When it comes to saving for retirement, Canadians have a number of choices available to them. Beyond government benefits and workplace savings plans, how can you prepare for your retirement? Two of the most popular savings plans are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Here’s a breakdown on how they work and why they may be right for you.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is an account designed to help Canadians plan for their future. Your RRSP can hold a variety of investments like mutual funds, ETFs, guaranteed investment certificates (GICs), bonds and stocks.
Essentially, when you “register” your retirement savings plan you’re entering into an agreement with the government: you put money away for retirement and they provide some perks. And those perks are what make RRSPs special.
Benefits of RRSPs
- You can defer tax on every dollar you contribute to your RRSP up to a specific limit – as long as the money stays in your account. Say you’re working and you make $50,000 this year. You put $5,000 of that in your RRSP account. You would not owe tax on this amount until you withdraw it from your RRSP. Instead, you can deduct your contribution directly from your income on your tax return. So you would pay tax on only $45,000.
- You can defer tax on any investment gains you make within the RRSP as long as the money stays in your account. When interest and earnings on investments are not taxed, you have more money to invest and grow, leading to more money for you to spend in retirement.
- Your tax bracket may be lower when it counts. When you begin to withdraw money from your RRSP, you’ll most likely be retired and have a lower income than when you were working. You will therefore be in a lower tax bracket and pay less tax on your withdrawals.
How much can I contribute to my RRSP?
Rules apply to how much you can contribute each year and what happens when you don’t contribute the maximum amounts allowed. You can contribute to your RRSP until December 31 of the year you turn 71. Then you have to convert it to another vehicle, such as a Registered Retirement Income Fund (RRIF).
- Yearly amount: This amount changes from year to year. For 2024, the total amount that can be contributed is the lesser of $31,560 or 18% of your earned income the previous tax year (plus any unused RRSP deductions from previous years). In 2025, the limit will be bumped to $32,490.
- Carry forward: You can carry forward any unused contribution room from previous years to top up the yearly amount.
What is a TFSA?
The Tax-Free Savings Account (TFSA) is another registered account designed to encourage people to save for retirement and other goals. You’re eligible to start contributing as soon as you turn 18. There is no limit on how long you keep your account open.
What’s in it for me?
Like the RRSP, this account can hold a variety of investment products – GICs, mutual funds, ETFs, stocks, bonds, etc. The big difference is that the money you put into your TFSA is ‘after-tax income.’ In other words, you will pay income tax on those dollars before you deposit them into your account. But withdrawals are not taxed as income. That includes any investment gains you make within the TFSA.
How much can I contribute to my TFSA?
Rules apply to how much you can contribute each year and what happens when you don’t contribute the maximum amount you are allowed.
- Yearly amount: This amount changes from year-to-year. Maximum annual contributions can change each year, so for 2024 you can put in up to $7000, but check back next year to keep on top of the limits.
- Carry forward: You can carry forward any unused contribution room to future years to top up the yearly amount. If you withdraw money at any time, the withdrawal amount is added back to how much you can contribute the next year.
This makes the TFSA an excellent vehicle to fund larger expenditures, like a car or house, or to serve as an emergency fund. It’s also a good vehicle for retirement savings, particularly if you have used up your RRSP contribution room.
Tips for retirees
- If you have unused contribution room in your TFSA and do not require all your mandatory annual Registered Retirement Income Fund (RRIF) withdrawals for immediate living expenses, you may want to consider reinvesting the excess funds from your RRIF withdrawals in your TFSA, where they can continue to enjoy tax-sheltered growth. There are no minimum withdrawals with your TFSA.
- The fact that the money you take out of your TFSA isn’t considered taxable income may be more important for retirees. It means you can take money out without it affecting other benefits (like Old Age Security) that are based on income.
TFSA
- Contributions are not deductible from income
- Growth within your account will be tax free
- When you contribute to a TFSA, you have already paid tax on the money you deposit
- With a TFSA, there is no tax on any money you take out (including any interest, dividends or capital gains earned)
- TFSAs have no age limits and can be appealing for seniors who don’t need the money immediately – you’re not required to make withdrawals as with a RRIF
- Can be used for short-term goals, such as saving for a house or a car, and long-term goals like retirement
RRSP
- Contributions are deductible and reduce your income for tax purposes
- Income earned in your RRSP is not taxed until it is withdrawn. Capital growth is tax sheltered and so the total value may grow more quickly
- Money you withdraw from an RRSP is added to your income and taxed accordingly
- You can contribute to an RRSP until December 31 of the year you turn 71, then you have to convert it to another vehicle, such as a RRIF
Next steps:
- Read more about the many ways an RRSP can work for you.
- See these Keys to tax-efficient retirement
Talk to your financial advisor to find out which account type is right for you based on your individual goals and needs.