRSP? Ready to start investing today, with the help of a financial advisor who is there to help your reach your long-term goals? Well, that’s what we’re here for.
“I really need flexibility, so which is better between a TFSA vs RRSP?”
If you’re going to be withdrawing the money in the short-to-medium term, the TFSA is the better investment account for you. Saving for a vacation? Need to pay tuition for a professional development course this year (and don’t have money socked away in an RESP)? The TFSA is great for when you need some funds for bigger purchases like that.
“I want to have an emergency fund. In that case, what is the difference between a TFSA and RRSP?”
It’s really no contest, here. The TFSA is just the best vehicle for this, assuming you actually need this rainy day fund, which is a separate question. There are a few drawbacks for an RRSP for an emergency fund: when you take out those funds, that contribution room for your RRSP is gone for good. You’ll pay income tax and a withholding tax on the funds you withdraw. Your RRSP is really a long-term investment account.
“What if I want to buy a home? Which is better for helping with that, a TFSA or RRSP?”
In this case, RRSP holders can use up to $25,000 from their account towards the first-time Home Buyers’ Plan (HBP), without paying tax on the funds. You will still have to pay it back into your RRSP over a long time of up to 15 years.
Keep in mind that in today’s Canadian real estate market, $25,000 doesn’t go quite as far as it did when this program first started. So, if you have other savings to top up your downpayment in other accounts, that’s certainly an option. However, it is generally worth it to use the HBP. You can always talk to a financial adviser with respect to your personal situation before you proceed with what might be the biggest purchase of your life.
“I’m saving for retirement and want to make sure I’ll have enough to maintain my lifestyle after I stop working. So, which is better, a TFSA or RRSP?
It’s all in the name: RRSP stands for Registered Retirement Savings Plan, which is the bedrock of many Canadians’ financial plans for retirement. As you can see in the infographic above, an RRSP is projected to outperform a TFSA over the long-term.
“I see here that an RRSP converts to a RRIF at age 71. What’s that?”
When you’re in retirement, you’re obviously making the shift from saving to spending. The Registered Retirement Income Fund is the vehicle for making that happen. Your RRSP automatically converts to it (if you haven’t converted it already). From that point on, you have to make mandatory withdrawals on those funds you invested within the RRSP. The TFSA has no such counterpart and you can keep contributing money into it.
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