Avoiding common errors with your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) isn’t just good planning — it can save you money and protect you from penalties. Missteps with these registered accounts can trigger unnecessary taxes, fees, or lost growth opportunities.
One of the biggest traps is choosing the wrong account for your situation. RRSPs and TFSAs are both tax-advantaged, but they work differently: RRSP contributions lower your taxable income today and are taxed on withdrawal, while TFSA contributions don’t provide a tax deduction but grow and are withdrawn completely tax-free. The ideal choice often depends on whether your tax rate is higher now or is likely to be lower in retirement.
Another costly mistake is exceeding contribution limits. Both RRSPs and TFSAs have annual contribution caps — and overcontributing can lead to penalties. For TFSAs, excess contributions are taxed at 1% per month on the amount above your limit until fixed, and RRSPs also carry penalties if you go over your allowable room. Staying on top of your contribution room through CRA records is critical.
Also Read: Dividend paying stocks Canada
For TFSA owners, withdrawal rules can be tricky. While you can withdraw funds at any time without penalty, you only regain the contribution room in the following year, not immediately — a common misunderstanding that leads many to accidentally overcontribute.
Also Read: Stock investment Canada for beginners
Additionally, remember that your TFSA and RRSP should fit into your broader financial plan. An RRSP can help reduce taxable income and qualify you for income-tested benefits, while the TFSA provides flexibility for both short- and long-term goals. Many Canadians use both strategically — maxing TFSA room when possible and contributing to RRSPs when wanting immediate tax relief or when planning for retirement income.
Sign Up For our Newsletters to get latest updates
