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TFSA vs RRSP: Which investment is better?

Compare the pros and cons of TFSAs vs RRSPs to find the best fit for your financial situation.

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Tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) are both used to save money. The major appeal of these accounts is that any interest you earn on them will be tax-free.

But how do TFSAs and RRSPs work, who can open an account, and which one is right for you. Keep reading for a detailed TFSA vs RRSP comparison.

TFSA vs RRSP: Quick comparison

FeatureTFSAsRRSPs
What it’s used forSaving money to reach any savings goalSaving for retirement
Tax-free interestYesYes
Tax-free withdrawalsYesNo. Tax is withheld at a rate between 10% and 30% (5-15% + provincial tax in Quebec) on withdrawals you make before retirement. RRSP withdrawals must also be included as part of your income on your tax return
Tax-deductible contributionsNoYes
Holds other investmentsYesYes
Contribution limit$7,000 per year (in 2024) or $95,000 total18% of earned income or up to $31,560 for 2024
Eligibility
  • Canadian resident
  • Valid SIN
  • 18 years of age or older
  • Canadian resident
  • Valid SIN
  • Filed a Canadian tax return in the past year
  • Must contribute to your RRSP by December 31 of the year you turn 71
Expiry dateNoMust be converted to a registered retirement income fund (RRIF) at the age of 71

Investing in TFSA vs RRSP: Which should I choose?

TFSAs and RRSPs are both government-registered plans that let you save and invest money while also paying less tax. The investment that’s best for you will depend on factors such as what you are saving for, your income and when you want to take your money out.

Registered retirement savings plan (RRSP)

RRSPs are designed to help you save for retirement. The biggest benefit of these types of investments is that you can deduct the amount you put in each year from your taxable income. The downside is that you’ll need to pay tax on any money you withdraw, and you lose that contribution room when you make a withdrawal. This type of investment is a particularly good fit for high-income earners because it allows you to defer tax until retirement, when you could potentially be in a lower income tax bracket.

RRSPs can be used to hold a wide range of investments, including cash, stocks, ETFs, bonds, GICs and mutual funds.

Tax-free savings account (TFSA)

TFSAs can be a good choice if you want to save money in the long term, but you still want easy access to your funds in an emergency. The biggest benefit of these types of investments is that you can take your money out whenever you want without being penalized. The downside is that you won’t be able to claim any money you put in as a tax deduction. This type of investment is a particularly good fit for those who are in a lower tax bracket or don’t have much to invest.

Just like an RRSP, a TFSA can be used to hold investments such as cash, stocks, ETFs, bonds, GICs and mutual funds.

RRSP vs TFSA: Which offers better returns?

The return you’ll earn with TFSAs vs RRSPs will depend less on which investment you choose and more on which financial institution you put your money with. The provider that offers the highest interest rate on your investment will typically net you the highest returns overall.

Your returns will also be influenced by your risk appetite and what type of investments you hold in your TFSA or RRSP. Both accounts are designed to hold a number of investments like stocks, bonds, mutual funds, guaranteed investment certificates and precious metals. You’ll likely earn a higher return if you mix and match these investments to create a balanced portfolio within your TFSA or RRSP.

TFSA vs RRSP: Which has more flexibility?

TFSAs offer much more flexibility than RRSPs because they let you take your money out of your account whenever you want, without penalty. That said, you won’t be able to take advantage of special benefits like tax deductions which can help to bring down your taxable income and save you money at tax time.

RRSPs give you higher contribution amounts and your contributions are tax-deductible. But once your money is invested, if you make a withdrawal you’ll lose a big chunk of your savings to taxes.

How much will I pay in taxes to withdraw from my RRSP?

The current rates of RRSP withholding tax are:

  • 10% for withdrawals up to $5,000 (5% in Quebec)
  • 20% for withdrawals between $5,000 and $15,000 (10% in Quebec)
  • 30% for withdrawals over $15,000 (15% in Quebec)

If you’re a resident of Quebec, provincial tax is also withheld.

There are only two exceptions that allow you to withdraw money from your RRSP for purposes other than retirement.

  • Home Buyers’ Plan. You can take out up to $35,000 for a down payment on your first home, but you’ll need to repay it over 15 years.
  • Lifelong Learning Plan. You can withdraw up to $10,000 in a calendar year, and up to $20,000 in total, to pay for full-time training or education. You’ll have to repay what you withdraw over 10 years.

TFSA vs RRSP: How much can I contribute per year?

RRSPs let you contribute more over the lifetime of your investment, but the amount you can contribute each year depends on how much money you earn. Your RRSP contribution limit for 2024 is 18% of the earned income you reported on your tax return in the previous year, up to a maximum of $31,560.

TFSAs have smaller annual contribution limits. You can invest $7,000 per year (as of 2024) with up to $95,000 for the lifetime of your TFSA.

TFSAs and RRSPs both let you carry your unused contribution amounts forward into future years. For example, if you only contribute $5,000 to a TFSA instead of the maximum of $7,000, the $2,000 difference will be added to your contribution limit for the following year, allowing you to contribute up to $9,000. You’ll also incur penalties from the Canada Revenue Agency (CRA) if you exceed your maximum allowable contribution in any given year.

Can I contribute to both a TFSA and an RRSP?

Yes, you can hold a TFSA and an RRSP at the same time and contribute to both. This could be a good solution for you if you want to save for retirement (with an RRSP), but you’d also like to stow away an emergency fund (with a TFSA) that you can use at any time without penalty.

You may even want to max out your contribution for both types of investments each year. This will let you take advantage of tax breaks while still earning the maximum amount of tax-free interest on your investments.

TFSA vs RRSP pros and cons

RRSP Pros

  • Tax benefits. Contributions to an RRSP can be deducted from your taxable income, and you can defer paying tax on RRSP withdrawals until retirement when you will likely be in a lower income tax bracket.
  • Large contribution amount. Depending on your income, you can contribute up to $31,560 to your RRSP per year, and any unused contribution space can be carried over to future years.
  • Easy to open. There’s no minimum age requirement to worry about with an RRSP.

RRSP Cons

  • Lack of liquidity. You’ll be taxed when you withdraw money from an RRSP before retirement, so an RRSP is not suitable if you want to be able to access your funds at any time.
  • Tax is deferred. RRSPs allow you to defer tax, not avoid it completely — you still have to pay tax on the money you withdraw in retirement.
  • Your income affects your contribution limit. Your RRSP contribution limit is capped at 18% of earned income.
  • Tax complications during retirement. RRSPs must start paying out an income or be converted to an RRIF when you turn 71. This means you’ll have tax obligations to manage in retirement, while it can also affect the Old Age Security pension you’re entitled to.

Pros and cons of TFSAs

TFSA Pros

  • Save money for any purpose. You can use a TFSA to save for any financial goal you want, such as a vacation, a home renovation, an emergency fund — you name it.
  • Tax-free withdrawals. TFSAs let you withdraw from your savings without having to pay taxes, so you can access your money when you want.
  • Simple eligibility requirements. If you’re a Canadian resident, 18 years or older and have a Social Insurance Number, you can open a TFSA.
  • No expiry date. You won’t have to worry about your TFSA rolling over into a retirement income fund in the same way that an RRSP will.

TFSA Cons

  • Small contribution limit. You can only put $7,000 per year into your TFSA, which may limit your ability to reach your savings goal.
  • Contributions aren’t tax-deductible. You won’t be able to claim your contributions as deductions to reduce your taxable income.
  • Dipping into savings. Because it’s easy to access the funds in a TFSA, you’ll need to be disciplined and resist the temptation to dip into your savings unnecessarily.

Should I choose a TFSA or an RRSP (or both)?

Should you invest in a TFSA or an RRSP? The answer depends on your financial situation and goals.

Consider a TFSA if…

  • You want easy access to your money. If your income fluctuates, or if you just want to be able to withdraw from your savings to cover unexpected expenses, a TFSA lets you access your savings at any time without penalty.
  • You have short-term savings goals. If you’re saving for a vacation, a home renovation or a new car, a TFSA is a good choice. However, it’s worth noting that a TFSA also offers an effective way to save for your retirement.
  • You’re in the lowest tax bracket. A general rule of thumb is that if you earn less than $50,000 a year, a TFSA may be a more suitable choice than an RRSP. This is due to the fact that tax-deductible RRSP contributions won’t have the same impact on the tax you pay as they would for someone who earns a higher income.

Consider an RRSP if…

  • You’re saving for retirement. If you’re thinking long-term and you want to save and invest to fund your retirement, an RRSP offers several benefits.
  • You’re above the lowest tax bracket. Making tax-deductible RRSP contributions will reduce your tax bill. Then, when you retire and access the money in your RRSP, you’ll likely be earning a reduced income so you’ll be taxed at a lower rate.
  • Your employer matches your RRSP contributions. If you have a group RRSP where your employer matches each contribution you make, you can grow your retirement savings even quicker.

Ultimately, you may decide to open both types of accounts. This will allow you to save for shorter-term goals and build a rainy-day fund with a TFSA, while also investing for your retirement with an RRSP. If you’re not sure about the best approach to help you reach your financial goals, speak to a financial advisor.

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Bottom line

RRSPs and TFSAs can both be used to save for the future and pay less tax. RRSPs may be the best fit for you if you want to take advantage of tax deductions and you won’t need to access your savings in the short term. TFSAs may be a more suitable choice if you’d prefer tax-free withdrawals or you want easy access to your savings. For the best of both worlds, you can also look at investing in both products at the same time.

TFSA vs RRSP FAQs

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