Question

What is the difference between RRSP and TFSA? Briefly describe how each one works. What is the advantage of RRSP over TFSA? What is the
advantage of TFSA over RRSP? What is the advantage of each(RRSP and TFSA) over a regular taxable investment account?

Answer 1

An RRSP is a registered retirement savings plan. It is a type of savings account in which the contributions made into the account are tax-deductible. However, the the amount withdrawn later is taxable.

A TFSA is tax-free savings account. It is a type of savings account where the contributions made are taxable, but the amount withdrawn later is tax-free

The advantage of RRSP over TFSA is that an individual in a high income tax bracket can reduce their tax liability by contributing to the RRSP now, and withdrawing during their retirement when they are in a lower tax bracket

The advantage of TFSA over RRSP is that they are more suited for saving for short to medium term goals, such as buying a car or a home. The contributions are taxed, but they can be withdrawn tax-free anytime unlike RRSP which can only be withdrawn at retirement

The advantage of each over a regular taxable investment account is that both offer a tax benefit at some point - either at the time of contribution or at the time of withdrawal. A regular taxable investment account does not provide a tax benefit at either point