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The difference between RRSP, TFSA, and cash accounts

By ATB Financial 11 March 2019 7 min read

When you hold investments, such as mutual funds, stocks or GICs, you need somewhere to ‘store’ these investment products. That’s where RRSPs, TFSAs and cash accounts come into play. RRSPs, TFSAs and cash accounts serve as containers or accounts that you put your investments in and can offer tax benefits.

Both RRSPs and TFSAs are referred to as “registered” investment vehicles. They are registered with the Government of Canada and allow the government to keep track of your investments so that you are taxed appropriately. A cash account, or a “non-registered account” does not offer any tax benefits, but also doesn’t have a capped contribution limit. This makes it a good option if you have already maxed out your RRSP and TFSA contributions for the year.

What is a Registered Retirement Savings Plan (RRSP)?

RRSPs are what we call “tax-deferred” investment vehicles. You don’t pay income tax on the money you contribute to your RRSP in the year you make the contribution, but you do pay tax on your withdrawals. Your money grows in your RRSP tax-deferred, giving you enhanced earnings potential and possible tax savings if you are in a lower income tax bracket in retirement than you are currently.

What is a Tax Free Savings Account (TFSA)?

A TFSA is also an investment vehicle that offers tax benefits, with greater flexibility. You pay regular income tax on your TFSA contributions in the year that you make them (in other words the cash you contribute has already been taxed) but those contributions then grow tax-free. You don’t pay tax on your withdrawals, even if you’ve earned significant investment returns on your contributions.

What is a cash account?

Unlike an RRSP or a TFSA, a non-registered account or “cash account” does not offer any tax benefits. A cash account will offer you the opportunity to earn interest, dividends or capital gains on your contributions, but you are depositing taxed money and the income you earn is subject to tax.

Let's take a look at how RRSPs, TFSAs and cash accounts differ in the breakdown below. 

Or, you can check out this infographic: RRSP vs TFSA vs cash accounts 

RRSP vs TFSA vs Cash account

RRSP

A registered investment vehicle where tax is deferred on investment earnings; contributions are tax-deductible.

 

TFSA

A registered investment vehicle where investment earnings and withdrawals are tax-free. 

 

Cash account

A non registered cash savings account is a taxable and offers you the opportunity to grow your savings.

RRSP

Tax-deferred:
you pay tax later, when you're most likely in a lower income bracket.

 

TFSA

Tax-free growth:
you pay tax on your contributions now, but any growth is never taxed.

 

Cash account

Taxable:
you pay tax on contributions and returns.

RRSP

An investment vehicle that can hold many different individual investment types including GICs to mutual funds.

 

TFSA

An investment vehicle that can hold many different individual investment types including GICs to mutual funds.

*CRA restrictions on some products may apply.

 

Cash account

An investment vehicle that can hold many different individual investment types including GICs to mutual funds.

RRSP

March 1

 

TFSA

December 31

 

Cash account

No deadline

RRSP

Maximum annual contribution: 18% of last year's earned income, up to a maximum of $27,830

 

TFSA

Maximum annual contribution: $6,000

 

Cash account

No limit

RRSP

If you don't make your full eligible contribution the contribution room is carried forward.

 

TFSA

If you don't make your full eligible contribution the contribution room is carried forward.

 

Cash account

Not applicable.

RRSP

Contribution receipt - for deposit
T4RSP - for withdrawal

 

TFSA

Not applicable

 

Cash account

T5 or T3 - while invested
T5008 - on sale of securities

What are the annual contribution limits and deadlines for RRSPs?

For RRSPs, contributions must be made in the current year or the first 60 days of the following year to qualify. If the 60th day falls on a weekend, the deadline is extended to the Monday that follows. That means that if you're filing taxes for last year, you can deduct from your income the RRSP contributions you made between January 1 of that year and generally March 1 of the current year. You don’t, however, have to claim your entire annual RRSP contribution as a deduction in the same year—you can carry some or all of your deduction forward. Most accountants and tax software programs can help you determine what the optimal amount to claim is in any given year.

The annual RRSP contribution limit is usually 18 percent of the earned income you reported on your tax return in the previous year, to a maximum amount. However, this amount is adjusted based on circumstances, such as if you belong to a pension plan or if you have unused room from a previous year. Please visit the Canada Revenue Agency to find out the maximum contribution for the current year.

If you didn’t max out your RRSP contributions last year (or any previous year), you are able to roll forward unused contribution room to another year. The amount you are able to contribute in any given year will be on your CRA notice of assessment from the previous year.

What are the annual contribution limits and deadlines for TFSAs?

For TFSAs, there is no contribution deadline, since the maximum annual amount you are allowed to contribute is carried forward year by year. All TFSA contributions you make during the calendar year, including the replacement or re-contribution of withdrawals made from your TFSA, will count against your contribution room. Do note that the amount you withdraw in any given year will be added to your cumulative contribution room in the following year.

Please visit the Canada Revenue Agency to find out what the TFSA annual contribution limit is for the current year.

What if I have over-contributed to my RRSP or TFSA?

Usually you won’t be penalized if the amount you over-contributed to your RRSP is $2,000 or less—but you won’t be able to claim a deduction on the over-contributed amount until you have available contribution room in future years. For over-contributed amounts in excess of $2,000, you will have to pay a penalty tax of one per cent per month, unless you withdraw the excess amounts using the applicable prescribed form from CRA (either T3012A Tax Deduction Waiver on the Refund of Your Undeducted RRSP Contribution, or form T726 Calculating Your Deduction for Refund of Unused RRSP Contributions). If you do have to pay the one percent tax, you’ll need to fill out a T1-OVP form and send it to your tax centre. Visit the Canada Revenue Agency to review what the over-contribution limit is for the current year.

What if I have over-contributed to my TFSA?

If you over-contributed to your TFSA, the penalty is one percent per month on the total amount of over-contributions until you have withdrawn that amount, or more contribution room becomes available in future years.

What documents related to my investments will I need to include when filing my taxes?

You will need to report your investment income, which is generally reported on a T5 or a T3. A T5 Statement of Investment Income, reports interest from GICs or bank accounts, and investment income paid to you from a corporation. A T3 Statement of Trust Income reports the investment income earned in a trust, most commonly if you are invested in a mutual fund trust such as the ATB Compass Portfolios. You may also receive a T5008 if you have sold securities, or a T4RSP if you have made withdrawals from your RRSP. You will also need your contribution receipts for the contributions made to your RRSP. These will allow you to deduct the amount you contributed from your taxable income.

What do I do with my RRSP tax refund?

Ultimately, what you do with your tax refund should be based on your individual situation and long-term goals. Maybe you prefer to use your refund to pay down a high-interest debt.

 

When planning your investment savings it’s always a great idea to speak with an ATB Financial Advisor. If you prefer a DIY approach, ATB Prosper​ can also help to set your goals, track your progress and help you reach your goals faster.​​​​​​​​​​​

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