TFSA vs. RRSP: What They Are, How to Choose

TFSA vs. RRSP: How to Choose

The tax-free withdrawals of a TFSA offer more flexibility, but the tax-deferred contributions of an RRSP are great for retirement. The type of account you choose will depend on your savings goals.

Tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) are both registered accounts that you can use to save and get tax advantages.

If you’re deciding between a TFSA or an RRSP, make sure you know how each account works and weigh their benefits and drawbacks against your financial position and goals at that stage in your life.

Do you need a TFSA or an RRSP?

Generally, you can use both RRSPs and TFSAs to save for your future. However, each registered account has detailed rules about contributions, withdrawals and tax implications that you must know before you start investing.

How a TFSA works

A TFSA allows you to set aside money throughout your lifetime for your savings goals, without incurring any tax on the interest or investment income you earn. Though TFSA withdrawals are tax-free, your contributions are not tax-deductible.

A TFSA can be used for anything you want. You can withdraw funds anytime and there’s no requirement to replace them.

» See our picks: Best tax-free savings accounts in Canada

How an RRSP works

An RRSP is a tax-deferred account that allows you to save for your retirement. You may choose an RRSP so you can avoid paying income taxes on your contributions or the earnings they generate until your savings are sheltered inside the registered account. However, you will have to pay taxes later when you withdraw the money.

Another reason you may choose the registered plan is if your employer offers an RRSP matching program, which can further maximize your benefits with the additional retirement investment and compounding returns.

» See our picks: The best high-interest RRSPs in Canada

TFSA vs. RRSP similarities and differences

Knowing how TFSAs and RRSPs features compare to one another can help you understand how you can benefit from them.

Uses

You can choose to withdraw money from a TFSA for purchases, travel or emergencies at any time and not replace it — or you can invest in a TFSA each year and let your savings earn compound interest tax-free to help fund your retirement.

Besides saving for retirement, funds from an RRSP can be borrowed for the Home Buyers’ Plan and Lifelong Learning Plan to pay for your first home or education expenses, provided you repay the money within a specified time.

Eligibility

To open a TFSA, you need to be at least 18 years old and have a Social Insurance Number (SIN).

For starting an RRSP, you must be less than 71 years old, be a Canadian resident, earn an income and pay taxes.

Contribution limits

Both TFSAs and RRSPs have contribution limits. If you are unable to max out your contributions for either of these accounts in a particular year, that’s OK. In both cases, the contribution room will be carried forward to the following years.

For a TFSA, there is a set annual contribution limit — in 2024 it was $7,000 — that is added to any unused contributions you have leftover from previous years since you turned 18 or since 2009, whichever is more recent.

The RRSP contribution limit is 18% of your earned income from the previous year — up to a maximum set by the CRA each year, plus any unused contributions from past years. For the 2023 tax year, the RRSP contribution limit is $30,780.

Withdrawals

When you withdraw from your TFSA, you get that contribution room back the following year.

However, once you withdraw funds from your RRSP, you lose that contribution room and the potential for compound growth that comes with it. Plus, you’ll have to pay a withholding tax on the amount withdrawn. This is partly why it’s best not to withdraw from your RRSP until retirement.

Taxes

Both types of accounts shelter interest and investment income from tax.

TFSA contributions are not tax-deductible. The tradeoff, however, is that withdrawals from a TFSA are tax-free.

RRSP contributions are tax-deductible, which means that they can help reduce the amount of tax you pay for that year on your income. However, RRSP withdrawals are taxable at your annual marginal tax rate in the year you make them. Additionally, you’ll pay a withholding tax for any lump sum withdrawal from your RRSP.

Time limits

TFSAs have no time limits; you can use them as long as you like.

For RRSPs, you can contribute up until December 31 of the year in which you turn 71. After this point, you must transfer the funds to a registered retirement income fund (RRIF) or an annuity, or withdraw the entire amount in a lump sum — though the last option is subject to withholding tax.

TFSA	RRSP
Both TFSAs and RRSPs: Have contribution limits. If you are unable to max out your contributions for either of these accounts, the contribution room will be carried forward to the following years. Shelter interest and investment income from tax. Used to save for retirement.
Uses
Bigger purchases, travel or emergencies. Or, annually invest in a TFSA and earn compound interest tax-free to help fund your retirement.	Save for retirement. Borrow funds from RRSP for the Home Buyers’ Plan and Lifelong Learning Plan to pay for your first home or education expenses.
Eligibility
Must be at least 18 years of age and have a Social Insurance Number (SIN).	Must be under 71 years of age, earn an income and be a Canadian resident paying income tax.
Contribution limits
A set annual TFSA contribution limit for 2024 is $7,000 — that is added to any unused contributions since 2009, your total contribution room is $95,000.	The RRSP contribution limit for 2023 tax year is $30,780. It is 18% of your previous year’s earned income — up to an annual maximum limit set by the CRA, plus any unused contributions from past years.
Withdrawals
If you withdraw from your TFSA, you get that contribution room back the following year.	Once you withdraw from your RRSP, you lose that contribution room and the potential for compound growth on your savings. Plus, withdrawals are subject to withholding tax.
Taxes
TFSA contributions are not tax-deductible. Withdrawals from a TFSA are tax-free.	RRSP contributions are tax-deductible, helping reduce the total income tax you pay for that year. RRSP withdrawals are taxable at your annual marginal tax rate in the year you make them. Plus, these withdrawals are subject to withholding tax.
Time limits
No time limits.	You can contribute to an RRSP up until December 31 of the year in which you turn 71. After this point, you must transfer the funds to a registered retirement income fund (RRIF) or an annuity, or withdraw the entire amount in a lump sum and pay withholding tax.

How do I choose between a TFSA vs. RRSP?

The type of account you choose will depend on your savings goals and financial situation. You can also open both types of accounts to save for multiple goals at once.

When you’re saving for something short-term, such as a dream vacation, a home or an emergency fund, a TFSA may be a better fit. It allows you the flexibility to withdraw funds as needed and get that contribution room back the following year.

If you have a long-term plan to save for retirement, then an RRSP is a smart choice. However, a TFSA can also be used as a retirement vehicle. You may choose one or both investment options based on your specific goals, income and lifestyle.

People who earn a high income now and expect to have less income during retirement can benefit from the tax deferral provided by an RRSP, since they will likely be in a lower tax bracket when they withdraw the money. They may also find the other RRSP benefits appealing.

However, if your income is unpredictable or you prefer to keep more of your savings liquid, a TFSA might be a better idea.
If you aren’t sure whether a TFSA or RRSP is right for your needs, it might be worth considering other RSP options or consulting a professional financial advisor.

Yes, you can and probably should have both types of registered accounts based on your income, lifestyle and financial situation. Make sure you stay within the prescribed contribution limits unique to RRSP and TFSA.

Yes, you can have multiple accounts at numerous financial institutions, although it may become challenging to keep track of your finances and to make sure you stay within your RRSP and TFSA contribution limits.

For example, you can’t contribute the maximum annual amount to each TFSA account. Your contribution limit is the total amount you can contribute to all accounts of that type. Same goes for RRSPs.

Your decision to invest in a TFSA or an RRSP depends on your goals, income, timing and other factors. Many financial experts recommend saving for retirement in an RRSP if you’re in a higher tax bracket and want to take advantage of the tax deduction.

Additionally, if your employer matches RRSP contributions, you can further maximize your benefits through additional returns on those funds.

However, contributing to your TFSA may be a better option if you want easier access to your funds.

TFSA vs. RRSP: How to Choose

Written By

Edited By

Do you need a TFSA or an RRSP?

How a TFSA works

How an RRSP works

TFSA vs. RRSP similarities and differences

Uses

Eligibility

Contribution limits

Withdrawals

Taxes

Time limits

How do I choose between a TFSA vs. RRSP?

Frequently asked questions about RRSP and TFSA

About the Author

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