At first glance, many investors are left wondering whether they should invest in a Tax-Free Savings Account (TFSA) or an Registered Retirement Savings Plan (RRSP). Both offer tax advantages, but deciding which account is more appropriate for you depends on your goals, risk tolerance and time frame.

TFSA and RRSP Similarities

Both accounts offer tax advantages. Plus, both accounts allow you to invest in mutual funds, stocks, segregated funds, bonds and Guaranteed Investment Certificates (GICs), to name a few.

Registered Retirement Savings Plan features include:

1. Contribution limits
   Your allowable contribution is $30,710 or 18% of earned income, less pension adjustment for 2023. Unused contribution room can be carried forward to future years, and contributions can be made to an individual, group, or spousal RRSP.
2. Contributions are tax deductible
   Allowable contributions are deducted from your gross taxable income for the year, and you may end up with a tax refund (which many recommend putting right back into your RRSP for next year or even a portion into your TFSA). This makes an RRSP an ideal first choice for savings especially for high-income earners.
3. Defer the taxes
   Investments inside an RRSP grow on a tax-deferred basis; tax is payable when funds are withdrawn. Funds typically stay invested until you start income payments in your retirement years. RRSPs must be converted to a Registered Retirement Income Fund (RRIF) by the end of the year you turn 71. Withdrawals from RRIFs are fully taxable, and annual withdrawal amounts may reduce government Old Age Security benefits. Those with a rich pension plan, are working in retirement, or have other sources of alternative income, may want to consider additional savings options, such as a TFSA, in consultation with a financial advisor.
4. Estate considerations
   An RRSP (or RRIF) can transfer directly to your spouse or commo-law partner upon your death on a tax-deferred basis when he or she is named the beneficiary directly on the account.

Tax Free Savings Accounts

1. Contribution limits
   As of January 1, 2023, if you have reached the age of majority, you can contribute up to the maximum annual amount of $6,500. Any unused contribution amount can be carried forward to future years. If you have never contributed to a TFSA before and were at least 18 years old in 2009, your accumulated contribution room was $81,500 in 2022.
2. Tax free
   Your annual contribution is not tax-deductible and any growth in your TFSA investments is sheltered from taxation even when money is withdrawn. You can withdraw TFSA money without paying tax at any time and, best of all, the full amount of any withdrawals can be put back into your TFSA in future years (but not the same year).
3. Impact of eligibility on government benefits
   Income earned in a TFSA and amounts withdrawn do not affect your eligibility for federal income-tested benefits and credits, such as Old Age Security or the Canada Child Tax Benefit.
4. Estate considerations
   You can set up the account’s assets to transfer directly to your spouse or common-law partner upon your death, as long as he or she is named the successor holder on your TFSA.

While an RRSP is primarily intended for your retirement, you can use a TFSA for any long-term investment goal.

This article was written by Edward Jones for use by your local Edward Jones advisor, Nicolle Lalonde.