Canadians have options when it comes to retirement savings. The Registered Retirement Savings Plan (RRSP) has been the standard since 1957, when it was first established to encourage saving for retirement. In 2009, however, a new retirement savings plan - the Tax-Free Savings Account (TFSA) - was introduced by Jim Flaherty, Canadian federal Minister of Finance, providing Canadians with another powerful savings method. While the goal of both the RRSP and the TFSA is the same - to help Canadians save money - each is a unique savings vehicle with plan-specific advantages. (To learn more, see our RRSPs Tutorial.)

IN PICTURES: 7 Counterintuitive Retirement Strategies That Work

The Tax-Free Savings Account
Canadian residents who are 18 years or older can contribute up to $5,000 each year to a Tax-Free Savings Account. Contributions are not deductible for income tax purposes, but TFSA savings can be withdrawn tax-free at any time and for any reason. A TFSA can hold a variety of investment instruments, including cash, stocks, bonds and mutual funds, all of which can grow tax-free for life. That means that interest, dividends and capital gains earned in a TFSA are never taxed, even when they are withdrawn.

Since the savings in a TFSA can be withdrawn at any time and for any reason, these plans are frequently used to save for purchases, such as automobiles, homes or even vacations. In addition, any money that is withdrawn can be put back into the plan in future years (but not during the same year if it would lead to over-contribution and a penalty tax). (To learn more, see Tax-Free Accounts Make Saving A Snap For Canadians.)

IN PICTURES: 6 Things You're Doing To Delay Your Retirement

The Registered Retirement Savings Plan
Canadian taxpayers each year can contribute up to 18% of the previous year's earned income plus any unused contributions from previous years to a Registered Retirement Savings Plan - up to a yearly maximum contribution limit. The contribution limit for 2010, for example, is $22,000, and is set for each tax year. Contributions are tax deductible, and earnings grow tax-free inside the plan; however, withdrawals are taxed. Since withdrawals are typically made during retirement and when participants are earning less money, it is likely that lower-tax brackets will apply, resulting in less tax liability. Like TFSAs, RRSPs can hold a variety of assets including cash, guaranteed investment certificates (GICs), mutual funds, stocks and foreign currency.

Because RRSPs are tax-deferred savings vehicles, these plans are ideal for taxpayers who expect to have a higher tax rate when the money is put into the plan versus when they will take money out of the plan. Figure 1 shows a comparison of the basic features of the Tax-Free Savings Plan and the Registered Retirement Savings Plan.

Registered Retirement Savings Plan
Tax-Free Savings Account

Minimum Age
No minimum age, as long as there is earned income
18 years or older

Maximum Age
Must cash out, convert to RRIF or purchase an annuity by December 31st of the year the participant turns 71
No maximum age

Tax Deductible Contributions

Tax-Free Accumulation

Tax-Free Withdrawals

Contribution Limit
18% of earned income, plus previous years\' unused contributions, up to $22,000
$5,000, plus previous years\' unused contributions. Limits will rise in $500 increments to account for inflation

Contribution Room
Withdrawals do not make room for more contributions
Withdrawals do make room for the next year\'s contributions

Allowable Investments
Stocks, bonds, mutual funds, index funds, ETFs, GICs, savings accounts, etc
Stocks, bonds, mutual funds, index funds, ETFs, GICs, savings accounts, etc

Figure 1: A comparison of the basic features of two popular Canadian retirement savings plans, the Registered Retirement Savings Plan and the Tax-Free Savings Account.

Bottom Line
Both RRSPs and TFSAs offer Canadians powerful means of saving for retirement. The Registered Retirement Savings Plan, which has been around for more than 50 years, provides an upfront tax incentive, since contributions are tax deductible. Withdrawals made during lower-earning years generally result in reduced tax liability. Tax-Free Savings Accounts, on the other hand, offer no upfront tax incentive, but since withdrawals can be made at any time tax-free, they provide a practical means of savings for retirement or even for large purchases. Canadians are not limited to choosing one plan over the other, and many opt for both plans to meet their savings and retirement goals. (For more, see 5 Retirement Questions Everyone Must Answer.)

Related Articles
  1. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  2. Savings

    Passing Down Values and Money to the Next Generation

    Amassing wealth to pass down to your kids is great unless your values don't come with it. A priceless gift is teaching them to be financially responsible.
  3. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  4. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  5. Investing Basics

    5 Things To Ask Before Hiring A Financial Advisor

    Choosing a financial advisor isn't an easy task. Here's a list of the most important things to consider when planning for your financial future.
  6. Professionals

    Advisors: Clients Want These Three Things from You

    Calmness, transparency and credentials (and more) are the key elements clients look for when selecting a financial advisor.
  7. Investing Basics

    Hiring a Financial Advisor? Look for the CFP Label

    Don’t skimp on the CFP designation. Here's why those three letters show that someone is qualified in financial and investment planning.
  8. Savings

    The Top Seven 529 Plans for 2015

    With so many choices and so many features (tax advantages, fees, annualized returns) to consider, it's hard to know which 529 plan to choose. Here's help.
  9. Insurance

    Life Insurance & Annuities: Sound Investments?

    There are certain scenarios in which investing in insurance is a savvy move. But expect a big chunk of your money to go toward fees.
  10. Budgeting

    How to Save Money on Your Disney Vacation

    Understand why Disney Parks are attractive vacation destinations and why they are expensive. Learn five money-saving tips for Disney vacations.
  1. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  2. How is marginal propensity to save calculated?

    Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and ... Read Full Answer >>
  3. What is the importance of residual value in an automobile lease?

    The residual value of a car is often used by banks and auto dealerships to determine how much to charge per month for a lease. ... Read Full Answer >>
  4. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ... Read Full Answer >>
  5. Why choosing the right investment advisor is crucial for your portfolio's health

    Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial advisor can ... Read Full Answer >>
  6. What documents I need to transfer an IRA/SEP/SIMPLE to a Traditional IRA?

    Most firms require that you complete their account transfer request form, which they use to request the transfer of assets ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!