TFSA vs RRSP – Top 10 Features & Comparison [2019]

When it comes to saving for retirement, what’s the difference between a TFSA and RRSP. Not sure whether to use an RRSP or TFSA for your retirement savings? That’s a common question.

In general, those earning a low income (under $35,000 or so) should favour the TFSA, while high-income earners are likely to be better off with an RRSP. For those earning a moderate income, however, it’s a coin flip.

The TFSA contribution limit for 2019 is $6,000, up from $5,500 in 2018. With the TFSA limit at $6,000 for next year, the total room available in 2019 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $63,500.

6 Key Differences Between TFSA and RRSP 

     1. RRSP’s main purpose is for the retirement savings. TFSA can be used for any type of savings.

     2. RRSP contributions are tax-deductible, not while contributing but during the time of withdrawal when your income is low.

However if you plan to withdraw early (anytime sooner than retirement or when you are earnings are in higher tax bracket) you need to pay the tax accordingly as per to your previous years tax bracket.

TFSA contributions are not tax-deductible if you invest within your contribution limit (Login to your CRA account to know your contribution limit, you might have accumulated some amount from the previous years if you have not contributed much till date).

Also, the TFSA 2019 contribution limit stands at $6000 dollars up $500 from the previous year 2018. With the RRSP, you deduct your contribution from the income you report at tax filing. With TFSA, you can’t deduct your contribution on your tax return and vice versa.

    3. You have to pay taxes on your RRSP withdrawals because you made the contributions with pre tax dollars. On a contrary note TFSA withdrawals are tax-free because you made the contributions with after tax dollars.

    4. You are free to contribute to the RRSP account until you turn 71 and then you must close it, it’s a mandate. Then you have to use your RRSP savings to invest in RRIF or an annuity plan. With TFSA you are free to contribute as long as you want to, there is no age limitation.

    5. You need income(earnings from the previous fiscal year) from a source to contribute to an RRSP but for the TFSA there is nothing as such.

    6. Whether it’s the TFSA or RRSP, you can nominate your spouse as a beneficiary. In case of your death, money will roll over to them.But there is a catch with investments in the RRSP, after your spouse’s death, taxes will be due on the money outstanding in the RRSP account.

So in that case when your children inherit the money, they will receive only the chunk of leftover after the tax are paid. But with the TFSA, taxes are applied only on the increase in the value of the TFSA since the day of demise when your children receive it.

The best part is, if the amount your children will receive is not greater than the value of TFSA during the time of death then no tax is paid.

Why You Should Invest in TFSA

  • TFSA is a very flexible savings account tool that allows you to take money in and out of a tax sheltered account easily and without having to pay any penalty.

  • As TFSA investments are pre-taxed, unlike your RRSP investments, you are in total control of your withdrawal funds when you retire.

  • For the RRSP withdrawals tax rates are applied at the time of withdrawal with whatever the rate is at that point of time.

  • At the time you retire and start pulling out your funds from the RRSP and TFSA accounts, and if you are collecting government payments such as Old Age Security (OAS), the government takes your RRSP withdrawals into account. But thats not the case with TFSA.

  • All your investments growth inside the RRSP and TFSA tax-free.

tfsa vs rrsp

Why You Should Invest In RRSP

  • It’s a great feel to get a portion of your invested money in RRSP as your tax return. You can use this amount towards your RRSP contributions for the following year or for any other needs immediately. 

  • RRSP’s are great way to build financial corpus in a disciplined way, as you are forced not to withdraw from unless you want to pay huge taxes (RRSP withdrawals can still be used tax-free towards school and your first home purchase).

  • RRSP’s are excellent investments for those with middle to high incomes and very high incomes whose tax slab is in the highest tax bracket . 

  • With the RRSP’s, you can invest in the US stocks and ETF’s as there is no tax on the dividend (passive income) income you earn. So that’s another an other feather in the cap for RRSP.

  • So there you go, its time for you to make a choice between the TFSA or RRSP is good for you based on multiple factors like your income levels and the type of investment that’s applicable for your needs.

  • Both are great investment tools and you can invest in both at the same time and benefit the rewards. Which ever investment tool you choose you are building a corpus towards your financial goals and wealth creation.

  • Blue chip stocks are usually part of every portfolio – be it the TFSA, RRSP or the brokerage accounts. Again, there are a number of blue chip companies in different sectors to choose from. Its usually not that hard and takes minimal effort to find a good blue chip stock in today’s internet age with all the information on web. 

You will accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA.

  • The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000

  • The annual TFSA dollar limit for the years 2013 and 2014 was $5,500

  • The annual TFSA dollar limit for the year 2015 was $10,000

  • The annual TFSA dollar limit for the year 2016, 2017 and 2018 was $5,500

  • The annual TFSA dollar limit for the year 2019 is $6,000

10 Tips To Invest in your TFSAs and RRSPs 

1. Review the company’s finances going back 5 to 10 years or even more. The more you dig into the finances the better to decide. The types of blue chip investments we recommend have a history of profits going back for at least that long or even further.

Blue chip stock companies that make money on a regular basis are safer than chronic or even occasional money losers. Even though a blue chip stock may lose money in the immediate run, its always much safer than other stocks. That’s the usual trend. 

2. TSX blue chips stocks should pay dividends – Usually blue chip stocks pay descent to good dividend and the dividends only get better over time with increases year over year. Always remember blue chip stocks are the most valuable pieces of assets in any stock market.

Most of the times an entire stock market valuation depends on the blue chip stocks trading within. For example Apple, Microsoft, Google, Coca Cola, Facebook, Netflix from NASDAQ, Dow Jones. RBC, CIBC, BOM, Telus, Rogers in TSX.

Review a company’s five-to-10-year record of paying dividends from the company’s investor notes. Companies cant fake earnings and dividends are cash outlays. If you only buy blue chip stocks for their dividend you will end up with increased income YOY.  Don’t forget the growth aspect of it over the long run.  

3. However, be wary of blue chip stocks with an unusually high dividend yield. Investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

That’s because a high yield can at times be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

4. Good TSX blue chips have low debt. It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.

5. TSX blue chip investments should have industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.

6. The best blue chip investments have geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

7.Good TSX blue chip stocks have the freedom to serve (all) shareholders. High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

8. Some of your TSX blue chip stocks should have freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. You can hold some blue chips from those sectors, but look as well for companies that have broad product lines or products that are indispensable.

TSX blue chip companies should have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

9. Good blue chip investments may have hidden assets in the form of real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially.

The historical value remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock.

This hidden value may only become apparent to investors when the company upgrades the use of the real estate.

For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.

10. Some TSX blue chip stocks may have a hidden asset in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company.

For example, Apple Computer was able to move into the digital music player and smartphone businesses as quickly as it did because it had an established core of fans for its Mac computers.

RRSP converting to RRIF at age 71. What do I need to know?

When you’re in retirement, you’re obviously making the shift from saving to spending. The Registered Retirement Income Fund is the vehicle for making that happen. Your RRSP automatically converts to it (if you haven’t converted it already).

From that point on, you have to make mandatory withdrawals on those funds you invested within the RRSP.

TFSA has no such counterpart and you can keep contributing money into it.

Please let us know you thoughts and comments below. 

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2 thoughts on “TFSA vs RRSP – Top 10 Features & Comparison [2019]

  • February 25, 2019 at 2:33 pm
    Permalink

    Ah! This makes so much sense now. TFSA is more beneficial for lower wages and RRSP for higher ones. I was jumping through hoops trying to figure out what is best for me. I earn roughly 47k per year so I am a bit above the 35k mark. I guess that would mean I should favor RRSP? Are there any exceptions to this?

    Reply
    • March 9, 2019 at 9:59 am
      Permalink

      Hey Nick!

      I think you should invest in the TFSA with that income. Its more beneficial actually when compared with RRSP.

      Your RRSP contribution limit keep growing YOY as in TFSA, so dont worry about it. The single reason I am asking you to look at TFSA now is – higher the income, higher the tax bracket and you’ll end up getting a good descent refund while filing the taxes.

      Thanks,
      Sagar

      Reply

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