If you're like many Canadian’s, you're probably wondering what the new Tax-Free Savings Account (TFSA) is all about. This product, introduced by the Government of Canada, was designed to help Canadians increase their savings without being taxed on the interest earned in that account.
So, what's the difference between a TFSA and an RRSP?
Both TFSAs and RRSPs are savings vehicles. RRSPs are tax deductible at the time of contribution, whereas a TFSA is not. However, when you withdraw money from an RRSP it is taxable, where a TFSA is not. TFSAs can be used for other purposes besides retirement, so they offer additional flexibility, being able to access these savings at any time.
Deciding whether a TFSA or RRSP (or a combination of both) is right for you will depend largely on your need to access your funds, or whether you need the immediate tax deduction. Perhaps you expect to be in a higher tax bracket in the future and will need the tax-free benefits that a TFSA presents. Or maybe you've topped out on your RRSPs and would like another savings vehicle that doesn't get taxed when withdrawn. Cambrian can help you decide what the right solution is.
Below is a listing of other comparisons between the two products.
| Comparison Items |
TFSA |
RRSP |
| Minimum Age |
18 years |
No minimum |
| Age limit for contributions |
No limit |
Year of 71st birthday |
| Contribution limit |
2009: $5,000
2010: $5,000
(indexed in subsequent years) |
2008: Up to $20,000 |
| Limit as a % of income earned |
No limit |
18% |
| Carrying forward of unused contribution room |
Annual |
Annual |
| Replacement of withdrawal amounts |
Yes |
No |
| Tax-deductibility of contributions |
No |
Yes |
| Tax on Income |
No |
No |
| Tax on withdrawals |
No |
Yes |
| Impact on government benefits (OAS, GIS) |
No |
Yes |
*Source: National Bank Advisor, Investments Executive, December, 2008