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Comparing TFSAs, RRSPs and RESPs
Written by The Inspired Investor Team | Published on January 6, 2021
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Feeling overwhelmed by the account choices when it comes to your savings goals? Let's compare three registered accounts — Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs).
|
Account type |
TFSA |
RRSP |
RESP |
|
Useful to: |
Save for any goal with tax-free growth of your investments and easy access to your money |
Save for retirement with tax-deductible contributions and tax-deferred growth of your investments |
Save for a child's education and benefit from tax-deferred investment growth |
|
Annual contribution limit |
The federal government determines the amount individuals can contribute to a TFSA each year Unused contribution room is carried forward indefinitely Find your available contribution limit by logging in to My Account on the Canada Revenue Agency website* |
18% of the previous year's earned income, less any pension adjustment, up to the maximum annual contribution limit for the year Unused contribution room is carried forward until the end of the year you turn 71 Find your available contribution limit on your most recent Notice of Assessment, or log into My Account on the Canada Revenue Agency website |
No annual limit; lifetime limit of $50,000 per beneficiary Unused contribution room can be carried forward Through the Canada Education Savings Grant (CESG), the federal government matches 20% of your contribution, to a max of $500 per year (per beneficiary) – until the end of the year the beneficiary turns 17 Lifetime maximum for the CESG is $7,200 per beneficiary Additional government incentives available for qualifying families |
|
Tax treatment for contributions |
Contributions are not tax-deductible. Excess contributions subject to a 1% per month penalty; a 100% penalty tax may be charged on any income connected to deliberate over-contributions |
Contributions are tax-deductible Excess contributions subject to a 1% per month penalty if you exceed the $2,000 lifetime over-contribution amount; a 100% penalty tax may be charged on income earned from over-contributions Spousal RRSPs can be used to reduce household taxable income |
Contributions are not tax-deductible Excess contributions above the $50,000 lifetime contribution limit subject to a 1% per month penalty |
|
Tax treatment for withdrawals |
Withdrawals are tax-free Withdrawal amount is added to contribution room starting the following calendar year |
Withdrawals (except Home Buyers' Plan and Lifelong Learning Plan) are subject to withholding tax and added to taxable income |
Educational assistance payments (plan earnings and grants) are taxable to the beneficiary (student); return of original contributions is tax-free |
|
Special features |
No requirement to close the plan at a certain age Foreign dividend and interest payments received on investments may be subject to non-recoverable, non-resident withholding tax |
By the end of the year you turn 71, you must convert an RRSP to a retirement income option such as a Registered Retirement Income Fund (RRIF) Can withdraw funds tax-free to buy or build a first home or for lifelong learning, as long as the funds are returned to the plan within a specified time |
You can contribute to an RESP until 31 years after you first opened it. The plan must be closed at the end of the 35th year following the year the plan was opened With a family RESP, if a child doesn't pursue post-secondary education, a sibling can use the funds for their education Foreign dividend and interest payments received on investments may be subject to non-recoverable, non-resident withholding tax |
*Note: Any TFSA contributions or withdrawals contributions made in the previous year may not be reflected in your available current year contribution room until after the end of February. All issuers have until the last day of February to electronically submit a TFSA record to the CRA for each individual who has a TFSA. Transactions made in the current year will not be included.
Explore the Investing Academy to learn more about account types and to find the latest investing guides.
The information provided in this article is for general purposes only and does not constitute personal financial or tax advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.
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