What The Hell Are RRSPs & TFSAs? Here's How This Alphabet Soup Affects Your Taxes

Saving is important, or so I've heard.

Staff Writer
A Canadian flag flies over Vancouver. Right: Canadian tax forms lie unfilled.

A Canadian flag flies over Vancouver. Right: Canadian tax forms lie unfilled.

So, you're saving for retirement. There are plenty of ways to do this, including by putting money into various forms of savings accounts. Two such retirement-specific accounts are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Both allow you to earn interest on your savings and avoid being taxed for it, but in slightly different ways.

You would think that the elders in our society inherently deserve care and community support, rather than being relegated to saving for our inevitable old age by using our own hard-earned dimes. Unfortunately for us, capitalism is such that retirement is a privilege we must all actively prepare for. It's a scam, but it's a scam you can get better at, so let's take a look at two of the ways Canada lets us plan for the moment when our ability to work for other people's profit is gently taken from us by age.

What's the point of RRSPs and TFSAs?

Both accounts provide you with a way to save money on the money you're saving. They're each a type of "savings vehicle," which is just any account that lets your money accrue interest and make your future slightly more comfortable. For any Canadian over 18 with a social insurance number, these accounts are two good options for saving in the longer term.

What's a TFSA?

A Tax-Free Savings Account (TFSA) is an account into which you deposit money that earns tax-free interest. This means that any money that your deposit earns via interest is not taxable, saving you extra cash.

For 2022, you can put up to $6,000 into your TFSA (this increases if you didn't deposit the full amount in the previous year). You can always withdraw money from a TFSA, but it gets a little complicated, so don't use it as your primary savings account from which you withdraw emergency funds.

What's an RRSP?

A Registered Retirement Savings Plan (RRSP) is an account into which you can deposit money without paying taxes on those deposits OR the interest they accrue. In other words, any money you deposit into your RRSP is tax-free, not just the additional money it earns you.

RRSPs can include the "most common types of investment," according to the Canadian government, but any investment entails some risk, so look into what you're dealing with before you sink all your money into soybean futures.

While TFSAs have a set maximum, the RRSP deposit maximum is 18% of your employment income (up to a limit). In 2022, that maximum amount was $29,210.

The money you put into your RRSP can be removed temporarily for things like buying a home or paying for education, but withdrawals for other reasons may be withheld for taxes.

How does a TFSA or an RRSP affect your Canadian taxes?

Once you retire, your RRSP money will become taxable again. In the meantime, depositing money into an RRSP can be a good way to save without paying taxes immediately on those funds.

Depositing into a TFSA doesn't affect your taxes directly, but the income you earn from those deposits are not taxed, reducing what you'll have to give to the government out of your precious savings.

This article's cover image was used for illustrative purposes only.

Willa Holt
Staff Writer
Willa Holt is a Staff Writer for MTL Blog, often found covering weird and wonderful real estate and local politics from her home base in Montreal.
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