TFSA vs RRSP: How to Choose Between the Two

The main difference between TFSAs and RRSPs is when you pay the tax: now, or later.

TFSAs and RRSPs are the two most common investment vehicles held in Canada, with approximately two thirds of Canadians holding them.

Let’s take a look at exactly what these types of accounts offer, and which best suits your particular needs.

What is a TFSA?

A TFSA, or tax-free savings account, is a type of investment account that has special ‘registered’ status with the government, meaning that any investment income or capital gains made by the account are tax-exempt.

But don’t be fooled by the word ‘savings’ – this doesn’t mean TFSAs can only hold cash.

They can hold many different types of investments.

As with other forms of registered account, there are specific rules pertaining to exactly how you can use a TFSA to invest.

What is an RRSP?

An RRSP, or registered retirement savings plan, also holds ‘registered’ status and is specifically intended for retirement savings.

The tax breaks associated with RRSPs are a little different than for TFSAs; contributions to RRSPs are tax-deductible, but the income withdrawn from them during retirement are then subject to income tax.

As with TFSAs though, they have strict rules about contributions and withdrawals.

What’s the Difference Between a Tax Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?

The major distinction to be made between these two types of investment accounts are their tax advantages.

Both instruments allow for investment in GICs, mutual funds, stocks, bonds, and ETFs, and both are good ideas when planning for the future.

However, the RRSP is designed to help you save for your retirement, by making any contributions tax-deductible at the time of contribution.

This can help lower your income tax burden on a yearly basis, while building up your retirement savings.

TFSAs, on the other hand, are set up to be useful for more general savings purposes – such as emergency savings, big purchases and so on – and contributions are themselves not exempt from any of the normal taxes.

So adding to them gets you no immediate advantage.

But their growth, via capital gains or investment income, is entirely tax-free, so when you withdraw from them you pay no additional taxes.

Account Characteristic TFSA RRSP
Eligibility Age of majority Receiving income
Major Purpose General savings Retirement savings
Tax Advantages Tax-exempt earnings Tax-deferral
Annual Contribution Limit 2024 limit = $7,000
Lifetime limit as of 2024 = $95,000
18% of annual income, up to a maximum of $27,830 (as of 2021)
Unused contribution rooms rolls over; you can only contribute the max yearly allowance even if you’ve made withdrawals Unused contribution rooms rolls over; you can only contribute until you’re 71 years old
Annual Withdrawal Limits None None, but all withdrawals are subject to income tax
None Can only be withdrawn penalty-free as retirement income, for first-time home purchases and for educational purposes
Expiry None Dec 31 of the year you turn 71
Spousal Options None Direct contributions allowed

How Do I Decide Whether to Open a TFSA or an RRSP?

You might be wondering what all this means for you.

What’s the best type of account for your needs and circumstances? Well, as you might expect, it depends on quite a few things, including:

  • Your age
  • Your income
  • Your existing tax levels
  • Your savings goals
  • Your existing savings
  • Your work benefits

Generally speaking, TFSAs are more flexible, but don’t have as much contribution room.

RRSPs let you save more, but have strict rules on how and when you can use the money.

Most experts recommend that Canadians have both types of accounts – as general savings and retirement savings are both important.

However, not everyone has the ability to contribute to both, and even if you do, the split between the two may vary each year.

Using Your RRSP for Something Other Than Retirement

RRSPs are designed for retirement, but the government has several exceptions that allow you to use these accounts for other purposes.

These two exceptions are for first-time home buyers and further education.

The former is covered under the Home Buyer’s Plan, which allows eligible homeowners to withdraw, tax-free, up to $35,000 to put towards the purchase of their first property.

This money however must be repaid – you have 15 years to re-contribute the amount you effectively ‘borrowed’ from your RRSP.

In this way, your RRSP can be used to efficiently save towards a home purchase.

The latter exception relies on the Lifelong Learning Plan, which allows you to withdraw tax-free up to $10,000 per year (up to a maximum of $20,000 overall) from your RRSP to finance full-time education or training, for either you or your spouse.

There are several restrictions on what qualifies under this program, and how you can repay it, but again this program means you can effectively use your RRSP to save for your education.

Other Points to Consider

  • U.S. stocks. If you hold them in your RRSP, you do not have to pay withholding taxes, but if you hold them in your TFSA they are subject to a 15% withholding tax when withdrawing funds.
  • Matching contributions. Some employers offer RRSP matching, which seriously turbo-boosts your retirement savings and makes RRSPs a more impactful way to save than TFSAs.
  • Other forms of income. If you take income from your RRSP during retirement, this affects your Old Age Security benefits. However, funds from TFSAs do not.
  • Bankruptcy. RRSP savings of more than a year old are exempt from bankruptcy proceedings, while TFSA savings are not.
  • Spousal contributions. You can contribute towards your spouse’s RRSP, thereby investing in your future income as a couple, while maximizing your joint tax deductions and minimizing the effect on your RRSP contribution limits.
Lady Sitting With Daughter On Sofa

Quick Guidelines

Still not sure what’s best for you? There are some basic tenets around which account works best in specific circumstances.

Let’s look at these in turn:

1. High Income

The higher your income, the more you want to focus on your RRSP, as contributing here rather than in your TFSA will lower your tax burden most efficiently.

2. Timeline

The further away your savings goal is, the better an RRSP is.

The sooner your goal is, the better a TFSA is for your purposes.

3. Purpose

If you know you’re saving for a house or tuition, then RRSPs provide the best tax advantages for you.

If your savings goals are more general, a TFSA is much more flexible.

Questions To Consider

  • What am I saving towards?
  • Will I have other sources of income when I retire?
  • How much can I save?
  • When does cutting my tax bill help me the most?
  • What is my spouse doing with their savings?

Frequently Asked Questions

  • Should you max out your TFSA or RRSP first?
  • Can I have 2 TFSA accounts?
  • Can I transfer my RRSP to my TFSA without any penalty?
Amy Orr

Amy Orrstarted her career with several prestigious internships in investment banking and asset management. In 2007 she went on to graduate with an MSc in Finance and Investment from the University of Edinburgh Business School.

She has since spent years as both a Portfolio Analyst and as a Financial Researcher/Writer, in both the UK and Canada.

Versed in the intricacies of multiple financial markets, her forte is parsing complex technical concepts into relatable, digestible content for the masses.