TFSA vs. RRSP

Purpose and Use

TFSA: Designed for flexible savings, suitable for various goals (retirement, emergency fund, big purchases). No specific purpose is required for withdrawals.
RRSP: Primarily intended for retirement savings. Withdrawals are generally made during retirement when the individual's income is typically lower.

Tax Treatment

TFSA: Contributions are made with after-tax dollars and are not tax-deductible. However, withdrawals (including investment income and gains) are tax-free.
RRSP: Contributions are made with pre-tax dollars and are tax-deductible, reducing taxable income for the contribution year. Withdrawals are taxed as income at the time of withdrawal.

Contribution Limits

TFSA: The contribution limit is not tied to income and is the same for everyone, subject to annual increases. Unused contribution room is carried forward indefinitely (7000 CAD in 2024).
RRSP: The contribution limit is 18% of the previous year’s earned income up to a maximum limit, plus any carry-forward amount from previous years.

Withdrawal Rules

TFSA: Withdrawals can be made at any time for any reason, tax-free. Withdrawn amounts can be recontributed in future years.
RRSP: Withdrawals are subject to income tax. There are programs like the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP) that allow tax-free withdrawals under certain conditions, with the requirement to repay the withdrawn amount.

Impact on Government Benefits

TFSA: Withdrawals do not affect eligibility for federal income-tested benefits and credits.
RRSP: Withdrawals increase your taxable income, potentially impacting eligibility for income-tested benefits and credits.

Age Limits

TFSA: No age limit for contributions; you can contribute as long as you are alive and have contribution room.
RRSP: Contributions must stop in the year you turn 71, and the plan must be converted to a RRIF (Registered Retirement Income Fund) or an annuity, or be fully withdrawn.

Spousal Plans

TFSA: No spousal TFSAs. However, you can give money to your spouse to contribute to their TFSA without the income being attributed back to you.
RRSP: Spousal RRSPs allow a higher-earning spouse to contribute to an RRSP in their lower-earning spouse’s name, which can be advantageous for income splitting in retirement.

Estate Planning

TFSA: TFSAs allow for the naming of a beneficiary or successor holder. The account can be transferred to a spouse without tax implications.
RRSP: RRSPs can have a designated beneficiary. However, unless the beneficiary is a spouse, dependent child, or grandchild, the remaining funds are taxed as income in the year of death.

Best Use Case

TFSA: Ideal for short-term and medium-term savings goals due to its flexibility and for individuals who expect higher tax rates in retirement.
RRSP: Best suited for long-term retirement savings, especially for those currently in a higher tax bracket and expecting to be in a lower bracket in retirement.

In summary, TFSAs offer great flexibility and tax-free withdrawals, making them suitable for a variety of savings goals. RRSPs, on the other hand, are specifically tailored for retirement savings, offering upfront tax benefits and deferred taxation until withdrawal. The choice between a TFSA and an RRSP depends on individual financial situations, tax considerations, and retirement plans.