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Pattie Lovett-Reid

Chief Financial Commentator, CTV


This is it – the last day to contribute to your registered retirement savings plan (RRSP) for the 2019 taxation year. 

It can be difficult to decide whether the RRSP or tax-free savings account (TFSA) is a better investment vehicle for you. 

The main difference between an RRSP and a TFSA comes down to the timing of taxes. An RRSP lets you defer taxes today and is especially effective if your marginal tax rate will be lower in retirement. With a TFSA, you have already paid tax on the money contributed, so this is the plan for you if you believe your marginal tax rate will be higher when you take the money out.

Here are some other notable differences between the two plans, to help you assess which will serve you better:

1. RRSP contributions are tax-deductible. TFSA contributions are not. With an RRSP, you can deduct your contribution from your income on your tax return. You cannot do this with a TFSA.

2. RRSPs were designed for retirement savings. TFSAs can be used effectively for any savings goal, including retirement.

3. You pay tax on money withdrawn from your RRSP because the contributions were made with pre-tax dollars. TFSA withdrawals are tax-free because contributions were made with after-tax dollars.

4. There are restrictions on how long you can contribute to your RRSP. The last day you can make a contribution is Dec.31 of the year you turn 71. After that, the plan must be converted to an annuity, a registered retirement income fund, or cash. There are no age restrictions attached to a TFSA.

5. You need earned income for a RRSP. However, earned income is not a requirement for a TFSA.

Both RRSPs and TFSAs have merits. You decide which is right for you given your age, income, tax rate and investment strategy.