TFSA vs RRSP: Which savings account should I focus on?

Do you find yourself daydreaming at work about lounging on the beach in some far away land with a cocktail in hand, but know you don’t have enough in savings to get away? Or perhaps you’re ready to kick back, relax and stop working for good even though your retirement fund is still in the double digits?

You’re not alone. According to Statistics Canada, the average Canadian household has just $852 in net savings - that’s barely enough to handle a major car bill, let alone a vacation or retirement.

Thankfully, Canadians have a few great options when it comes to saving your income, whether it’s for a down payment on a house or an extended holiday abroad. In fact, TFSAs and RRSPs are two of the most popular accounts for people looking to build up a financial safety net, regardless of how much they earn.

But trying to wade through all that financial jargon about APY, CDIC insurance, and tax-breaks is enough to confuse anyone. So, it’s understandable if you’re not sure which account is best for your financial goals.

To get you started, here’s everything you need to know about TFSAs and RRSPs, plus some top tips for making the most of all that money you’ve saved using your KOHO reloadable prepaid Mastercard account.

"Canadians have a few great options when it comes to saving your income, whether it’s for a down payment on a house or an extended holiday abroad."

What is a TFSA?

A TFSA, or a Tax-Free Savings Account, is a banking option that allows people to hold a variety of assets, such as cash, stocks, GICs, bonds, and mutual funds in one place. What makes TFSAs unique is that any interest made on these funds is completely tax-free.

TFSAs were created as a way to incentivize and encourage Canadians to save money. Since all earnings made through these accounts are tax-free, they’re a great way to accrue interest without getting saddled with a big bill come tax time.

Plus, unlike other tax-sheltered accounts, TFSAs allow people to access their money at any time, without penalty. Unlimited access to one’s money is something that’s normally reserved for taxable accounts, like a High Interest Savings Account (HISA). But, with a TFSA, consumers get the best of both worlds: tax-free interest and the ability to withdraw funds at any time.

What’s the catch, you might ask? Well, TFSAs are subject to contribution limits. This means that individuals can only invest a certain amount of their money into these accounts each year. These contribution limits change every few years to account for inflation and you can find the current year's limits on the CRA’s website.

The contribution limits on TFSAs, however, roll over from year to year. So, someone that puts aside $2,000 less than the current year’s maximum will then be able to contribute up to $2,000 above the limit the following year. This allows people to maximize their overall investments if their income increases from one year to the next.

"TFSAs were created as a way to incentivize and encourage Canadians to save money."

What is an RRSP?

Registered Retirement Savings Plans, or RRSPs, are a type of investment account that’s specifically designed to help people save for retirement. They are what’s known as a “tax-deferred” account, so any money that’s invested into an RRSP isn’t taxed until it’s withdrawn many years later.

Another advantage of an RRSP is that any money contributed to these accounts is deducted from your annual earnings. Someone that earned $50,000 this year but put aside $5,000 into their RRSP would only be liable for income tax on $45,000 of their income.

This means that RRSPs save Canadians money on their tax bill every time they contribute to their account while simultaneously setting themselves up for a comfy retirement. Additionally, some funds from these accounts can be used towards a down payment on a home or to pay for university.

Like most other tax-advantaged accounts, RRSPs have contribution limits. This is generally 18% of a person’s annual income, but there are some rules in place, particularly for people with larger incomes.

Finally, any money that’s withdrawn from an RRSP before the age of 71 for purposes other than a mortgage down payment or university tuition is taxable. So, these accounts are best for people with long-term savings goals.

"Someone that earned $50,000 this year but put aside $5,000 into their RRSP would only be liable for income tax on $45,000 of their income."

Deciding between TFSAs and RRSPs

Both TFSA and RRSP accounts are great ways to save money for the future. But, determining which one is best for you really comes down to two things: your financial goals and when you’ll need access to your money.

Anyone that wants to build a solid nest-egg that can provide them with financial freedom after they stop working will benefit from having an RRSP. These accounts provide tax breaks now and allow people to save for retirement at the same time. So, they’re ideal for individuals with long-term savings goals that also don’t need immediate access to these funds.

On the other hand, TFSAs are a solid choice for Canadians that are thinking shorter-term. A TFSA is a good option for people that want to create a financial safety net while also maintaining an unlimited ability to draw on their savings.

Basically, if you won’t need to have access to your savings for many years to come, an RRSP will offer the most in terms of immediate tax breaks and potential for growth. Meanwhile, TFSAs are the best bet for people who want to save for more immediate goals and who want to be able to withdraw their money at any time.

The final thing to keep in mind when deciding between a TFSA and RRSP is how much you plan to contribute. TFSAs have a standard maximum contribution for everyone, regardless of income level.

Alternatively, RRSP maximum limits are based on one’s income. Higher-income Canadians will find that they can generally benefit more from contributing to an RRSP than from a TFSA.

Getting started with a TFSA or RRSP

Once you’ve decided which of these accounts best aligns with your savings goals, it’s time to start investing. Many financial institutions offer both TFSAs and RRSPs, so it’s best to look for an account that offers you a good interest rate or a solid return on your investments.

Additionally, many Canadians can open an RRSP through their work. So it’s worth checking in on your benefits package to see if your employer will help contribute to your retirement.

But, the best way to maximize your earnings from one of these accounts is to regularly contribute to them. Creating a budget is a great way to see where you can cut down on spending to free up money that can be put away in a TFSA or RRSP. If you need a place to start, check out our ultimate budget template by entering your email at the bottom of this article!

Savings-focused financial tools and accounts can also help you find ways to put aside more of your earnings into a TFSA or RRSP. With a KOHO reloadable prepaid Mastercard account, anyone can quickly and easily save money and get cash back on their daily purchases, all while avoiding hidden fees and getting free financial coaching.

Ultimately, whether you decide to go with a TFSA, an RRSP, or both, opening any investment or savings account is a fantastic step towards becoming financially secure throughout your life.

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