Bankruptcy Professional on Differences in TFSA & RRSP

Mclennan and Company Default Feature Image

Bankruptcy Professional on Differences in TFSA & RRSP

TFSA and the RRSP 

McLennan and Company Ltd. has over two decades assisting individuals and families in London with bankruptcy, consumer proposals, debt solutions and more.

Part of getting on track post-bankruptcy is creating a budget that sets aside funds for a rainy day, retirement or other financial goals. This post will examine some of the difference between the two primary savings programs most Canadians use: the TFSA and the RRSP.


What is a TFSA?

A TFSA is short for the Tax-Free Savings Account. This program was designed to allow Canadians to set money aside tax-free throughout their lifetime.

Contributions to a TFSA are not deductible for income tax purposes, however, any amount contributed as well as any income earned in the account is generally tax-free. Even withdrawals made from the TFSA are tax-free, which will be discussed further below.


What is an RRSP?

RRSP is short for the Registered Retirement Savings Plan. An RRSP is a retirement savings plan that you establish, that is registered with the Canada Revenue Agency.

You or your spouse or common-law partner make contributions to the plan. These deductible RRSP contributions can be used to reduce your tax burden at the time of the contribution.


Tax Benefits and Withdrawals: the TFSA v. the RRSP

RRSP contributions are deducted from your income to decrease you overall taxable income and thus decrease you overall tax rate now. However, this is really a tax deferral as when the funds are removed during retirement, they will still be taxed, but likely at a lower rate, as most Canadians have lower income and thus lower tax rates at retirement.

TFSA contributions are made with post-tax money, ie those contributions are not deducted from your income. However, the funds in your TFSA grow tax free and are not taxed at withdrawal.


Withdrawals: the TFSA v. the RRSP

Withdrawals from an RRSP are taxed at source automatically, unless the withdrawal is part of another Canada Revenue Agency such as the First-Time Homebuyer’s Plan. Even then there is a hard cap of $25,000 on that withdrawal and it must be paid back within 15 years of the withdrawal.

Withdrawals can be made from the TFSA for any reason at any time and those funds will not be taxed, which makes sense as all TFSA contributions were made in post-tax dollars and thus previously subject to taxation at source.


The Verdict?

Which of these programs is better for you will depend on: your current income, expected income in retirement, the purpose of your savings and other personal and financial factors.

The main thing to take away is that a key component of getting your finances back on track will involve saving for a rainy day and saving for retirement. Contact a financial professional to determine whether the TFSA or RRSP is right for you.


Contact Us

At McLennan & Company Ltd. we focus our work on debt solutions, consumer proposals and bankruptcy in London and surrounding areas. We help individuals and families who want to start over financially. Contact our head office in London, Ontario at 519-433-4728 or fill out our online form and someone will contact you within one business day to schedule a consultation.

We know that this is a difficult time for you and your family and we offer free initial consultations. For your convenience, in addition to our head office in London, we also have satellite offices in Ingersoll and Woodstock and offer flexible appointment times.

Please be advised that effective March 31, 2021, Bruce McLennan is retiring, and the insolvency files at McLennan & Company Ltd., LIT, have been transferred to Paul J. Pickering and Associates Limited, LIT (Licensed Insolvency Trustee).



TELEPHONE: 519-672-2494