TFSA vs. RRSP: How To choose between the two?
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Choosing between the TFSA vs RRSP is easier than you think.
When it comes to saving, the TFSA vs. RRSP debate is always at the forefront. Many people are confused as to whether to choose the Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), or a combo of both to put money away for the future.
Regardless of whether you choose the RRSP or TFSA (or make use of both!), one of the best things you can do is invest consistently. This is why I recommend setting up a pre-authorized “set it and forget it” investment solution to pay yourself first. Over time, you can gradually increase your contributions until you max out both accounts.
Both RRSP and TFSA investments are vehicles that shelter taxes on your investment returns, but depending on your circumstances, one might be better for your money than the other.
The TFSA is more flexible and offers a better tax benefit than the RRSP but doesn’t have as high contribution room. The RRSP will probably let you set aside more but has stricter rules around when you can withdraw your money and the reason behind it. Ultimately, everyone should aim to have both an RRSP and a TFSA and spread the savings across both accounts.
The TFSA was introduced in 2009 to give Canadians a more flexible savings tool. Like the RRSP, the TFSA is best used for retirement savings. However, unlike the RRSP, the TFSA can also be used for anything else! Here are the top five points to remember about TFSAs:
- It’s a very flexible, all-purpose savings tool that allows you to contribute and withdraw from a tax-sheltered account easily and without penalty.
- You can open a TFSA as soon as you turn 18, and there’s no expiry.
- You can make tax-free withdrawals from your TFSA anytime, for any purpose. You can only replace the withdrawal amount in the same year if you have available TFSA contribution room (unless you want to pay a penalty). The contribution room is returned the following calendar year.
- When you retire and start pulling money out of your RRSP and TFSA accounts, the government considers your RRSP withdrawals when “clawing back” your Old Age Security (OAS). But this is not the case when withdrawing from TFSA — a big bonus.
- Some employers only offer pension-match contributions for RRSP contributions. If this is the case, go with an RRSP vs. TFSA!
READ MORE: A guide to TFSAs
The RRSP was introduced in 1957 to help Canadians save for retirement. Here are the top eight points to remember about RRSPs:
- Since contributions are done with pre-tax income, you can claim a tax deduction in the year you contribute. If you don’t re-invest your tax refund, then you lose out on the pre-tax advantages.
- Unlike a TFSA, you will have to pay tax when you make a withdrawal. RRSP must be converted to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71.
- The maximum RRSP contribution is 18% of your gross income or $29,210, whichever is lower. Any unused contribution room can be carried forward to the following year.
- Two exceptions allow you to withdraw from your RRSP for purposes other than retirement. However, you will need to repay the amount:
- Home Buyers Plan (withdraw up to $35,000 for a down payment on your first home, and repay over 15 years)
- Lifelong Learning Plan ($10,000 per year to a maximum of $20,000 for school, and repay over 10 years)
- RRSPs are a great place to park US-based equities.
- RRSPs are especially beneficial for Canadians in a high tax bracket. If you aren’t making much money in a given year (e.g., if you are a student), there isn’t too much point in chasing a big tax refund via an RRSP contribution. You already aren’t taxed very much (if at all), so you won’t get much of your taxes paid back. Go for a TFSA!
READ MORE: A guide to RRSPs
Main difference between RRSP and TFSA for taxes
The primary difference between an RRSP and a tax-free savings account (TFSA) lies in how income and withdrawals are taxed. Contributions to an RRSP are made with pre-tax income, and taxes are deferred until withdrawal. On the other hand, TFSA contributions are made with after-tax income, and withdrawals are entirely tax-free. This distinction is why many financial experts recommend using an RRSP if you are in a higher tax bracket now and expect to be in a lower one during retirement. For flexible savings, a TFSA may be more suitable.
For example, here’s what happens when you compare putting your earned income in a TFSA vs. RRSP:
TFSA
RRSP
Gross earned income
$1,000
$1,000
Income tax (30%)
$300
$0
Net contribution
$700
$1,000
Value after 30 years at 6%
$4,020
$5,743
Income tax at withdrawal (30%)
$0
$1,723
Net
$4,020
$4,020
Keep in mind the above table makes a few assumptions, namely that if you claim your RRSP contribution at tax time to get a refund, you deposit that refund into your RRSP. If you make RRSP contributions and claim them when you file your tax income but don’t use the tax benefit to further top up your investment, the calculations won’t be the same. Likewise, the calculations assume you know what your marginal tax rate will be during retirement, which is difficult to predict if you’re in your 20s or 30s!
Should you contribute to an RRSP or TFSA?
Many Canadians often ask, “Should I contribute to an RRSP or TFSA?” The answer depends on your income and savings goals. High-income earners may benefit more from the tax deferral of an RRSP. However, if you prioritize easy, penalty-free withdrawals for various life events, a TFSA might be the better choice. For comprehensive savings, consider contributing to both an RRSP and TFSA, balancing short-term flexibility with long-term tax efficiency.
TFSA vs. RRSP calculator
RRSP vs TFSA: Pros and Cons
| Feature | RRSP | TFSA |
|---|---|---|
| Contribution type | Pre-tax | After-tax |
| Tax deduction | Yes | No, it's already been taxed |
| Tax on withdrawals | Yes, taxed as income when you withdraw (ideally, in retirement when you're income is lower) | No, it's already been taxed |
| Contribution Limits | 18% of previous year’s income (up to CRA limit) | Annual set limit (e.g., $7,000 for 2024) |
| Withdrawal Flexibility | Limited, with penalties | Unlimited, penalty-free |
TFSA vs. RRSP comparison
Despite their names, neither the RRSP nor TFSA has to be a savings account. You can and should hold various investments in your accounts, such as GICs, mutual funds, stocks, bonds, and ETFs. Both of these accounts should be more appropriately named “Tax-Free Investment Account” and “Registered Retirement Investment Plan” because investing is really the best way to unlock the power of these accounts.
The real difference between the RRSP and TFSA comes down to their contribution limits and withdrawal restrictions, as well as how and when you pay taxes at these events. Our chart below summarizes some of the pros and cons of TFSAs and RRSPs.
Comparing TFSA vs. RRSP
TFSA
RRSP
Flexible?
Can be withdrawn anytime and used for anything
Can't take out money penalty-free except for buying your first home or under the Lifelong Learning Plan
Investment options:
You can choose your own investments
You can choose your own investments
Tax Rules:
Tax-sheltered growth on investments
Tax-sheltered growth on investments
Direct contributions?
Can contribute directly (up to $95,000 total as of 2024)
Can contribute directly (18% of previous year's earned income up to $31,560 for 2024)
Tax deduction?
No tax deduction for contributions
You can claim a tax deduction in the year you make a contribution, or carry it forward to future years
Withdrawal rules:
Withdraw any amount at any time, without paying income taxWhen you cash out, it’s tax-freeCan only replace the amount of the withdrawal in the same year if you have available TFSA contribution room
Withdraw any amount at any time, subject to income taxWhen you cash out, you have to pay income tax
Contribution limits:
Annual maximum: Varies year to year. Max of $7,000 for 2024, increased from $,6500 in 2023.Lifetime maximum: As of 2024, $95,000 total for those who were 18 in 2009.
Annual maximum: 18% of previous year’s earned income up to $31,560 (whichever is lower).Lifetime maximum: Refer to your latest notice of assessment from the CRA
Expiration?
No expiry
RRSP must be converted to a Registered Retirement Income Fund (RRIF) by Dec. 31 of the year you turn 71.
Comparison of the best TFSA and RRSP accounts
Investing in your TFSA or RRSP is always a good idea. But if you need quick access to cash, a smart strategy is to keep some savings stashed in a TFSA or RRSP high-interest savings account to complement your investments.
But I can’t emphasize this enough: To really supercharge your RRSP or TFSA, make sure to open an investment account. Do not be fooled by the word “saving” in either name – these are investment accounts!
The TFSA or RRSP is best used for investing rather than saving. If you use the TFSA or RRSP to invest in long-term equities, you can shelter a substantial amount of investment earnings. Would you rather shelter the 2% you are getting in a high-interest savings account or the 7%-8% a balanced index ETF portfolio could snag you?
Comparison of RRSP and TFSA for different life stages
- Low-Income Individuals: A TFSA may be the best option as it offers tax-free growth and flexible withdrawals.
- High-Income Earners: RRSPs can provide significant tax savings through tax deductions, making it ideal to contribute heavily when earning more and withdrawing during retirement when in a lower tax bracket.
- Students: Starting with a TFSA can be more practical due to lower income levels, and once earnings increase, RRSP contributions can be added to the strategy.
The bottom line: you should have both a TFSA and an RRSP, preferably in an investment account. The TFSA makes sense for virtually everyone, but the RRSP becomes increasingly relevant if you’re at a high income or your TFSA is maxed out.
Tax implications of using RRSP and TFSA together
Using both an RRSP and TFSA in your financial plan can yield significant tax benefits. By contributing to an RRSP when your income is high, you can lower your taxable income and reinvest the tax refund. Allocating that refund into a TFSA can then ensure tax-free growth and access to your funds.
How to invest your TFSA or RRSP
Thanks to the internet, it’s really easy to invest your TFSA or RRSP. To open a TFSA or RRSP investing account, you have several options:
Robo-advisors
If you’re looking for growth, low fees, and some investing guidance, a robo-advisor is a great option for investing your TFSA or RRSP that follows the couch potato investment strategy. Here’s how it works: when signing up for a robo-advisor, you answer a series of questions, and then the computer algorithm suggests a portfolio that matches your financial goals and risk tolerance. Then, just set up pre-authorized contributions and let the robo-advisor do the work of monitoring and rebalancing your portfolio – at a much lower fee than what traditional financial advisors and mutual funds charge.
| Wealthsimple | JustWealth | Moka |
|---|---|---|
|
|
|
|
Average Management Expense Ratio (MER) 0.4% to 0.5%
Management fees ◦ 0.50% up to $100,000 ◦ 0.40% once you pass $100,000 |
Average Management Expense Ratio (MER) 0.20%
Management fees: ◦ 0.50% on your first $500,000 ◦ 0.40% once you pass $500,000 |
Monthly Subscription Fee:$7 to $15
MER Management feesThe ETFs in Moka's portfolios range from 0.09% to 0.39% |
| Wealthsimple review | JustWealth review | Moka review |
Related read: Best robo advisors in Canada
Online brokerage
If you’re comfortable with DIY investing, you can create your own retirement investment plan or replicate some of the robo-advisors’ portfolios.
All you have to do is set up a TFSA or RRSP investing account with an online brokerage and then make the trades on your own.
Yes, it’s true that you must pay for some of your transactions, but overall, the management expense ratio would likely be lower than robo-advisors. Plus, some online brokerages offer zero-commission trading.
| Questrade | CIBC Investor's Edge | Moomoo Financial |
|---|---|---|
|
|
|
| Questrade review | CIBC Investor's Edge review | Moomoo Canada review |
| Start Investing with Questrade and get $50 in Free Trades (when you fund your account with $1,000) | Get 100 free online equity trades when you open a CIBC Investor’s Edge account using promo code EDGE100.† Offer ends September 30, 2025. |
Promo: New users can receive up to $2,200 in trading perks when they open an account: $2,000 commission rebate card, 6% p.a. returns for 60 days, and up to $250 in cash coupons based on deposit amounts.
|
Related reads: best trading platforms in Canada
TFSA or RRSP savings account
Lastly, if you’re looking to stash some cash for the short term, consider opening a TFSA or RRSP savings account with a bank that offers a high-interest rate.
Final thoughts
RRSP vs. TFSA? Ideally, you should spread out your savings and contribute to both. Whether you choose the RRSP or TFSA (or both), you’ll likely come out with the same amount of money because of the tax structure. The important thing is to start saving now and make regular contributions to a TFSA or RRSP. That way, you know you have all your bases covered when it’s time to retire.
Read more: What are RRSPs, TFSAs, and RESPs?
Bridget Casey
Author
Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.
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