Q

Why should I have an RRSP when a TFSA is similar and has no early withdrawal fees?

A

We love both RRSPs and TFSAs, and both have their irresistible features.

TFSAs are designed to make funds available throughout a person’s life, offer tax-free growth, and since the CRA won’t assess penalties for withdrawal from TFSAs, are especially great for big purchases like cars, real estate or weddings. Unlike RRSPs, which you’ll need to convert to another account type or annuity by the last day of the year you turn 71, you can keep a TFSA for as long as you live.

So why would anyone even bother with a RRSP? There are a couple big reasons. Since RRSPs are tax-deferred, they offer immediate tax benefits that TFSAs don’t. Any amount you contribute to an RRSP in a given year will be safe from income tax, which can save you a ton of out of pocket money at tax time. (TFSAs instead offer tax-free growth on any investment.) If you happen to have a lot of money available to put away, the RRSP annual contribution ceiling is much higher than that of TFSAs; as of 2017, you can contribute up to 18% percent of your prior year’s reported income or $26,010 — whichever number is smaller. TFSAs currently have an annual contribution limit of $5,500, but if you’re over 21 and have never put in money before, you can make up for past years you didn’t contribute — up to $57,500 as of 2018.

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