Question

What is the main difference between TFSAs and RRSPs? A. Tax deductions for retirement savings

B. Penalty for early withdrawal from retirement accounts
C. Tax credits for buying a home
D. Higher taxes on earned income

Answer 1

The main difference between TFSAs and RRSPs lies in the tax treatment of contributions and withdrawals.

Step-by-step explanation:

TFSAs and RRSPs are both types of retirement savings accounts in Canada, but they have some key differences.

1. Tax deductions for retirement savings: RRSP contributions are tax-deductible, meaning you can deduct them from your taxable income for the year. TFSA contributions are not tax-deductible.
2. Penalty for early withdrawal from retirement accounts: With an RRSP, if you withdraw funds before retirement, you'll be subject to an immediate tax penalty. TFSA withdrawals, on the other hand, are tax-free and can be made at any time without penalty.
3. Tax credits for buying a home: There are specific programs and savings plans in Canada that offer tax credits for buying a home, but these do not directly apply to TFSAs or RRSPs.
4. Higher taxes on earned income: Neither TFSAs nor RRSPs directly affect the taxes on earned income.

In summary, the main difference between TFSAs and RRSPs is the tax treatment of contributions and withdrawals. RRSPs offer tax deductions for contributions and impose penalties for early withdrawals, while TFSAs do not offer tax deductions but allow tax-free withdrawals at any time.