The difference between RRSP, TFSA, and cash accounts
By ATB Financial 11 March 2019 4 min read
View infographic: RRSP vs TFSA vs cash accounts
RRSPs and TFSAs, registered versus non-registered accounts…what does it all mean for you? Maybe you’ve been stressing out about filing your taxes because you’re not sure how your investments affect the income you’ll report. Or maybe you’re simply trying to figure out which financial vehicle will help you reach your financial goals.
Some thorny questions come up when thinking about your investment savings, but the answers might be simpler than you think.
What’s the difference between Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and investment savings accounts (aka cash accounts)?
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.
TFSAs also offer 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. So you don’t pay tax on your withdrawals, even if you’ve earned significant investment returns on your contributions.
Both RRSPs and TFSAs are referred to as “registered” investment vehicles, because they are registered with the Government of Canada. This way the government can keep track of your investments and tax you appropriately. Both RRSPs and TFSAs can hold individual investment products such as GICs, ETFs, mutual funds, stocks and bonds.
A non-registered investment savings account or “cash account” might offer you the opportunity to earn some interest on your contributions, but it doesn’t offer you tax benefits. You’ll pay tax on money you deposit, as well as on any interest or gains you earn.
What are the annual contribution limits and deadlines for RRSPs and TFSAs?
For RRSPs, the annual contribution deadline for the previous calendar year is usually around March 1. That means that if you're filing taxes for the relevant year, you can deduct your RRSP contributions from your income between January 1 of the previous calendar year and 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. 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 might be able to roll forward unused contribution room to another year. The amount you are able to contribute in any given year will be on the notice of assessment form from the previous year.
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. For over-contributed amounts in excess of $2,000, you will have to pay a penalty tax of 1 per cent per month, unless you withdrew the excess amounts. If you do have to pay the 1 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.
If you over-contributed to your TFSA, the penalty is 1 percent per month on the total amount of over-contributions until you have withdrawn that amount, or more contribution room becomes available in the following year.
What documents related to my investments will I need to include when filing my taxes?
The three main ones are any T5, T4RSP or T3 slips you’ve received. A T5 is a statement of your investment income, a T4RSP is a statement of your RRSP income and a T3 is a statement of income from interest, dividends and capital gains.
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.