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Financial Literacy

What’s the big difference between a TFSA and an RRSP?

January 04, 2018

It’s a question as old as the TFSA (we can’t say time because in the grand scheme of things TFSAs are only 10 years old): what’s the big difference between a tax-free savings account and a retirement savings account?

 

First, let’s talk about some similarities. Both accounts are great options to save large amounts of money. They both have limits to how much you can contribute / claim in a year and can both be locked into terms (like our current term special) to earn more interest. Whichever route you go, remember that saving for the future is always a good thing, and all your deposits at Sunova are 100% guaranteed by the Deposit Guarantee Corporation of Manitoba. In other words, your money is protected!

 

Now, here’s a big difference. With a TFSA you don’t have to pay tax on the interest you earn and you can withdraw at any time. While with an RRSP, you will pay taxes on your contributions and interest when you withdraw money. However until that time (AKA your retirement) you get a tax break.

 

Here are some more differences.

 

TFSA RRSP
Taxes With a TFSA, you don’t pay taxes on the interest you earn… ever! While with a regular savings account, if you need to claim interest earned on your taxes as income. You don’t pay taxes on the interest you earn in an RRSP until you withdraw the money. You get to claim your RRSP contributions as a tax break each year (up to a limit).
Limits The Government decides the contribution limit each year.

 

*If you don’t reach your limit in the year, the room carries forward.

How much you can claim in a year is based on your income.

 

*If you don’t claim your limit in a year, you can carry a certain amount forward.

Withdrawals You can withdraw money in your regular TFSA at any time. If you have money locked in a term, you shouldn’t touch it until the term is up or else you won’t earn the full interest. When you withdraw money from an RRSP you will be taxed, which is why we suggest you don’t touch your money until you retire and are in a lower income bracket.
Down payments TFSAs are a great place to save a down payment for a new home. You won’t be taxed on the interest you earn and you can withdraw it anytime without penalty (unless, again, it’s currently locked in a term). You can use up to $25,000 from your RRSP as a down payment on your first home. You won’t be taxed on the withdrawal, but you will need to pay back the money to your RRSP within 15 years.
Terms TFSAs can be locked in terms to earn more interest. RRSPs can be locked in terms to earn more interest.

Ready to save? Give your branch a call today to set up the savings plan of your choice!

 

PS. Remember to ask about auto-transfers. They make savings a breeze.

have questions?

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