When it comes to saving, many young Canadians are confused about whether to put money into a TFSA vs RRSP. They can easily become overwhelmed by the complexity of both, that they choose neither, and miss out on the awesome tax advantages of both these accounts.
You should strive to have both a TFSA and an RRSP, but if you can only pick one, the TFSA is probably the right choice.
TFSA vs RRSP summary
The Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are different enough that it takes some time to explain them well. However, if you’re in a hurry, here’s a brief run down comparison:
| TFSA | RRSP | |
| Age to open account | 18 | as soon as you have earned income |
| Annual contribution limit | $6,000 | 18% of gross income earned |
| Lifetime Limit | up to $75,500 depending on birth year | up to 18% of gross income earned |
| Unused contribution room carried forward? | Yes, automatically | Yes, but must be declared when you file taxes in order to be carried forward |
| Penalty for over-contribution | 1% of over-contribution per month | 1% of over-contribution per month for amount in excess of $2,000 |
| Eligible Investments | cash, GICs, mutual funds, stocks, bonds, and ETFs | cash, GICs, mutual funds, stocks, bonds, and ETFs |
| Withdrawal rules | can withdraw at any time for any reason without penalty | can only withdraw during retirement, for the Lifelong Learning Plan, or the First Time Home Buyer’s Plan |
| Contribution rules | can contribution your entire lifetime | must be converted to an RRIF at age 71 |
| Tax status | All investment gains are tax-free | All investment gains are tax-deferred |
Want more info? Keep reading!
The TFSA and RRSP at a glance
Both the TFSA and the RRSP are tax-advantaged accounts, but they work in very different ways and have very different rules. They’re part of a family of registered accounts in Canada, that also includes the RESP. However, unlike the RESP, the TFSA and the RRSP are retirement savings tools. Here is a brief summary of each:
The Tax-Free Savings Account (TFSA)
The Tax-Free Savings Account was introduced in 2009 to help Canadians save money. Despite having “savings” in its name, this account can actually be more than a savings account. You can hold GICs, mutual funds, stocks, bonds, and ETFs in your TFSA. You can read more about the TFSA here.
The Registered Retirement Savings Plan (RRSP)
The Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement savings tool. Despite having “savings” in its name, this account can also be used to invest. You can hold GICs, mutual funds, stocks, bonds, and ETFs in your RRSP. You can read more about the RRSP here.
Similarities between the RRSP and TFSA
Both the TFSA and RRSP are registered accounts. This means they are tied to your social insurance number and the Government of Canada monitors your contributions and withdrawals. This is because there are penalties to over-contributions to both accounts, as well as rules as to when you can open one (age 18 for the TFSA and have to have a taxable income for the RRSP) or what you can withdraw money for.
Both the Tax-Free Savings Account and Registered Retirement Savings Plan have “savings” in their name, but neither account is restricted to keeping your money as cash savings. In both the TFSA and RRSP you can hold a variety of investments including GICs, mutual funds, stocks, bonds, and ETFs.
Here are the ways the RRSP and TFSA are the same! Both the TFSA and RRSP:
- are registered accounts tied to your SIN (Social Insurance Number)
- have contribution limits
- can hold cash, mutual funds, GICs, stocks, bonds, ETFs
- tax-shelter investment income earned within each account
Both the TFSA and RRSP are fantastic savings vehicles for building long-term wealth. The primary purpose of both accounts should be retirement savings, but they can also both be used to save for a down-payment on a home or money to go back to school.
Differences between the TFSA and RRSP
Here are the differences between the TFSA and RRSP:
- age at which you can open an account
- annual contribution limits
- lifetime contribution limits
- when you can make a withdrawal
- what you can make withdrawals for
- there is no withholding tax on US dividend paying stocks in the RRSP, but there is withholding tax on the same in a TFSA
Opening and contributing to a TFSA vs RRSP
You need to be at least 18 to open a TFSA, but you can open an RRSP as soon as you start earning income. This means if you’re 17 years old and working part-time at Starbucks, you could open an RRSP right now (especially if they offer any kind of employer-matching!).
The contribution limit for the TFSA is the same for all Canadians: $6,000 per year. But the RRSP is income dependent, so the more you earn, the more you’re allowed to put into an RRSP. For high-earners, the RRSP is an excellent tax-shelter because it effectively lowers your taxable income. This is how many people get an income tax refund for making RRSP contributions.
Withdrawing from a TFSA vs RRSP
One of the biggest perks of the TFSA is the flexibility to withdraw from the account at any time, for any reason. As long as there’s money in your TFSA, you can use it for whatever you want! The RRSP, on the other hand, is designed almost exclusively to be a retirement savings tool. You can make special withdrawals under the First Time Home Buyers Plan or the Lifelong Learning Plan. However, these are loopholes and for the most part, you won’t be able to access the money in your RRSP until you actually retire.
Because it is completely tax-free, the TFSA is a superior savings vehicle to the RRSP. If you have the choice between raiding one account or the other for a purchase, you should always drain your RRSP first and leave your TFSA alone.
Should you choose the TFSA or the RRSP?
The short answer is everyone should have both a TFSA and an RRSP and striving to max out both accounts. However, since that’s not easy to do, what you want to focus on is prioritizing saving in the account that will benefit you the most.
The primary determinant as to whether you should save in an RRSP or a TFSA is your income. High earners should make the RRSP a priority over the TFSA, and low earners should focus on the TFSA before the RRSP. The easiest rule of thumb is to make the TFSA a priority if you make less than $50,000 per year, and the RRSP your focus if you make more than $50,000 per year.
I go through the math in this post: Should You Contribute to an RRSP or a TFSA?
Hope you found this post a helpful guide to the TFSA vs. RRSP when it comes to your savings goals!
16 Comments. Leave new
Hi Bridget,
Thanks for a great post. I’m working my first post-grad job and making minimum employer-matched RRSP contributions while working on maxing out my TFSA.
What do you recommend for savings with a timeline of 1-5 years? For example, a vehicle when mine craps out? Should I have an unregistered account with this specifically in mind or focus on TFSA and RRSP? Thanks!
I personally like to save for big purchases like vehicles and vacations in unregistered accounts, just because mentally I like to keep my hands out of my TFSA — in the past I’ve gotten into the habit of withdrawing from it, and then it made it a really big challenge for me to think of it as a retirement account!
If you know you’re going to need a new car in 5 years, definitely save for it. It’s ok that *all* your savings isn’t going to retirement — you have other life costs too! The fact that you have started a TFSA & RRSP is half the battle!
Hey Bridget,
Just want to mention (it may be in one of the linked posts as well) … if you have a defined benefit pension then the $50K rule of thumb for using an RRSP may be negated due to anticipated high income in retirement.
My advisor suggested I stop putting money in my RRSP (even though it is not maxed) … and save/invest in an unregistered account (TFSA is maxed) and look at other strategies for tax mitigation down the road.
Anyway, this won’t apply to a lot of people, but just wanted to mention it.
True! For most 20- and 30-somethings it’s hard to predict what your income will be in retirement though, so I always err on the side of more contributions rather than less. But you can always move money from an unregistered account to your RRSP, so no worries there!
It can get complicated. How far up are you expecting your salary to move over your career? What tax bracket are you in now, where do you expect to be in retirement? How much flexibility do you need for your savings (retirement alone, or retirement and other medium/long-term goals?)
Don’t forget that the tax-free compounding is a big benefit, both in dollars and in effort saved having to track and report your investments on your taxes. Even if you move *up* in tax brackets (by a few percent — not if you’re going from 30% to 50%) from where you are now, it can still make sense to use your RRSP because of the benefit of the tax-free compounding. Even salespeople/”advisors” can forget that (or “forget” it if they have conflicts of interest in play, like moving on to step two of convincing a client that now that they have non-registered investments, they should use leverage because hey the interest is a tax deduction).
^^^this!
But what about when you add in OAS and CPP (not GIS) for those with defined benefit pensions? How much will that affect your ‘retirement’ income? There would be less ways to deduct taxable income at a Normal Retirement Age, compared to your working years, so it wouldn’t make a lot of sense to dump tons of money into RRSP for those with a DB pension right? (My TFSA is also maxed)
You can always use your RRSP to retire early if you’ve maxed out your pension before 65!
Hi Bridget,
If I withdraw from my RRSP to fund my Master’s degree through the Lifelong Learning Plan, can I later withdraw from my RRSP through the First-Time Homebuyer’s Plan? I’ve tried searching but haven’t found an answer unfortunately and have yet to withdraw any funds.
Thanks!
Yep! They’re separate. Just be careful when you do it, because then repayment will overlap — you have 10 years to pay back the Lifelong Learning Plan and 15 years to pay back the First Time Homebuyer’s Plan. As long as you can afford the payments for the 10 years or so that those repayments will overlap, it’s a good option!
Hey Bridget,
This was a great post, super interesting because I’m located in the US and these two accounts are similar to choosing between a Roth IRA (post tax dollars) and a traditional IRA (pre-tax dollars).
I, too, have paid off my student debt and bought a house within 2 years of graduation. Just came across this blog and will definitely keep reading to keep my own knowledge sharp. I love talking shop about personal finance, if you’re ever looking to connect with a fellow writer.
keep it up,
–rebekah
Thanks Rebekah!! Nice to e-meet you =D
A few points.
“You need to be at least 18 to open a TFSA”
In some provinces, where the age of majority is 19, you have to wait until January of the year you turn 19 to contribute to a TFSA. But as soon as that January rolls around you will have two years of contribution room.
“This means if you’re 17 years old and working part-time at Starbucks, you should open an RRSP right now.”
Maybe – or maybe they should pay off the car loan or top up existing RESPs to get maximize CESGs – but if they do they should know that they don’t need to claim the RRSP deduction the year they make the contribution. They can choose to defer it to when they are in a higher income bracket.
“If you have the choice between raiding one account or the other for a purchase — say, for putting a down-payment on a home — you should always drain your RRSP first, and leave your TFSA alone.”
Not “always”. While RRSPs are set up so that you aren’t taxed for withdrawals related to a home purchase or for education you are taxed, at your marginal rate, if you make a withdrawal to buy a car or travel the world. If you are in a lower tax bracket than when you claimed the contribution it might be a good idea. If you are in the same tax bracket it is a bit of a wash. If you are in a higher bracket you should probably take the money from the TFSA.
I have no idea why a 17yro would have a car loan.
RESPs are only for people who want to go to university (and that’s increasingly a losing investment) and really they should have maximized the CESG by 17.
Withdrawing from your RRSP to buy a car or travel the world is stupid regardless of your tax bracket. You never get the contribution room back.
Great point Bridget. Using an RRSP for fun money is irresponsible at best. I’d also add that opening an RRSP when you are working part time at a minimum wage job is probably not the best option as you will gobble up contribution when you are in the lowest tax bracket with very little tax break. Best to save in an Non-reg at that point if a tfsa is not available. Like Bridget mentioned, an RRSP when you make less than 50k is probably not very beneficial.
It could make sense if you want to claim the contributions later! You don’t have to claim your RRSP contributions the same year you contribute, so if someone decides to open an RRSP and put money in it while earning minimum wage at a part-time job, they can always carry those contributions forward a few years to when they’re making a higher income. This can make sense for kids under 18 at their first job (you can open an RRSP as soon as you have earned income, but you can’t open a TFSA until you’re 18) or university students whose parents have helped them max out their TFSA and are looking for another place to save.