Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) are excellent saving options but it can get confusing when deciding which the best fit is for you.

Here’s a more simplified look at each alternative.

  1. TFSA’s and RRSP’s let you put your money into any type of investment and shelter you from paying tax for as long as the funds are held in your account.
  2. In an RRSP, your contribution is deducted from your income, which may result in a tax refund, but your money will be taxed when you use it down the road.
  3. In a TFSA, you do not get a tax break but when you need your cash it won’t be taxed when you take it out.
  4. RRSP’s have a contribution limit of 18% of your previous year’s income (to a max of $24,270, for 2014) whereas a TFSA has a $10,000.00 limit per year. Both plans allow you to carry forward funds so that you can “catch up” on the years when you weren’t able to save.
  5. TFSA’s are flexible and if you need to take out funds there are no ramifications.
  6. If you need to access money from your RRSP, say for an emergency, there will be a tax liability payable that year. RRSP’s will allow first time home owners a $25,000 withdrawal and for those furthering their education a $20,000 withdrawal is also permissible.
    Note: This money must be repaid within ayear time frame or you will face serious tax problems!
  7. If you’re trying to decide whether the RRSP tax break makes a better option, one consideration is to look at your taxable income (income after deductions). If it is above $43,561 for 2013 your marginal tax rate jumps into another category, and therefore your RRSP contributions will produce a larger tax refund. Below that line, the benefit of going with RRSPs is not as compelling.
  8. Since withdrawals from RRSP’s have such a significant tax consequence, it makes it more difficult to remove funds. This added level of hardship deters many from taking this route and these funds remain invested until retirement.
  9. If your employer matches your contributions to a workplace retirement savings plan you should take advantage of RRSP’s. This is “free” money and should be priority over other options if you can’t do both.
  10. The accessibility of TFSA’s is an important consideration if you have different goals than saving for retirement. If your goals are saving for a wedding, a car, or travel, this may be a better option.
  11. If you are carrying debt, be it a student loan or from credit cards, retiring the debt can be an excellent investment as well. Once you have cleared the debt, beginning a savings plan with the same funds can be a part of your budget.