1. Contributions are tax deductible

All investments within an RRSP/TFSA account grow tax deferred. In other words, any profits made on investments within an RRSP/TFSA account in the form of interest, dividends or capital gains are not immediately taxable to you as income. Later in the tutorial, we'll go through some examples showing just how powerful this benefit can be.

Note that there is a difference between tax deferred and tax free, however. RRSP/TFSA investors do have to pay taxes on the profits in their RRSP/TFSA, but this does not occur until the funds are withdrawn. Tax deferral remains a benefit because, in theory, income tends to be lower in retirement than in your peak earning years.

2. Savings grow tax free

You won’t pay any tax on investmentInvestment An item of value you buy to get income or to grow in value. earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments. as long as they stay in your RRSP/TFSA. This tax-freeTax-free Money that you do not pay tax on. compoundingCompounding A way to grow your money faster. Instead of spending the money you make investing, you reinvest it so it can grow. allows your savings to grow faster.

Make sure your RRSP/TFSA fits into your overall financial and retirement plan. Learn more about retirement planning.

3. A spousal RRSP/TFSA can reduce your combined tax burden

If you earn more money than your spouse, you can help build their tax-free savings by contributing to a spousal RRSP/TFSA. Retirement income will then be split more equally between the 2 of you — which may reduce the total amount of tax you pay. Learn more about spousal RRSPs.

4. You can borrow from your RRSP/TFSA to buy your first home or pay for your education

You can take out up to $25,000 for a down payment for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.

Start saving now

The sooner you start contributing to an RRSP/TFSA, the more money you’ll have when it’s time to retire. That’s because of tax-free compounding.