What are the differences between a RRSP and a TFSA?
Both are ways to save money and reduce the taxes you pay the government.
When you contribute to a RRSP (Registered Retirement Savings Plan) the government effectively gives you back the tax you paid on that component of your income. So if you contribute $10,000 and your tax rate is 50%, you will receive $5,000 back from the government when you do your taxes. Thus you have contributed “before” tax dollars. Any income you earn in your RRSP from your investments is not taxed until you take money out of your RRSP – then what you take out is taxed. The idea is that you do not take money out until you turn 71 when your RRSP converts into a RRIF – then you are required to take money out.
When you contribute to a TFSA (Tax Free Savings Account) you do so with “after” tax money. Your money that has already been taxed. You do not receive anything back from the government when you contribute. Like a RRSP the investments inside the TFSA grow without paying tax. However when you take money out, it is not taxed. And whatever amount you take out you can put back in.
Ideally it’s a good idea to maximize your RRSP and TFSA and at some point build another portfolio to help fund your retirement. See Step 2 of June Inc Online to calculate how much you need to retire.
However if you are young and can only choose one to start with, start with the TFSA. As your income tax rate increases as you age, you may switch to contributing to your RRSP. Ideally do both if you can.
You can use the enclosed spreadsheet to see the differences of the two for you. RRSP vs TFSA
