How TFSAs Differ From RRSPs
In a sense the tax treatment of a TFSA is the opposite of a Registered Retirement Savings Plan (RRSP). For RRSPs, there is a tax deduction for contributions to a RRSP, and withdrawals of contributions and investment income are all taxable. In contrast, there is no tax deduction for contributions to TFSA, and there is no tax on withdrawals of investment income or contributions from the account. Beginning in 2013, contribution room in the TFSA has increased to $5,500 per calendar year, with a limit of $5,000 per year for each year before 2013. This money can then be withdrawn at any point of time, without penalty. Unlike RRSP’s, which must be withdrawn before the holder turns 71, the TFSA does not expire. The contribution room for funds withdrawn from a TFSA is reallocated in the tax year after the withdrawal, unlike an RRSP, where the contribution room is permanently reduced once a contribution is made.
The Canada Revenue Agency (CRA) describes the difference between a TFSA and an RRSP as follows: "An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life."
Read more about this topic: Tax-Free Savings Account
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