5 Key differences between TFSAs and RRSPs (and how to use them to save money)

1. RRSP contributions are tax deductible. TFSA contributions are not tax deductible. With a TFSA, you can’t deduct your contribution on your tax return. This means that the money you put into a TFSA is funded with after tax dollars. Conversely – with an RRSP you can deduct your contribution on your tax return which means you get a bigger return the higher your marginal tax rate.

2. An RRSP is generally recommended for retirement savings although there may be small sub-set of circumstances when efficient tax planning can be done using RRSP when there are large variations in personal income and efficient income splitting can be done (understand this before executing).

3. TFSA withdrawals are tax free because you made the contributions with after-tax dollars.

4. When you withdraw your RRSPs you pay tax on your withdrawals because contributions were made with pre-tax dollars.

5. You need earned income to contribute to an RRSP but not to a TFSA.

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