Canadians: TFSAs and RRSPs ..and how to make sense of it all

I’ve just realized that there aren’t that many Canadian blogs out there talking about money, or investing in general.

So here’s my one and only post on “What’s up for Retirement Options” for Canadians:

Registered Retirement Savings Plans (RRSPs)

They are not an actual investment or product that you can buy.

Think of it as an account with the federal bank.

It is simply a plan where Canada allows you to put in money to save for retirement, up to a certain amount each year as a percentage based on your income.

Where you decide to put that money you’ve contributed to this plan, is totally up to you: in bonds, stocks, index funds, mutual funds, GICs, savings accounts.. etc

Key points:

  • How much you are allowed to save, is calculated as a percentage on your income
  • Whatever you contribute, is deducted from your taxes for the year you contributed
  • You will not pay taxes on anything until you go to retire & withdraw your money
  • You can carry forward any unused RRSP contribution space from previous years
  • If you try to withdraw the money before you retire (65), you’ll pay at hefty penalty

You can withdraw the money in exceptional circumstances, like for education or for a home, but you will be put on a fixed schedule where you have to re-contribute the money back into your RRSP, or face a penalty.

Best for:

General savings for retirement.

It forces you to put in money and not take it out, and a lot of companies do a 100% match, which means free money for you if you contribute.

If you are making a lot of money now, you can also write off a tax deduction of what you contributed.

Then, when you go to retire, if you take out less than what you were earning when you first contributed, you will be taxed at a lower tax bracket.

Tax-Free Savings Accounts (TFSAs)

Also not an actual investment or product that you can buy.

It is like a savings account, but any interest you earn is yours to keep without having to worry about it being taxed.

You are also not limited to a savings account. You can put it in bonds, stocks, index funds, mutual funds, GICs, savings accounts.. etc

Key Points

  • You must be 18 years of age or older
  • You are only allowed to save a fixed amount of $5000 a year (starting Jan 1st)
  • You put in your after-tax money, that means it is NOT tax-deductible
  • You pay taxes on that $5000 for the year you contributed, but none thereafter, even when you retire and withdraw your money
  • You can carry forward any unused TFSA contribution room ($5000/year) from previous years
  • And the best? You can withdraw & pay it back any time you want

This means if you didn’t contribute your $5000 in 2009, you can put in $10,000 this year.

So if you decide to withdraw all $10,000 for a down payment or an emergency, you can put the $10,000 back any time you want, without having to pay any taxes or penalties.

Withdrawals also don’t affect your eligibility for federal government benefits like GST/HST credit, Child Tax Benefits or Old Age Security.

Best for:

Anyone in my opinion. This is my favoured option of the two, although I contribute to both.

It’s really great for people who want to save for retirement, but need liquid or emergency savings in the meantime — just put it in a high interest savings account and you can decide to buy stocks or funds with it later when you are more comfortable with your cash flow.

It’s also great for budding investors. I put in $5000 in my TFSA with Questrade, and the $300 I’ve made so far on it, is not taxed.

If I had tried to invest outside of a TFSA with my $5000, I would have been taxed on the $300 I earned.

Think about the major difference this way:

If you put $5000 into a stock under a TFSA, and it makes you a million dollars over night, you will not be taxed on those earnings if you decide to withdraw the million and $5000.

But if you put $5000 into an stock under an RRSP, and it makes you a million dollars over night, you can’t take the money out unless in exceptional circumstances (education or home).

And when you go to withdraw the money at retirement at 65, you will have to pay the taxes on that amount, depending on how much you decide to take out each year.

Here’s a handy comparison chart for you to keep:

Click on it to make it larger.

Happy Saving!

P.S. I made it into the Carnival of PF this week over at Cash Money Life with my Haggling post.


Wanna win a loose diamond?

Answer this question best: ‘Why Does Your Loved One Deserve a Diamond‘.

All you have to do is email your answers to, and let them know FB sent you!

Want more info? Watch this YouTube Video.

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.