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This month, we explore key differences between the two most popular registered plans, discuss how the tax benefits they offer can help you get closer to your goals, and answer your FAQs.
Canadians have access to several types of investment accounts that provide them with the opportunity to protect their investment income from taxation while held within these plans. Understanding the differences in these account types and the unique advantages they offer can help you achieve your goals – whatever they may be!
Two popular account types are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA). As many Canadians consider making contributions to these accounts around this time of year, we want to outline the features and benefits they each present.
For both account types, you generally do not pay taxes on gains, interest, or dividends when the funds are held within the account. With an RRSP, you can potentially reduce your taxable income when you make contributions to the account. Additionally, you do not pay any taxes until you withdraw your funds (at which point, the withdrawn funds are subject to taxation). This is known as “tax deferral”. An RRSP is well suited to those in the higher earning years of their career and who are looking to save for retirement, or those in their early years looking to save for their first house. In contrast, a TFSA does not offer tax deferral benefits; however, withdrawals from TFSA are entirely tax-free. This makes it more flexible than the RRSP and generally better suited for building an emergency fund or saving for a major purchase. Furthermore, any funds you withdraw from the TFSA can be re-contributed in the following calendar year, whereas RRSP withdrawals cannot generally be re-contributed.
When deciding how much to contribute to your TFSA or RRSP, it is important to consider your liquidity needs, potential tax savings and how much of your current income you are willing and able to contribute to each account type. RBC’s Investing Academy recently published an articleLegal Disclaimer 1 that compares the two accounts and could help you decide which one you may want to prioritize.
Below, we address frequently asked questions posed by our clients in regards to TFSA and RRSP contribution limits, deadlines and tax documents.
TFSA/RRSP FAQs
If you are in position to invest, a volatile market climate alone should not dissuade you from investing your funds. By investing at regular intervals (which can be achieved by setting up pre-authorized contributions), you avoid decision fatigue which could lead to long delays in investing your funds and missed opportunities. Instead, you can implement a dollar cost averaging strategy and use market volatility to your advantage.
The annual TFSA limit is indexed to inflation and rounded to the nearest $500. With Inflation having spiked in 2022, for 2023, the TFSA contribution limit has been increased from $6,000 to $6,500Legal Disclaimer 2. If you have been eligible to contribute to the TFSA since the inception of the account type, your total contribution room would be $88,000.
| Year | Annual Contribution Limit | Total Contribution Limit |
|---|---|---|
| 2009 | $5,000.00 | $5,000.00 |
| 2010 | $5,000.00 | $10,000.00 |
| 2011 | $5,000.00 | $15,000.00 |
| 2012 | $5,000.00 | $20,000.00 |
| 2013 | $5,500.00 | $25,500.00 |
| 2014 | $5,500.00 | $31,000.00 |
| 2015 | $10,000.00 | $41,000.00 |
| 2016 | $5,500.00 | $46,500.00 |
| 2017 | $5,500.00 | $52,000.00 |
| 2018 | $5,500.00 | $57,500.00 |
| 2019 | $6,000.00 | $63,500.00 |
| 2020 | $6,000.00 | $69,500.00 |
| 2021 | $6,000.00 | $75,500.00 |
| 2022 | $6,000.00 | $81,500.00 |
| 2023 | $6,500.00 | $88,000.00 |
RRSP: The RRSP contribution limit for is 18% of your preceding year’s earned income up to a maximum of $30,780 for 2023Legal Disclaimer 3 (up from $29,210 for 2022). As always, any unused contribution room from previous years would carry forward.
As in previous years, the deadline for 2022 RRSP contributions is March 1st, 2023. If you submit an RBC InvestEase RRSP account application prior to the deadline, and if you made an initial contribution in your account application, it will be backdated to March 1st 2023 and would qualify for a 2022 RRSP contribution even if the funds are not deposited into your RBC InvestEase account until after March 1st, 2023.
For both your TFSA and RRSP, you can track your contribution room through your online account with Canada Revenue Agency (CRA).
The CRA will reflect contributions and withdrawals for your TFSA made in the prior year shortly after the end of February.
There are no tax documents issued for TFSA accounts. For InvestEase RRSP accounts, contributions made between March and December will be summarized in one RRSP contribution slip that will mailed to you or posted on the RBC InvestEase dashboard (depending on your document preferences) by mid-January. A contribution slip will be issued for any contributions made in January and February and will be generated approximately 2-5 business days afterwards. RRSP contributions made in January and February can be used to claim an income tax deduction in either the current or the preceding year (or unused and carried forward)
For 2022 RRSP withdrawals, T4RSP/R2 tax slips will be posted online or mailed to you by early March. Any amounts that you withdrew from your RRSP in 2022 will be included in your overall income and taxed at your marginal tax rate. Your marginal tax rate may be higher or lower than the withholding taxes that were applied to your RRSP withdrawal.
You can specify if you would like your InvestEase tax documents mailed to you or made available online through the InvestEase dashboard.
If you have questions about RRSPs and TFSAs, how to decide which one to prioritize, or which portfolio is right for you, please reach out and our Portfolio Advisors would be happy to share their advice.
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