New Podcast 🎙️ & TFSA vs RRSP 🥊

We started a podcast! Guillaume and Sam will give you an in-depth look into the journey to build a millennial focused firm, with different financial literacy topics on every episode!  

Find us on Spotify, Apple or Youtube under the name "Millennial Money Canada Podcast"

Podbean link: https://millennialmoneycanadapodcast.podbean.com/

The year-end is just around the corner and that means you have until March 1st, 2025 to make your RRSP contributions.

Should you prioritize your RRSP or your TFSA? The answer might surprise you!

RRSP vs TFSA: Understanding the Key Features of Canada’s Top Savings Accounts

When it comes to saving and investing in Canada, the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) are two of the most popular and powerful tools available.

Here’s a breakdown of the key features, advantages, differences between the RRSP and TFSA, as well as mistakes that people often make that hinder their ability to meet their financial goals.

1. Purpose of the Accounts

RRSP: Retirement-Focused

• The RRSP is designed primarily for retirement savings.
• Contributions to an RRSP are tax-deductible, meaning they reduce your taxable income for the year.
• The account encourages long-term savings by deferring taxes until retirement, when you are likely to be in a lower tax bracket.

TFSA: All-Purpose Savings

• The TFSA is more versatile and can be used for any financial goal—retirement, a house, a vacation, or an emergency fund.
• Contributions are not tax-deductible, but all earnings (investment growth, interest, or dividends) and withdrawals are completely tax-free.

Pro Tips:

• Use both your RRSP and TFSA to invest for retirement and shelter as much tax as possible instead of using your TFSA as an emergency fund account.
• Avoid speculating with high risk investments in your TFSA or RRSP as you won't be able to offset your realized gains with your realized losses. If you speculate in a non-registered account, and you do end up with losses, you can at least use them to offset realized gains.

2. Tax Treatment

RRSP:

• Contributions: Tax-deductible, reducing taxable income for the year.
• Growth: Investments grow tax-free within the account.
• Withdrawals: Fully taxable as income at your marginal tax rate in the year of withdrawal.
• Goal: Maximize tax benefits when your current tax rate is high and withdraw in retirement when your tax rate is lower.

TFSA:

• Contributions: Made with after-tax dollars (no tax deduction).
• Growth: Investments grow tax-free within the account.
• Withdrawals: Completely tax-free, regardless of the amount or purpose.
• Goal: Grow wealth without worrying about future taxes.

3. Contribution Limits

RRSP:

• Annual contribution limit: 18% of earned income from the previous year, up to a maximum limit set by the Canada Revenue Agency (CRA). For 2024, the limit is $31,560.
• Carry-forward unused room: Unused contribution room accumulates and can be used in future years.

TFSA:

• Annual contribution limit: A flat dollar amount set by the CRA. For 2024, the limit is $7,000.
• Cumulative lifetime limit: If you've never contributed, you can contribute up to $95,000 (as of 2024, if you were at least 18 in 2009).
• Withdrawals: Any amount withdrawn is added back to your contribution room in the following year.

4. Withdrawal Rules

RRSP:

• Withdrawals are taxed as income, making it less flexible for short-term goals.
• Early withdrawals (before retirement) may trigger withholding tax (10–30%) and are added to your taxable income.

TFSA:

• Withdrawals are completely tax-free, with no penalties or tax implications.
• Contribution room is restored in the following calendar year after a withdrawal.

Conclusion: Which One Should You Use?

The choice between an RRSP and a TFSA depends on your income, financial goals, time horizon, and your tax bracket now versus your tax bracket during retirement.

• If you expect your tax bracket today to be higher than the tax bracket you expect to be during retirement, and your time horizon is long, prioritize funding your RRSP first and then your TFSA.
• If you expect your tax bracket today to be lower than the tax bracket you expect during retirement, and/or your time horizon is short, prioritize funding your TFSA first and then your RRSP.
• If you expect you will be in a similar tax bracket today and in retirement, then both the RRSP and TFSA offers you the SAME tax advantage, although the TFSA will offer you more flexibility if you need to withdraw your funds compared to the RRSP.

If you need guidance with deciding whether to contribute to your RRSP or TFSA and want professional guidance on how to invest within these accounts to help you achieve your financial goals, we are here to help you.

Click the link below to start the conversation!  

­Get in Touch

Guillaume Girard, CFA CFP | Sam Lichtman, CFP

‍Millen Wealth Advisors ­

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