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RRSP vs. TFSA: Which is right for me?

December 6, 2019

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RRSP vs. TFSA: Which is right for me?

Finance 101

Which is better—a TFSA, or an RRSP? That’s kind of like asking, “Which is better—a t-shirt, or a sweater?”

Fundamentally, they do the same thing—t-shirts and sweaters both keep you covered, Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) both let you save money for the future. But the way they do it is different, and which one you choose depends on your needs.

That being said, sometimes it’s good to wear a t-shirt, and throw on a sweater if it gets chilly. In the same way, TFSAs and RRSPs can work together, depending on circumstances.

But choosing the right one can feel like a guessing game. Don’t worry—it isn’t. In this article, we’ll look at how TFSAs and RRSPs work, how they’re different, and how to pick the best investing account for your goals. 

Which is better: RRSP or TFSA? The Journey of $1000

Before we get into the nitty gritty, let’s look at an example. With so much debate online about which account is truly best for retirement savings, we decided to do some calculations of our own. 

In the infographic below, we look at how $1000 could grow overtime when invested in a TFSA and an RRSP. 

When it comes to long-term retirement savings, you can see how the RRSP comes out ahead. In this example, the money is invested when you’re 25, and withdrawn at 71. The income taxes you save upfront can grow into a big return over time when invested. 

Keep in mind that with an RRSP, the funds are locked up until retirement and withdrawals are taxed as income, so the money in your account doesn’t all end up in your pocket. Meanwhile, with the TFSA, the full account balance is yours to spend as you wish, when you wish. 

Now, let’s dive deeper into how each account works, and find out which account is more beneficial for any savings goals beyond retirement. 

The differences between a TFSA and an RRSP

You can use either a TFSA or an RRSP to store assets—cash, as well as investments like stocks, bonds, mutual funds, and other financial products. 

But there are two major differences between them: how much you can contribute per year, and how your assets are taxed.

How a TFSA works

This year, the annual amount that you can contribute to your TFSA is $6,000. Unused contribution room rolls over, so if you haven’t maxed out your contribution room in previous years, chances are you’ll have additional space.

The money you put in a TFSA has already been taxed, so there’s no tax break at the time you contribute. But here’s where the “tax free” part comes in: when you withdraw your assets, none of the growth on your investments is taxed in any way. 

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The fact that you pay tax now (before you contribute) and not later (when you withdraw) is important—it’s what makes a TFSA and an RRSP different, and affects the saving strategy for each.

How an RRSP works

We’ve got a great article diving into everything you might want to know about how an RRSP works, but here’s the summary:

You can contribute 18% of your 2019 gross income, or $26,500, (whichever is less) to your RRSP, plus any amount that rolled over from previous years. Find out more on calculating the right amount here

When you put assets in your RRSP, you don’t pay income tax on it. Typically, that means you’ll see a bigger tax return in the spring. Sounds good, right? Here’s the catch: you’ll pay taxes on those assets when you eventually withdraw the money in retirement. 

RRSP becomes a RRIF

Because the government wants to ensure that you use the money you save for retirement income specifically, eventually, you’ll be forced convert your RRSP into a registered retirement income fund (RRIF). The main difference between the two account types is that while one is designed to help you save, the other forces you to make withdrawals. 

Once you convert the account to a RRIF, you can no longer make contributions—just withdrawals. You are required to convert your RRSP to a RRIF the year you turn 71. 

Keep in mind, you don’t have to convert your RRSP to a RRIF to start taking retirement income. 

The fact that you get taxed later (when you withdraw) rather than now (before you contribute) is what sets an RRSP apart from a TFSA.

Is it better to invest in a TFSA or an RRSP?

T-shirts vs. sweaters—either can be best, depending on your situation. TFSAs and RRSPs are the same. They’re both excellent options for long-term investing, and both offer tax advantages, but determining the best one depends on what you’re investing for. 

Like the name suggests, the RRSP is typically going to be the best option if you’re investing specifically for retirement. That’s especially true if you’re in your peak earning years.

That said, if you’re a living, breathing human being, chances are you’ll need to spend money before retirement — and sometimes that will require shelling out a big chunk of change. A TFSA gives you the benefit of flexibility. The money is always available to you, and you don’t need to consider taxes when you make withdrawals. 

Most people have multiple savings goals, and those goals can change overtime, so most people can likely benefit from contributing to both a TFSA and an RRSP.

Scenarios

Here are some goals you might be saving for, and the best investing account to choose for each:

GoalAccount 
“I want to start an emergency fund.”TFSA: Money in a TFSA is available to you any time. Best part? When invested, it can keep growing while you keep saving.

When you withdraw the money, it won’t be taxed—so the amount that appears in your account is the exact amount that ends up in your pocket.
“I’m making a big purchase next year.”TFSA: A TFSA is great for any and all short to medium savings. 
“I’m saving for my first home.”RRSP or Both: Thanks to the Home Buyers’ Plan (HBP), as a first time home buyer, you can withdraw up to $35,000 from your RRSP without paying taxes on the funds. You’ll have 15 years to gradually pay that money back. If you have a partner, they can do the same, effectively doubling the amount. That’s a tax advantage worth taking! 

But here’s the catch: if you live in one of Canada’s major cities, $35,000 or even $70,000 for a couple may not get you far towards a down payment.

Investing through a TFSA will allow you to make up the difference. 
“I’m saving for a bigger home.”TFSA: You don’t qualify for the Home Buyers’ Plan, so you definitely don’t want to dip into your RRSP and face steep tax consequences. 

No worries! Investing tax free through a TFSA is a great way to save towards your next home.
“I want a comfortable income in retirement.” RRSP: An RRSP is the best way to ensure you have an income in retirement that will cover the cost of living, and maybe even a little extra! Remember that the money will be taxed as annual income. 
“I want to live larger in retirement.”TFSA: Your TFSA can be a great account for tax-free spending in retirement, which is particularly handy in years where you want to make a big purchase, or if you plan to spend more in retirement that you do today.

The TFSA vs. RRSP calculator

To get the most out of your investments, you’ll want to calculate where you’ll see the greatest tax benefit. That will depend on what you earn right now, what you’re saving for, and when you plan to use the money. 

To help you see how your money could grow in either account, we’ve created a free, easy to use TFSA vs. RRSP calculator

Nobody can tell the future, but we can help you plan for yours. Sign up for CI Direct Investing now to talk to a financial advisor and start investing for any goal.

Calculations

¹ The RRSP and TFSA comparison illustration depicts the growth of an initial investment at a 6% annual rate of return with withdrawals only in retirement. It assumes a 25% income tax rate for both pre- and post-retirement.
Portfolio performance is not guaranteed. The value of your investment can go down, up and change frequently. Past performance is not indicative of future returns.

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56 Comments
  1. Jim Kinnear

    Very good graphic explanation. With a TFSA, there is a limit to how much, per year, can be deposited without incurring a penalty.

    • Richard Hordern

      It is EXTREMELY important to note that RRSPs only work on the assumption that when you retire, you will be in a lower tax bracket, than when you were in the workplace. My career has been in teaching where it is common for salaries to start low and then have incremental increases, and many other occupations are similar. I now find that, cashing out RRSPs on top of my pension income, I will be paying a higher tax rate than I would have paid, in my earlier years, if I had invested post tax dollars. I was also saddened when my father died and all of his RIFs (former RRSPs) had to be cashed at once, meaning at the highest tax rate -- lost almost 50% of what had appeared to be the face value of the investments. He should have been cashing them in at a much higher rate, then mandated, while he could cash them at a lower tax rate.

      • Dave777

        Me, RRSP has turned into a tax trap, guaranteed to pay more taxes out than defered in. Worse, you do not get gains and dividend deductions. Best to keep RRSPs small as in 50k per person ot less.

      • Art Dear

        And you have likely discovered your income is high enough to invoke OAS CLAWBACK.

  2. Red Harrison

    I have never seen a TFSA that has a 6% rate of return. Let's see these numbers with a reasonable rate of return like 1-2 %.

    • Denny Hollick

      Hi Red, This is a pretty common misconception about TFSAs. Many people think that they can only be used with 'high interest savings accounts' or GICs. This is not the case. TFSAs can be invested in stocks, bonds, ETFs and many other investments. Generally speaking in the long-term, returns of the US equities market as a whole is actually above 6%. Check out this article here in MoneySense: http://www.moneysense.ca/columns/what-are-normal-stock-market-returns/

    • Morridin19

      If in your TFSA you just bought an ETF that tracked the Canadian stock market you would see an average return (over all historically available data) of around 9.1%. This doesn't include the MER which is about 0.06% (for VCN and XIC). Not unreasonable at all. Now if you are basing your rate on the most banks give for just holding cash in a savings account in your TFSA you need to educate yourself on some better uses for your TFSA.

    • Tom Gilman

      Well Red, you definitely don't understand what a TFSA is intended to be. Not that I blame you. Banks have convinced Canadians that a 1-2% investment is appropriate. You have been mislead. I reccomend you seek sound advice.

      • Denny Hollick

        It's true. Banks lobbied quite hard to have the TFSA called a 'savings' account. We did a blog post on how it should be renamed! https://blog.cidirectinvesting.com/tfsa-turns-7-wants-new-name/

      • Danielle

        You probably haven't seen a 6% rate of return because your money was not invested in a solid portfolio. If you opened your TFSA at the bank they never tell you can actually invest your money in the market. It is rather accumulating interest at a regular savings account. I am a financial advisor and I show that to my clients all the time. Look for an investment company rather than investing your money at the bank. Advisors at the bank are paid to open an TFSA account for you but are paid very little to open an investment account inside a TFSA for low amounts of money. They are usually looking at clients that can invest 300 K or more.

    • Rick

      I don't think you're using your TFSA properly.

    • Doug

      You must be dealing with a bank. I average about 8-9% with my fiance all planner

      • Robyn

        Who is your financial planner? Looking for a referral.

    • jeff

      When you choose to invest in professional managed portfolios you definitely can earn 6% plus ROR. The TFSA is intended for long term wealth creation, not short term emergencies. You and your advisor would choose the best appropriate investment vehicle.

    • Gabino

      Just like RRSP you can always invest TFSA in mutual funds as well and they it is not guaranteed to get 6% it will have a rate of return greater than savings tfsa or GICs and bonds.

    • Kevin

      It's because you aren't supposed to keep cash in a TFSA. It's assuming you're keeping ETF's in there. You get your 1% interest plus whatever dividends and growth you get from the investments. I'd say 6% is a conservative estimate and you should be able to do better. If you're keeping cash in your TFSA please do some research because you're losing so much growth it's upsetting me.

    • CarolLynn

      Stocks! Tax free accounts can hold many different types of investments very possible.

    • Ryan

      I've been getting well over 6% a year I n my tfsa. It all depends on what you invest in once your money is in there.

    • Max

      Thats because you have not invested in stocks with divedends with 6+% return per annum

    • Rob

      Your TFSA assets can be invested in anything type of investment it does not have to be a savings account paying 1 or 2%.

    • Investor

      I have invested in marijuana stocks and some other high growth stocks. I have tripled my investments. TFSA is the best way to make investments. Imagine if I had to include these gains in my income tax?

  3. nnulk

    What is the final estate if the employer is matching RRSP contributions? Is it a better choice in that case?

  4. Lucas

    I noticed under RRSP additional Tax rebates from utilizing the RRSP are not considered. What additional $ are we saving... based on upfront-year end tax savings visa RRSP receipts here? It only displays RRSP holdings.

    • Denny Hollick

      Hi Lucas, This is taken into consideration with the starting balances. The TFSA starts at $750 (because tax is deducted from your paycheque), and the RRSP starts at $1000 since you get those taxes back for any RRSP contributions you make.

  5. Tim

    Why compare one vs the other? Why not position as a real wealth builder and demonstrate doing both! For example contribute to an RRSP and with the refund invest in the TFSA!

    • Denny Hollick

      We agree! We find many people don't understand the difference between the two, so this is of particular interest to many. It's not so much picking one, over another, and both have their advantages in certain circumstances.

  6. Varun

    Would love for this to be an interactive page where you could drag the tax rate. For e.g., what if you started out with a marginal tax rate of 43%? How does the end result look in that case? Everyone's personal situation will be different, which may tilt the final result one way or the other.

    • Denny Hollick

      That's something we're actually working on :D

    • ryan

      I agree this would be useful. Could include pension income as that will affect the marginal tax rate of RRSP withdrawal? Overall this is an amazing way to show the differences. Nice work!

  7. Pat

    Maybe you should include some shading to indicate the RIF payments (and taxes on the RIF payments) from age 71 to 90. Currently it just looks like they just disappear when actually 19 years of $1100-$275 = $15675 goes to the person with the RRSP before their estate collects the $6840.

  8. Jordan

    If u made your max contribution in tfsa and invested in stocks and say turned it into $100,000. Could at the end of the year you withdraw it all and then in the new year put all the $100,000 back in?

    • Martin

      Yes. Your contribution room is calculated as new contribution room (currently $5,500) + unused contribution room + withdrawals you made in the last year. AKA what goes out can go back in the following year PLUS the new contribution amount.

  9. Vincent

    You tax the RRSP upun withdrawal but do not include any tax return on the deposit nor any compound interest on that tax return. You also do not take into account the change in the marginal tax rate of a person overtime. I guess the graphic explains that a TFSA grows tax free and a RRSP do not, it is pretty much useless past that.

  10. Dean

    While I am a TFSA fan - shouldn't the RRSP take the tax refund and then invest in in a non registered account? Seems like a fairer comparison

  11. Brad Scheck

    One thing I didn't see mentioned that is quite important is that TFSA withdrawals aren't going to cause claw back on income tested benefits such as OAS and GIS. It really stings when you take money out of your RRIF and pay 30% tax and then are subject to 50% claw back on GIS.

  12. marcia

    so if you had money in an rrsp and none in tfsa would you recommend cashing out rrsp and paying taxes now to reinvest balance in tfsa?

    • Stephen

      Great question. I.m thinking the same as I have a large amount in response and a defined pension.

  13. James F

    Very good graphic. I would say that for many people all savings are "after tax". They have 500 or 1000 dollars left at the end of the month and this is their savings to a TFSA or RRSP. They don't typically think about the tax refund at the end of the year and simply contribute what they can afford. Likely they will deposit the same amount to either account and in that case the TFSA is the true winner . Debate?

  14. Des

    You forgot one big advantage of TFSAs. If you don't have pensions to draw at age 65, you can collect guaranteed income supplements (GIS) from the government for five years. Significant tax free income you wouldn't have if withdrawing RSPs.

  15. Kim

    One thing not considered is how RRSP income affects Canada pension, i.e., it reduces it, whereas TFSAs have no effect as it's not considered income.

    • Alan

      Kim, you're incorrect on RRSP affecting your CPP withdrawals - they do not. It may affect your OIS though.

  16. Manny

    Very educational presentation.

  17. Jerry

    Are RRSPs a good idea if you have a government pension plan?

  18. Jason

    This seems very one sided .it does not mention about the benefits of differing taxes with RRSPs this is especially helpful if you are in higher taxes brackets

  19. Norm Lalonde

    This comparison is misleading. The slight of hand occurs at the RIF point because it is reducing the RRSP amount by $1100 per year, when actually they would still have $1100 minus the taxes to reinvest. This amount would not even be taxable but that is another issue. If the RRSP was cashed out in a lumpsum at 25% tax it would work out to be exactly the same result as a TFSA. The TFSA and the RRSP end up exactly the same over time when a person's tax brackets remain the same. The RRSP is superior in cases where the RRSP is deducted in a higher bracket than when it is redeemed. If the concept works where a person saves in a lower bracket than when it is redeemed, then the TFSA is superior. Both options are good but they need to be deployed in the proper places.

    • Florin

      Absolutely correct. Notwithstanding government clawbacks or government help (GIS) in retirement, it's all a decision of tax rate while working vs in retirement. At the same rate, TFSAs and RRSPs are equal.

    • SUSIE

      AGREED

  20. 1Milltfsaorbust

    Max rrsp and use the income tax return to max tfsa. Hit em both while sacrificing to max 1. As for tsfa returns that is my area to swing for a home run. Was over 200000 at 1 point and held firm at the current 150000 range. Avoid using the tfsa for any purchase and it can become a powerfull income stream as well. Tax free and not income tested. Do your research people. And not at a bank or just marginally losing to inflation yearly will be the new goal. Somebody is getting rich. Just not you!

  21. Richard

    Something that many people fail to consider is that realized capital gains are tax-free in a TFSA, 50% taxable in a non-registered account, and 100% taxable in an RRSP (because they are withdrawn as "income").

  22. Alex M

    What an odd title - "the difference btw RRSP and TFSA", and posted with a question mark, as if the author herself is confused. These deductions hardly have anything in common. RRSP is a tax reduction while working and it comes with a big tax hit when you cash in at 69. TFSA is a tax-free investment (can be GIC, stocks, ETF, anything), and it remains tax-free when you retire. RRSP might not be a good idea for people working for very low wages and/or expecting substantial GIS supplement. RRSP will save them little to nothing on taxes, and they will lose one-year GIS when they cash RRSP out. OTH, they won't go wrong with TFSA.

  23. Lee John Jackson

    it does not mention about the benefits of differing taxes

  24. Gurdip Ahluwalia

    Me and my wife own a house which we use as a rental property. We both have TFSA. Can we use the funds from our TFSA to fund the mortgage on our rental property? Thank you

  25. Clumseyfingers

    I would like to see an illustration showing the same gross withdrawals from the TFSA as the RRSP after age 71.

  26. Michael Metzler

    As RRSP's were originally intended, they were a good thing. But when the Government changed the legislation to force people to remove funds on the basis of age, it has created a conflict with the Charter of Rights. The Carter clearly states that discrimination on the basis of age is illegal. If the Government chooses to comply with the Charter, it would be a good thing. The day the law was changed, IO stopped contributing to RRSP's. I do intesely dislike the Government forcing me to take into taxable income, money which I do not need yet. I would need part or all of the funds for medical use in the last few years I live. Under the current system, those funds will not be there when I most need them. Had TFSA's been available when contributiopns were made, almost all money would have been in TFSA's. I get to keep any income earned, and do NOT have tax to pay on the money. TFSA all the way.

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