There are two main tax-free savings accounts in Canada, the RRSP and the TFSA.
While they are both designed to achieve similar goals there are many circumstances where one account is favoured over the other.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged savings and investment account in Canada that is designed to help individuals save for their retirement.
RRSPs are best used when contributions are made during higher-income working years and withdrawals are made during lower-income retirement years.
What is a TFSA?
A Tax-Free Savings Account (TFSA) is a financial account available to Canadian residents that offers tax advantages for saving and investing. Unlike a Registered Retirement Savings Plan (RRSP), TFSA contributions are not tax-deductible, but the earnings and withdrawals from a TFSA are tax-free, making it a flexible and versatile savings and investment tool
Comparison Table: How are RRSPs and TFSAs different?
| RRSP | TFSA | |
| Contributions | Every dollar you contribute to an RRSP is deducted from your taxes in the year you deposit the funds | No tax deduction |
| Withdrawals | Every dollar you withdraw from an RRSP is added to your income in the year you withdraw the funds. | Withdrawals are not taxable |
| Tax-Free Withdrawal for Home Purchase | Yes, using the RRSP Home Buyer’s Plan | Tax-Free |
| Tax-Free Investment Growth | Yes | Yes |
| Contribution Room | Each year it is equal to 18% of your earned income to a maximum of $30,780. Contributions not used in previous years get carried over into future years | Each year the government provides the annual contribution amount. In 2023 this amount was $6,500. Contributions not used in previous years get carried over into future years |
| Employer Matching | This is a common feature offered by employers for employees. | While technically it could be done. It is not common to have employers match TFSA contributions. |
| Best For | Savings tax during high-income years. Setting money aside for retirement | Setting aside money for short-term goals Setting money aside for retirement. |
Contributions
Contributions to an RRSP
Whenever you contribute money to an RRSP you are able to deduct your contribution amount against your income. This is called a tax deduction.
If your income was $100,000 and you made a $10,000 RRSP contribution you would “deduct” $10,000 from your income and you would pay income tax on $90,000 of income rather than $100,000 of income.
This is one of the main benefits of RRSPs. The ability to reduce your taxable income during your working years – when you’re income is higher and you’re paying more tax.
In our example above the $10,000 RRSP contribution would save ~ $3,100 in tax. This will vary depending on which province you live in.
Contributions to a TFSA
When you contribute to a TFSA you do not receive the same tax deduction as an RRSP contribution.
However, the benefit of moving funds into a TFSA is that you can withdraw them tax-free. This makes the TFSA is good for shorter-term savings goals.
This is not the case for RRSPs. You pay less tax as a result of your RRSP contribution, but when you withdraw funds from an RRSP you will have to pay tax on those funds.
Withdrawals
Withdrawing funds from an RRSP
When you withdraw funds from an RRSP the amount you withdraw will be added as income on your tax return for that year.
The goal of optimizing RRSP withdrawals is to withdraw funds from your RRSP when you have a lower income. Typically this happens during retirement.
When you make RRSP contributions during your working years your income is higher, meaning that when you contribute to an RRSP you save more tax.
And when you withdraw funds from an RRSP your income is lower. So you end up paying some tax back when you withdraw the funds. But not as much as the tax you saved when you made the contribution.
Withdrawing funds from a TFSA
When you withdraw funds from an RRSP the withdrawals do not result in any tax.
This is a big benefit of the TFSA because it allows for more flexibility with contributions and withdrawals.
Ultimately this makes the TFSA better for short-term savings goals because you have easy access to your money.
RRSP & TFSA Tax-Free Investment Growth
The main benefit of both the TFSA and the RRSP is that investment income, dividends, or capital gains earned while funds are invested in these accounts is completely tax-free.
This allows your investments to compound at a faster rate compared to holding investments in a non-registered account – which are not tax-free.
Contribution Room
RRSP Contribution Room
The amount of RRSP contribution room you have depends on your earned income and carry forward room from previous years.
Here’s how you can calculate your RRSP contribution Room:
- 18% of your annual earned income, up to a maximum of $30,780 per year in 2023.
- Plus any unused RRSP contribution room from previous years.
You can find out your RRSP contribution room on your MyCRA online portal, or by looking at your most recent Notice of Assessment.
TFSA Contribution Room
TFSA contribution room is much easier to calculate.
TFSA room is increased each year by a government mandated amount. In 2023 TFSA contribution room increased by $6,500.
In addition, any unused TFSA contribution room from prior years is carried forward and can be contributed in a future year.
In 2023 the maximum amount you can contribute to a TFSA is $88,000. But your TFSA contribution room may be different. You must be 18 years old to contribute to a TFSA – meaning you had to be 18 in 2009 to get the full $88,000 of contribution room.
| Year | New TFSA Room | Total TFSA Room |
| 2009 | $5,000 | $5,000 |
| 2010 | $5,000 | $10,000 |
| 2011 | $5,000 | $15,000 |
| 2012 | $5,000 | $20,000 |
| 2013 | $5,500 | $25,500 |
| 2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016 | $5,500 | $46,500 |
| 2017 | $5,500 | $52,000 |
| 2018 | $5,500 | $57,500 |
| 2019 | $6,000 | $63,500 |
| 2020 | $6,000 | $69,500 |
| 2021 | $6,000 | $75,500 |
| 2022 | $6,000 | $81,500 |
| 2023 | $6,500 | $88,000 |
What’s better? TFSAs or RRSPs?
When is an RRSP better?
An easy rule of thumb is that if you expect your income in retirement to be lower than your income during your working years then the RRSP is a better account to use.
This is because you will be saving tax each year you contribute to the RRSP and you’ll be paying less tax when you withdraw the funds in retirement.
RRSPs are also excellent solutions if you have an irregular income year. This can happen for multiple reasons such as a rental property sale, stock option exercise, large investment gains, etc.
When you have a year with a very high income you can make a large RRSP contribution to save the high rate of tax you’d otherwise pay – with the expectation that your tax rate will be lower as your income returns to normal.
When is a TFSA better?
TFSAs are better for shorter-term savings goals and if you need to have more flexibility with your savings.
If you are planning to make a big purchase in the next few years, but need somewhere to save your money until then the TFSA is better. This is because you can withdraw funds from your TFSA without paying tax.
If you withdraw funds from your RRSP all at once to fund a large purchase the withdrawal will be added to your taxable income for the year. If you are also employed during that year your income tax rate will be very high and you may end up paying more tax on the RRSP withdrawal than you saved when you made the contributions.