Question

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 However, the the amount withdrawn later is taxable.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 It is a type of savings account where the contributions made are taxable, but the amount withdrawn later is tax-free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 The contributions are taxed, but they can be withdrawn tax-free anytime unlike RRSP which can only be withdrawn at retirement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