how to take advantage of your tfsa and rrsp
Many Canadians hear they should have a TFSA and RRSP and some know what the acronyms stand for (Tax Free Savings Account and Registered Retirement Savings Plan). However, less know what the difference is between them. While both are beneficial savings vehicles to have, how can you take advantage of each account?
Your ability to contribute to a TFSA and RRSP can change throughout your lifetime and depending on your life stage, withdrawals can have a significant impact on your taxes. The scenarios below address common significant lifestyle adjustments many Canadians will experience and how they can take advantage of their TFSA and RRSP in each stage.
| TFSA | Life Stage | RRSP |
| You can open your TFSA on the day you turn 18. First, fund your TFSA up to your maximum contribution room before contributing to your RRSP. |
Early Career Years (Low-Income Earners)
|
There is no minimum age to open an RRSP, although you do have to file a tax return and receive employment income. Adding to your RRSP once your TFSA has been maximized saves your contribution room for higher income years when your tax savings can be greater. |
| Maximize your contribution room to save tax in the future (this is a great estate planning tool). |
Career Building & Pre-Retirement Years (High-Income Earners)
|
Maximize your RRSP contribution room to reduce your current tax bill. |
| Withdrawals can supplement your RRIF payments to support your lifestyle while not impacting your Old Age Security (OAS) or taxes. |
Retirement
|
Begin taking from your RRSP when your income has reduced to a lower tax bracket (generally at retirement). Minimum payments will begin after your account has converted to a Registered Retirement Income Fund (RRIF) at the age of 71. |
| No restrictions to fund your down payment. |
Buying a Home
|
Borrow up to $35,000 as a first-time homebuyer with the Home Buyers’ Plan (HBP). |
| No restrictions to fund your tuition. |
Going Back to School
|
Borrow up to $20,000 to fund your education with the Lifelong Learning Plan (LLP). |
| Withdrawals are tax-free. |
Large Expenses
|
Withdrawals are taxable, try holding off until retirement when your income is reduced. |
| If you withdraw, you can deposit these same funds in the future. The only restriction is you must wait until the new year. |
Withdrawals
|
Withdrawals are taxable and you will lose the contribution amount permanently with the exception of the HBP and LLP mentioned above. |
us citizens and non-residents
US Citizens
- Your TFSA will be taxed on the income and capital gains each year which negates the tax benefits the account usually provides. Additional forms also need to be filed alongside your tax return which can add to your filing costs.
- Your RRSP is recognized in the Canadian/US tax treaty which allows the funds to grow without being taxed during these growth years.
Non-Residents
- While a non-resident of Canada, TFSA contributions are charged a 1% tax per month. To avoid this charge, you can still hold your TFSA while abroad but wait to contribute until you become a resident of Canada. Withdrawals remain tax free and your contribution room will be added back the following year and available upon becoming a resident of Canada again.
- Prior to becoming a non-resident, you can contribute to your RRSP up to your contribution room available. The income you earn while working abroad may qualify as earned income and can increase your contribution room. Withdrawals may be subject to withholding tax based on the country you reside in, so pulling from your TFSA will likely be your favoured option.
bottom line
With fewer restrictions, a TFSA can provide greater flexibility during your lifetime to access larger sums of cash while a RRSP provides immediate tax savings. With estate and income planning, both your TFSA and RRSP can be used simultaneously to reduce your overall tax bill.
Before taking from either your TFSA or RRSP, it is important to consider the immediate and future implications to determine the solution best for you.
We can assist you with your TFSA and RRSP contributions along with tax and estate planning to take advantage of your registered accounts.