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You’ve got a lot of choices to make when it comes to saving. Choosing whether to save with a Registered Retirement Savings Plan (RRSP) or with a Tax-Free Savings Account (TFSA) is just one of them. RRSPs and TFSAs both offer certain tax advantages. Deciding which one to use can depend on several factors such as your income, how long you plan to save and whether you have maximized your savings in one account. This article can help you understand the differences between RRSPs and TFSAs and help you decide which may be best for you.
What are the basics of RRSP and TFSA?
Definition of RRSP
A Registered Retirement Savings Plan (RRSP) is specifically designed to help you save for retirement. Contributions to an RRSP are tax deductible and grow tax-free while held within your account. RRSPs can hold a range of investment products like stocks, bonds, mutual funds, Exchange Traded Funds (ETFs) and Guaranteed Investment Certificates (GICs). You’ll pay income tax on future withdrawals, but, if you’re in a lower tax bracket when you retire, you may end up paying less income tax overall. Millions of Canadians use RRSPs to save for and fund their retirement plans.
Definition of TFSA
Introduced in 2009, Tax-Free Savings Accounts (TFSAs) are a relatively new way to save. TFSAs can be used to save for long-term goals like retirement as well as short-term goals like vacation. TFSA contributions are not tax deductible, as you contribute with after-tax dollars. Funds can be withdrawn from a TFSA tax-free, however, there is a 15% withholding tax on U.S. dividends earned within the account. Like RRSPs, savings within a TFSA can be held as cash, or invested. The flexibility and taxable benefits provided by TFSAs make them an increasingly popular savings tool.
What are the main differences between RRSP and TFSA?
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RRSP |
TFSA |
|
|---|---|---|
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Eligibility |
Any Canadian resident or non-resident with a Social Insurance Number who earned income and filed a tax return in Canada can open an RRSP. Non-residents are subject to Canadian non-resident withholding tax of 25% on withdrawals. |
Residents and non-residents of Canada who have a Social Insurance Number and are 18 years of age, or the age of majority in their province or territory, can invest in a TFSA. Any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account. |
|
Account holding period |
All RRSPs must be closed by Dec. 31 in the year you turn 71. |
No age maximums apply. You can keep your TFSAs for as long as you want. |
|
Contribution Limits |
Annual contributions are capped at 18% of your income or, at an annual limit set by the Canadian Revenue Agency – whichever is lower. The CRA limit for 2025 is $32,490. |
Annual contribution limits are set by the Canada Revenue Agency. The TFSA limit for 2025 is $7,000. |
|
Contribution Room |
Excess contribution room can be carried forward to future years. Any money withdrawn from your RRSPs will permanently reduce your total contribution room. You can still contribute in excess of annual amounts if you still have unused room. |
Excess contribution room can be carried forward to future years. Withdrawals from your TFSA will not impact the contribution room you have available, though, if your TFSA is maxed out, you can’t recontribute what you’ve removed until January 1 in the year after the withdrawal. |
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Taxes |
RRSP funds are taxed as income upon withdrawl, except when withdrawn under Home Buyers' Plan (HBP) or Lifelong Learning Plan (LLP). |
TFSA withdrawals in most circumstances are tax-free. The exceptions are a 15% withholding tax on U.S. dividends. |
|
Tax on Contributions |
RRSP contributions are tax-deductible. Contributions can reduce the amount of income tax you pay each year. |
TFSA contributions aren’t tax-deductible and can’t be used to reduce the amount of income tax you pay. |
|
Tax on Withdrawals |
Withdrawals are taxed at your marginal tax rate. |
Withdrawals can be made tax-free although there are exceptions. |
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Tax on Investment Growth |
Investments grow tax-free while in your RRSP, but you’ll pay tax on any money you withdraw.
|
Investments grow tax-free and you won’t pay any income tax on the money you withdraw. |
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Withdrawal Rules |
While there are no penalties for withdrawals on your RRSP, there may be tax implications if you do not convert the funds into a Registered Retirement Income Fund or an annuity prior to withdrawing the funds. Some exceptions apply – including when a certain amount of funds are withdrawn under the HBP or LLP. |
Funds can be withdrawn from your TFSA at any time and for any reason. |
What are the factors to consider when choosing between TFSA and RRSP?
TFSAs and RRSPs provide different benefits. Which one is best for you will depend on your specific needs. In many cases, it may be ideal to use both.
Purpose
Are you saving for the long-term or the short-term? Your answer can help determine whether an RRSP or TFSA is right for you.
- Saving for retirement: RRSPs were specifically created to help people save for retirement. Contributing to an RRSP lets you defer paying tax during your peak earning years. You can also optimize your savings by reinvesting your tax rebate back into your RRSP. You’ll pay tax on future withdrawals, but usually at a lower marginal tax rate considering you will be in lower tax bracket in your retirement years. With TFSAs, all your savings and income earned within the account grow tax free, which means there are no tax implications on your tax return (with a few exceptions). That's the reason you could also consider a TFSA: to help boost retirement income.
- Saving for a home: The RRSP Homebuyers’ Plan (HBP) lets first time home buyers withdraw up to $60,000 from their RRSPs to use toward a home. Withdrawals under the HBP aren’t taxed provided they are paid back within 15 years. Spouses and common law partners can each withdraw up to $60,000 for a total down payment of $120,000. Funds held within a TFSA can also be used to buy a new home. TFSA withdrawals are tax free and don’t need to be repaid. In addition, funds from a TFSA can be used to purchase any kind of home regardless of whether it’s your first home, second home, or an income property.
- Saving for education: The Lifelong Learning Plan (LLP) lets you withdraw up to $10,000 a year, or $20,000 over four years, for eligible training or education programs. You can use the funds yourself or give them to a spouse or your common-law partner. You won’t pay tax on any funds withdrawn provided you pay the money back within 10 years. Funds from TFSAs can also be used to pay for an education tax free and don’t need to be repaid.
- Short-term savings goals: The flexibility provided by TFSAs can make them better for short-term savings goals. Funds can be withdrawn from a TFSA at any time and for any reason. In addition, TFSA withdrawals aren’t taxed (with a few exceptions) and don’t need to be repaid. Funds held within a TFSA can be invested into a range of eligible investment products and any income earned from those investments are tax-free as well (with a few exceptions).
How to Apply for TFSA and RRSP Accounts?
RRSPs and TFSAs can be opened at most banks or financial institutions. You can even choose between a regular or self-directed account. Eligible investments with managed TFSAs and RRSPs are limited to the investment products offered by your bank and usually include GICs and mutual funds. Self-directed accounts usually offer a wide range of additional investment options including stocks, bonds and Exchange Traded Funds (ETFs). TD Direct Investing’s self-directed accounts allow you to buy and sell investments and let you trade on major Canadian and U.S. stock markets including the TSX (Toronto Stock Exchange), NASDAQ, (National Association of Securities Dealers Automated Quotations), and NYSE (New York Stock Exchange).
You can open a self-directed RRSP or TFSA with TD Direct Investing online, over the phone or in person.
FAQs Related to RRSP vs TFSA
Is it better to put money in a TFSA or RRSP?
TFSAs and RRSPs offer different benefits. RRSP contributions are tax deductible and encourage long-term savings, whereas TFSA withdrawals are tax-free and can be made at any time for any reason. Either one can help you save and it’s not uncommon for people to use both.
Should I max out my TFSA or RRSP first?
The answer depends mostly on the personal situation of the investor, their goals in life, their tax situation, age and when they may retire, among many other factors. Since both RRSPs and TFSAs can be used to achieve different goals in different ways, it may be ideal to contribute to both within your means.
Should I invest in both a TFSA and an RRSP?
If you don’t have to choose between a TFSA and an RRSP, don’t. Each offers its own benefits. And when it comes to savings, saving more is never a bad choice. As RRSP contributions are tax deductible, you can use the tax refund you may receive to fund your TFSA.
Conclusion
RRSPs or TFSAs can help you achieve your financial goals. Both accounts provide certain tax benefits and help you invest and grow your savings. Either can be used for long-term savings goals like retirement with TFSAs being better for shorter-term goals. They can also be used together to help you reach your savings goals sooner.
In most cases, which account you choose may be less important than when you decided to start saving. Talk to a TD advisor today to learn more about the benefits of RRSPs and TFSAs and how they can be used to help you reach your financial goals.
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