RRSP vs TFSA is one of the most common questions Canadians ask when planning for retirement or choosing where to save. This guide compares the accounts, explains the differences, and gives a clear step-by-step process to decide which account you should use first based on your situation.
Quick overview: RRSP and TFSA in one paragraph
RRSP (Registered Retirement Savings Plan): Contributions are tax-deductible today and grow tax-deferred. Withdrawals are taxed as income (except certain programs like the Home Buyers' Plan). Best when your marginal tax rate now is higher than in retirement.
TFSA (Tax-Free Savings Account): Contributions are made with after-tax dollars; investment growth and withdrawals are tax-free. Best for flexible savings, low-income earners, emergency funds, and long-term tax-free growth.
For official details see the CRA pages on RRSPs and related plans and TFSAs. The Financial Consumer Agency of Canada also has a practical comparison at FCAC — RRSP vs TFSA.
Key differences at a glance
Tax treatment
RRSP: Contributions reduce taxable income now; withdrawals taxed later.
TFSA: No tax deduction for contributions; withdrawals are tax-free.
Contribution room
RRSP: Limit based on 18% of previous year's earned income up to an annual maximum; unused room carried forward.
TFSA: Annual dollar limit (cumulative if unused); contribution room does not depend on income.
Withdrawals and flexibility
RRSP: Withdrawals are taxable (except HBP/LLP) and reduce contribution room once converted to RRIF; early withdrawals hurt retirement savings.
TFSA: Withdrawals are tax-free and recontribute room is restored the following calendar year.
Impact on benefits
RRSP withdrawals can increase taxable income and reduce income-tested benefits (like OAS).
TFSA withdrawals do not affect federal benefits and credits.
Employer plans and matching
RRSP often integrates with employer pension or group RRSPs; employer matching is effectively an immediate return on contributions.
Which account should you use first? A practical decision flow
Follow these steps to choose between RRSP and TFSA.
Check your contribution room
How-to: Log into CRA My Account to see up-to-date RRSP and TFSA room.
Assess your current marginal tax rate vs expected retirement tax rate
If your current marginal tax rate is higher than you expect in retirement → lean toward RRSP.
If your current marginal tax rate is low or you expect a similar/higher rate in retirement → lean toward TFSA.
Consider employer matching
If your employer offers matching in a group RRSP: Contribute enough to get the full match before prioritizing TFSA. Employer match is immediate guaranteed return.
Match savings to goals and time horizon
Short-term goals (0–5 years), emergency fund, or home down payment → TFSA (flexibility and tax-free withdrawals).
Long-term retirement savings and tax-deferral strategies → RRSP.
Account for specific programs
Planning to use the Home Buyers' Plan (HBP) or Lifelong Learning Plan (LLP) → RRSP contributions are required for these programs.
First Home Savings Account (FHSA): a new option for first-time homebuyers—consider coordinating TFSA, RRSP and FHSA. See the Government's FHSA overview at First Home Savings Account (FHSA).
Look at income volatility and benefits
If you're low-income now and expect higher later, prefer TFSA to avoid burning RRSP room when deductions give little benefit.
If OAS clawback is a concern, remember big RRSP withdrawals could push income into clawback range.
Common scenarios and recommended order
Young, low-income worker (student/recent grad)
Priority: TFSA for emergency fund and growth; avoid using RRSP deductions that give little tax benefit.
Middle- to high-income earner without employer match
Priority: RRSP if the tax deduction materially reduces taxes and you expect a lower retirement income.
Consider splitting: contribute to TFSA for some flexibility and RRSP for tax savings.
Employer offers RRSP matching
Priority: Contribute to group RRSP up to the employer match first; then decide between TFSA and additional RRSP contributions.
Saving for a house (first-time)
Use FHSA if eligible (tax-deductible contributions + tax-free withdrawal for a first home).
If not using FHSA, TFSA is usually better for flexible down-payment saving; use RRSP only if planning HBP withdrawals.
Near retirement
Use RRSP to maximize deferral earlier, then plan conversions to RRIF, and use TFSA for tax-free income layering and to manage OAS clawback.
Pros and cons — checklist
RRSP pros
Immediate tax deduction.
Lowers taxable income today.
Useful for high earners and employer-matched plans.
Can be used for HBP/LLP.
RRSP cons
Withdrawals taxed as income.
Can affect income-tested benefits like OAS.
Harder to access without tax implications.
TFSA pros
Growth and withdrawals are tax-free.
Flexible withdrawals and re-contributions (subject to timing rules).
Doesn't affect federal income-tested benefits.
TFSA cons
No tax deduction on contribution.
Contribution room limited annually (but accumulates if unused).
Step-by-step: How to decide (simple checklist)
Check TFSA & RRSP room on CRA My Account.
Estimate your current marginal tax rate.
Estimate expected retirement marginal tax rate.
Determine short-term needs (emergency fund, house).
Factor in employer match and workplace pensions.
Choose priority (get match → TFSA for flexibility → RRSP for tax savings) and allocate contributions accordingly.
Review annually and adjust if income or goals change.
How to open and contribute — practical steps
Choose a provider: bank, credit union, robo-advisor, discount brokerage.
Open the account (chequing account details and ID required).
Confirm contribution room via CRA My Account.
Set up automatic contributions from your chequing account.
Monitor and avoid overcontributions.
For RRSP, note the contribution deadline (usually 60 days into the next year) for tax deduction for the previous tax year.
Taxes, withdrawals and special programs (short notes)
RRSP Home Buyers' Plan (HBP): Allows withdrawal for first home purchase; withdrawn amounts must be repaid over time. See CRA's HBP page at Home Buyers' Plan (HBP).
TFSA recontribution rule: Withdrawals restore contribution room the following calendar year — don't re-contribute in the same year unless you're sure of available room to avoid penalties.
Overcontribution penalties: Excess contributions can incur a penalty tax. Monitor room on CRA My Account.
OAS clawback: Large RRSP withdrawals in retirement can increase taxable income and reduce Old Age Security (OAS). See Old Age Security (OAS) information.
Investment strategy tips for registered accounts
Asset location: Hold tax-efficient investments (e.g., Canadian dividends, interest) inside registered accounts to gain favourable tax treatment.
Diversify: Use a mix of equities, bonds, and ETFs based on risk tolerance and time horizon.
Re-balance annually to maintain target allocation.
Consider account purpose: Put highly taxable investments (bonds, REITs) in RRSP/TFSA, use non-registered for assets where sheltering is less critical.
Final checklist before you decide
- Check contribution room (CRA My Account).
- Get employer match first if available.
- Use TFSA for short-term and emergency funds.
- Use RRSP primarily for tax savings when your rate is high.
- Watch for program-specific opportunities (FHSA, HBP).
- Review annually as tax brackets, wages and goals change.
Useful links and tools
CRA RRSP information: RRSPs and related plans
CRA TFSA information: Tax-Free Savings Account (TFSA)
CRA My Account (check contribution room): CRA My Account for individuals
FCAC comparison and tips: FCAC — RRSP vs TFSA
Government overview of FHSA: First Home Savings Account (FHSA)
OAS information: Old Age Security (OAS)
If you'd like, I can:
Walk through your specific numbers (income, age, goals) and recommend an order.
Produce a one-year action plan with contribution amounts.
Compare TFSA vs RRSP in table form for a personalised example.