Canto 8

RRSPs versus TFSAs

So let's assume that you've decided to start saving for a long-term objective, such as retirement. As a Canadian, you can choose between two main tax-sheltered types of accounts. The Registered Retirement Savings Plan (RRSP) lets people subtract the money they put in from the income they report on their tax forms, but then they have to pay tax on the money when they take it out. The Tax-Free Savings Account (TFSA) doesn't let people subtract the contribution from their income on their tax forms in that year, but they don't have to pay tax on the money when they take it out. (By the way, for US readers, the RRSP is something like the IRA in the US, and the TFSA is something like the Roth IRA. I'm not going to talk about those here - you should find another article about them.)

How are they similar?

The RRSP has been around since 1957 and the TFSA has only been around since 2009, but there are lots of things about them that are similar:

How are they different?

From a tax standpoint, RRSPs and TFSAs are kind of inverses of each other, but there are also other differences:

What if you have to file taxes to the US?

My kids are dual citizens, so once they get beyond a certain income threshold, they're going to have to file to the US. The RRSP is recognized as a retirement tax shelter by the IRS, and although you still have to report it in a couple of ways, it's not all that onerous.

The TFSA requires the same level of reporting as we've been doing for the Registered Education Savings Plan (RESP):

We're filling out all these forms for accounts on which we have never owed any tax to the US, but if we don't fill them out (or if we screw them up) we can be subjected to fines. It's truly ridiculous. So if you have to file to the US, think twice before setting up a TFSA. If you're not comfortable around tax forms, you're going to need lots of help.

So which should you choose?

If you make less than about $43,000 per year at the moment, you probably don't want to start an RRSP. Chances are you'll be making more money in the year when you want to use the money, so you'll pay more tax altogether. If you're making less than that, you should probably choose a TFSA. (If you have to file taxes to the IRS, get some help to figure out what it's going to mean in terms of filing requirements.)

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