The following table illustrates some of the similarities and differences among various savings options available to you. The information in the chart is both limited and basic and was developed to provide a brief overview. You should consult with your advisor to help you make the most informed decisions about your plan.
Similarities and differences
|
TFSA |
RRSP |
Non-registered |
RESP |
|---|---|---|---|---|
Age limits |
18 + (age of majority) |
0 - 71 (but must have earned income) |
None |
None1 (Note: Canada Education Savings Grant (CESG)2 is only available for children up to age 17.) |
Contribution limits (annual) |
$7,0003, plus unused contribution room from previous years |
Lesser of 18% of earned income or $31,560 (2024), plus unused contribution room from previous years |
None |
No annual limit2 (lifetime $50,000 limit)4 |
Tax deductible contributions |
No |
Yes |
No |
No |
Tax payable on investment growth inside the plan |
No |
Deferred until withdrawal |
Yes5 |
Deferred until withdrawal |
Taxable withdrawals |
No |
Yes, except for qualified withdrawals under the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP). |
Varies - tax treatment largely relies on gain or loss position of investment at time of withdrawal. |
Yes (CESG amount and investment earnings are taxable; contributions to the plan are not)6 |
Re-deposit withdrawals (in addition to annual contribution) |
Yes (in the next calendar year) |
No, except for repayments under HBP and LLP |
Yes |
No |
Government grant |
No |
No |
No |
Yes - CESG, Canada Learning Bond (CLB). Some provinces have programs that provide additional benefits. |
Unique benefit |
Tax-free growth |
Tax deductible contributions, tax deferred growth |
Flexibility |
Up to $7,200 CESG and $2,000 CLB, tax-deferred growth. |
Claim capital losses |
No |
No |
Yes |
No |
NOTE: There may be negative tax implications for exceeding the allowable annual contribution limit and for prohibited or non-qualified investments. Please speak to your advisor for more information.
Options to fit every stage of your life
Like many Canadians, you may believe that your tax rate will be lower in retirement, making RRSPs an ideal vehicle for investing your savings. On the other hand, TFSAs are advantageous when you believe your tax rate will be higher on withdrawal than when you originally contributed, making it a good tool if you’re saving for a down payment on a home or a vacation.
A lifetime of options
| Young saver | Family with a mortgage | Pre-retiree | Retiree |
|---|---|---|---|
| Tax rate: Increasing tax rates over the course of a career | Tax rate: Increasing tax rates over the course of a career | Tax rate: Increasing tax rates over the course of a career | Tax rate: Lower tax rates in retirement |
Starting a new career TFSA: save for home down payment, vacations, purchase a vehicle RRSP: save for retirement, access for home down payment up to $35,000 under the HBP and training or education up to $10,000 in a calendar year or $20,000 in total under the LLP |
New home, children TFSA: save for vacations, emergency fund RESP: save for children’s education, benefit from CESG & CLB RRSP: save for retirement |
Readying for retirement TFSA: save for vacations, emergency fund, down payment on a vacation property RRSP: save for retirement RESP: save for children or grandchildren’s education |
Enjoying retirement RRSP: by age 71, converted into registered retirement income fund (RRIF) or purchase an annuity TFSA: invest excess (RRIF) withdrawals to use for travel, family gifts, unexpected health costs RESP : save for grandchildren's education |
Comparing a one-time contribution to each option
You may realize changes to your marginal tax rate over the course of your life. As a result, the various savings options provide different results based on your marginal tax rate at the time of withdrawal. The following chart assumes you make a one-time contribution after tax into each of the various savings options.
| TFSA ($) | RRSP7 ($) | Non-registered8 ($) | RESP ($) | |
|---|---|---|---|---|
| Cost to contributor9 | 1,667 | 1,000 | 1,667 | 1,667 |
| Opening account value | 1,000 | 1,667 | 1,000 | 1,000 |
| CESG | 0 | 0 | 0 | 200 |
| Investment income (20 yrs at 5.5%) | 1,918 | 3,197 | 1,1676 | 2,301 |
| Gross proceeds | 2,918 | 4,864 | 2,167 | 3,501 |
If withdrawn at same tax rate: Tax (40% rate) If withdrawn at same tax rate: Net proceeds |
0
2,918 |
1,946
2,918 |
0
2,167 |
500
3,001 |
If withdrawn at higher tax rate: Tax (45% rate) If withdrawn at higher tax rate: Net proceeds |
0
2,918 |
2,189
2,675 |
0
2,167 |
500
3,001 |
If withdrawn at lower tax rate: Tax (30% rate) If withdrawn at lower tax rate: Net proceeds |
0
2,918 |
1,459
3,405 |
0
2,167 |
500
3,001 |
As you can see, in addition to the benefit of flexibility, TFSAs are an advantageous investment option compared to RRSPs when you make a withdrawal at a higher tax rate. Conversely, RRSPs represent better returns compared to TFSAs when you withdraw funds at a lower tax rate. While RESPs are included in the comparison, it is important to note that RESP growth and grant money are taxed in the hands of the recipient of the benefit, the student, whose tax rate is generally low, if not zero.
Choosing the savings option that’s right for you
Your tax rate at the time of withdrawal is just one factor to help you decide which account type might best suit your goals. Asking yourself the right questions can also help you determine which savings strategy makes the most sense for you.
- What savings plans do I currently have?
- What are my savings goals? (e.g. retirement, down payment for a house, children’s education, a new car, a vacation, etc.)
- What is the time horizon for each of my savings goals?
- If my RRSP is an important savings vehicle for meeting my goals, what do I plan on doing with my tax refund?
- If saving for the children’s education is important, what type of post-secondary education do I envision for them?
- How much flexibility do I need for my general savings goals?
For more information, speak to your advisor.
1From the registration date, contributions may occur up to the end of the 31st year and must be withdrawn by the end of the 35th year from the registration date. For individuals who qualify for the disability tax credit, from the registration date, contributions may be made up to the end of the 35th year and must be withdrawn by the end of the 40th year.
2It is important to note provisions in the Income Tax Act that prevent what is considered “11th hour saving” for 16 and 17-year-olds. They are only eligible for a CESG if one of the following conditions are met:
- contributions of at least $2,000 are made to an RESP prior to (and not withdrawn from,) before the end of the calendar year the child turned 15;
- contributions of at least $100 per year are made to an RESP in any four years prior to (and not withdrawn from,) the end of the calendar year the child turned 15.
3The TFSA contribution limit has changed over the years. 2009-2012 - $5,000; 2013-2014 - $5,500; 2015 - $10,000; 2016-2018 - $5,500; 2019-2022 - $6,000; 2023 - $6,500 and 2024 - $7,000. The annual TFSA dollar limit is indexed to inflation and rounded to the nearest $500.
4For 2007 and subsequent years; $42,000 for 1996 to 2006.
5Unrealized capital gains are not taxed; however, interest, dividends and capital gains realized on the disposition of investments are taxable.
6Assuming student is enrolled in a qualifying education program or specified education program within the meaning of the Income Tax Act.
7Assumes that RESP withdrawals are taxed in child’s hands at 20%.
8The non-registered investment assumes a tax rate of 28.3% on investment income, based on portfolio returns that are assumed to be composed of 30% capital gains, 30% Canadian dividends and 40% interest. The assumed tax rate on investment income could differ based on the tax bracket the individual falls into and the Province where they reside. The analysis further assumes that the investments are withdrawn on Day 1 of the year of withdrawal, such that a higher or lower tax rate in that year will not impact the amount available to the investor.
9At a 40% marginal tax rate, an individual needs to earn $1,667 to make a $1,000 contribution to a TFSA, non-registered account or RESP.
Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.
