TFSA vs. RRSP: Which Should I Choose?

TFSA vs. RRSP: Which Should I Choose?

TFSA vs. RRSP Which Should I Choose
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The Canadian Government gives financial incentives to help her citizens save for retirement through programs such as the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). Choosing between these two can be confusing if you don’t know what exactly to look out for. With this in mind, conducted research and put together information that can help you make the right decision. 

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What is TFSA?

The TFSA was established in 2009 and targets individuals of 18-years and above who have a valid social insurance number. These individuals are able to set aside tax-free money throughout their lifetime. TFSA contributions are non-deductible for income tax purposes. Money contributed to the account of TFSA or income earned on account of TFSA is tax-free even when withdrawn.

What is RRSP?

The Registered Retirement Savings Plan (RRSP) is a government program that was established in 1957. It is a segment of the Canadian Income Tax Act. Like TFSA, RRSP is also a special type of savings account where Canadians, either employed or self-employed, make savings in readiness for retirement.

Both TFSA and RRSP are registered by the Canadian Government and their operations are overseen by the Canada Revenue Authority (CRA). It is the CRA that determines legislation for how much you can contribute to the plan annually, when to make the contribution and what assets are allowed as contributions to the plan.

How does TFSA work?

A tax-free savings account allows you to hold not only savings but also equities like stocks, mutual funds, GICs, bonds and EFTs. All investments made into the TFSA grow tax-free income. Every year, the Federal Government makes an announcement concerning the annual maximum limit for contributions for instance, $6,000 for the year 2020.

If a year in contributions is missed or you fall short of the maximum contribution, the unused contribution is rolled over into future years. When you make a withdrawal from TFSA, the exact amount withdrawn can be contributed again in the next calendar year.

Advantages of a TFSA account

Saving with TFSA has the following advantages:

  • TFSA is an all-purpose investment vehicle. As such, you can save for any financial goal.
  • You can withdraw TFSA money at any time without paying tax.
  • The full amount of any withdrawals can be re-contributed into the TFSA in the following years.
  • Income earned in TFSA and amounts withdrawn, unlike in RRSP, do not affect your eligibility for federal income-tested benefits and credits.
  • You don’t have to withdraw money from TFSA only after age 71. This makes it an excellent savings tool for senior citizens.

How does RRSP work?

The RRSP is a savings account where you can hold a variety of investments. Investments permitted in the RRSP account include stocks, bonds, GICs, mutual funds, foreign currency, income trusts, mortgage loans and equities among others. When deposits are made into the RRSP account, they are not taxed. However, when a withdrawal is made, there is a tax imposed, albeit at a marginal rate. This means that contributions to your RRSP account are tax-deferred.

Typically, making a withdrawal from your RRSP account much later in life will translate to less taxes paid. Your RRSP account has an annual limit of deposits. Any monies deposited in your RRSP account up to the annual limit amounts to a reduction in your taxable income for that particular year. The annual limit is a given percentage of the earned income summed up with unused room from previous years.

Advantages of a RRSP account

Saving with a RRSP account has a number of benefits. These benefits include:

  • Your contributions are tax-deductible. This translates to higher tax savings, especially when you are in a higher tax bracket.
  • Savings in a RRSP account grow tax-free. As long as investment earnings stay in the account, you will not pay any tax. The tax-free compounding makes savings grow faster.
  • RRSP savings can be converted to regular payments upon retirement. This can be done by transferring the RRSP savings tax-free into an RRIF or an annuity.
  • A spousal RRSP reduces the spouses’ combined tax burden.
  • It is possible to borrow from the RRSP account to buy a home for first-time homebuyers or to pay for education.

Which should I choose, TFSA or RRSP?

While both TFSA and RRSP are good investment plans, you need to carefully consider which plan meets all your financial needs before settling for one. The differences between these two accounts will help determine which account is best suited for you.

The following are the key differences between TFSA and RRSP accounts:


For TFSA, the maximum annual contribution limit as of 2020 is CA$6,000, irrespective of your earned income. For RRSP, the contribution limit is determined by the income earned from the preceding year, up to a maximum amount. For instance, in 2020, the limit for RRSP is CA$27,230 less your pension adjustment or the amount indicated on the 2019 Notice of Assessment.

Tax deductibility

Contributions made to TFSA accounts are not tax-deductible. Therefore, they do not translate to a reduction in taxable income. Also, income or returns earned from TFSA investments are tax-free. In case of RRSP, contributions made to the account are tax-deductible translating to reduced taxable income. Income or returns earned from RRSP investments are sheltered from tax except when a withdrawal is made.


Withdrawals made from your TFSA account can be re-contributed in subsequent years. In case of RRSP, withdrawals made are added to your taxable income and are taxed at the applicable marginal tax rate. The withdrawals cannot be re-contributed in subsequent years.

Which is the best option?

A RRSP account makes good sense as a preferred savings option for a vast majority of investors. Even so, a TFSA account offers greater opportunities for investment especially for high-income earners, those who are about to retire and senior citizens. It is also a better alternative for low-income investors or those who may need to access cash at any time without being taxed.

The best decision can be arrived at by seeking the services of a financial advisor. can provide you with tailored information about the myriad of flexibilities concerning savings opportunities and access to money in case of emergencies.

What happens if I over contribute to a TFSA or RRSP account?

When an over-contribution is made to a TFSA account, the Canadian Revenue Agency imposes a levy of 1% per month for every month or partial month that the excess contribution stays in the account. The 1% tax continues to apply until the whole excess amount is withdrawn or, in case of eligible individuals, the whole excess amount goes into their unused TFSA contribution room in the subsequent years. The same penalty applies to the RRSP over-contribution. However, the RRSP account has a $2000 grace amount.

Are you still undecided? Worry not, can help you choose the account that matches your unique needs. Reach out to us if you have any concerns. At MoneyWizard, we know what our clients want!


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