By Pankaj Babbar, licensed advisor at SAI Insurances · 3 min read
1-minute read
The short answer
- An RRSP gives you a tax deduction now; you pay tax when you take the money out, usually in retirement.
- A TFSA gives no deduction, but growth and withdrawals are tax-free, for any purpose, at any time.
- RRSP room is based on 18% of your earned income, up to the CRA's annual limit. TFSA room is a set yearly amount from the CRA, and unused room carries forward in both.
- Rough rule: if your tax rate is higher today than you expect in retirement, the RRSP usually wins. If it's lower today, or you may need the money sooner, the TFSA often does.
- Many people use both — they do different jobs.
Detailed guide · 2 min read
The one-line difference
With an RRSP, the tax break comes at the start: your contribution lowers your taxable income this year, and you pay tax later when you withdraw. With a TFSA, the break comes at the end: you contribute money you've already paid tax on, and everything that comes out — growth included — is tax-free.
Side by side
| RRSP | TFSA | |
|---|---|---|
| Contribution | Tax-deductible | Not deductible |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Added to your taxable income | Tax-free, any time |
| Room | 18% of earned income, up to a CRA limit | Annual CRA amount, regardless of income |
| Room after withdrawing | Generally lost | Added back the following year |
When the RRSP tends to come out ahead
- You're in a higher tax bracket now than you expect to be in retirement.
- You'll reinvest the tax refund instead of spending it.
- You're saving for a first home and want the Home Buyers' Plan option.
When the TFSA tends to come out ahead
- Your income is modest today, so an RRSP deduction saves you little.
- You might need the money before retirement — an emergency fund, a car, a wedding.
- You want withdrawals in retirement that don't count as taxable income.
The refund is the part people forget
The RRSP's advantage depends on what happens to the tax refund it creates. Put the refund back to work — into your TFSA, a mortgage payment or next year's RRSP — and the RRSP does its job. Spend it, and much of the edge disappears.
Why not both?
For a lot of families the honest answer is a split: the RRSP for long-term retirement savings, the TFSA for flexible savings you can reach. Your income, your workplace pension (which reduces RRSP room), and your goals for the next few years decide the balance — not a rule of thumb.
This article is general information, not financial or tax advice. Contribution limits and rules are set by the Canada Revenue Agency and can change year to year — check your CRA My Account or Notice of Assessment for your own room, and your advisor confirms what fits your situation.