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RRSPs and TFSAs: What are they?

RRSPs and TFSAs are plans that allow you to hold various types of investments, such as mutual funds, exchange-traded funds (ETFs), shares, bonds, and guaranteed investment certificates (GICs). Although you’ll save tax with both plans, they’re different in a number of ways.

RRSP

An RRSP (Registered Retirement Savings Plan) lets you build up savings that are taxed only when you withdraw them—usually when you retire. The return on your RRSP contributions is tax-free (normally, you must pay tax on investment income). Better yet, contributions to an RRSP will reduce your taxable income.

Remember, though, you’ll only get a tax deduction if you’ve earned enough income to pay tax! That may not be the case if you’re a student. If, however, you take money out of your RRSP, the withdrawals are added to your taxable income, in which case you would pay the applicable tax.

TFSA

A TFSA (Tax-Free Savings Account) is a savings plan that allows you to grow TFSA contributions tax-free. On one hand, TFSA contributions are not tax deductible. On the other hand, you don’t pay tax when you withdraw amounts from your TFSA. You must be 18 and over to contribute to a TFSA.

Here are the main differences you need to know to understand RRSPs and TFSAs.

TFSARRSP
Flexibility

You can withdraw amounts and replace them the following year.

Generally, the amounts you withdraw cannot be replaced.
Tax

You can withdraw amounts without paying tax.

When you contribute, you can obtain a tax deduction (if you pay tax).

However, the money in your RRSP will be taxed as part of your taxable income if you withdraw it.
To buy a first homeYou can withdraw amounts without paying tax.You can take out amounts tax-free to buy or build a first home (Home Buyers’ Plan), but you’ll have to pay these amounts back into your RRSP in the years following the withdrawal.

To find out more, especially about the maximum contributions you can make to an RRSP and a TFSA, check out the following information.