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When it comes to saving, the TFSA vs RRSP debate is always at the forefront. Many people are confused as to whether to choose the Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) or a combo of both to put money away for the future. Regardless of whether you choose the RRSP or TFSA (or make use of both!), one of the best things you can do is invest consistently. Which is why I recommend using a pre-authorized contribution plan to your discount brokerage account or setting up a pre-authorized “set it and forget it” investment solution with one of Canada's robo advisors to pay yourself first.” Over time, you can gradually increase your contributions until you max out both accounts.
Both the TFSA and RRSP are investment vehicles that reduce taxes on investment income but depending on your circumstances, one might better for your money than the other. The TFSA is more flexible and offers a better tax benefit than the RRSP, but doesn’t have as high contribution room. The RRSP will probably let you set aside more, but has stricter rules around when you can withdraw your money, and what for. Ultimately, everyone should aim to have both an RRSP and a TFSA and spread out the savings across both accounts.
In this article
Main Difference Between RRSP and TFSA
The main difference between the RRSP and TFSA is how your income is taxed when you contribute or withdraw from each account. The RRSP is a tax-deferred account, which means you contribute to it with pre-tax incomes and you’ll pay your income taxes on your withdrawals. In contrast, the TFSA is a tax-free account – meaning you contribute to it with after-tax income, so you’ll pay no more income taxes when you make a withdrawal. Because of this tax structure, you should come out with about the same amount of money whether you choose the RRSP or TFSA, which is why you shouldn’t sweat your TFSA vs RRSP decision too much.
For example, here’s what happens when you compare putting your earned income in a TFSA vs RRSP:
|Gross earned income||$1,000||$1,000|
|Income tax (30%)||$300||$0|
|Value after 30 years at 6%||$4,020||$5,743|
|Income tax at withdrawal (30%)||$0||$1,723|
Keep in mind the above table makes a few assumptions, namely that if you claim your RRSP contribution at tax time to get a refund, you deposit that refund into your RRSP. If you make RRSP contributions and claim them when you file your tax income but don't use the tax benefit to further top up your investment, the calculations won't be the same. Likewise, the calculations assume you know what your marginal tax rate will be during retirement, which if you’re in your 20’s or 30’s, is difficult to predict!
TFSA vs RRSP Comparison
Despite their names, neither the RRSP or TFSA have to be a savings account. You can and should hold a variety of investments in your accounts such as GICs, mutual funds, stocks, bonds, and ETFs. Both of these accounts should be more appropriately named “Tax-Free Investment Account” and “Registered Retirement Investment Plan” because investing is really the best way to unlock the power for these accounts.
The real difference between the RRSP and TFSA come down to their contribution limits and withdrawal restrictions, as well as how and when you pay taxes at these events. Our chart below summarizes some of the pros and cons of TFSAs and RRSPs.
|COMPARING TFSA vs. RRSP|
|Flexible?||Can be withdrawn anytime and used for anything||Can't take out money penalty-free except for buying your first home or under the Lifelong Learning Plan|
|Investment options:||You can choose your own investments||You can choose your own investments|
|Tax Rules:||Tax-sheltered growth on investments||Tax-sheltered growth on investments|
|Direct Contributions?||Can contribute directly (up to $63,500 total as of 2019)||Can contribute directly (18% of previous year's earned income up to $26,500 for 2019)|
|Tax Deduction?||No tax deduction for contributions||You get a tax deduction in the year you make a contribution|
|Withdrawal Rules:||Withdraw any amount at any time, without paying income tax||Withdraw any amount at any time, subject to income tax|
|When you cash out, it's tax-free||When you cash out, you have to pay income tax|
|Can only replace the amount of the withdrawal in the same year if you have available TFSA contribution room|
|Contribution Limits:||Annual maximum: Varies year to year. Max of $6,000 for 2019.||Annual maximum: 18% of previous year's earned income up to $26,500 (whichever is lower).|
|Lifetime maximum: As of 2019, $63,500 total for those who were 18 in 2009.|
|Expiration?||No expiry||RRSP must be taken out when you turn 71 via the Registered Retirement Income Fund (RRIF)|
The TFSA Lowdown
The TFSA was introduced in 2009 to give Canadians a more flexible savings tool. Like the RRSP, the TFSA is best used for retirement savings. However, unlike the RRSP, the TFSA can also be used for anything else! Here are the top 5 points to remember about TFSAs:
- It's a very flexible, all-purpose savings tool that allows you to contribute and withdraw from a tax-sheltered account easily and without penalty.
- You can open a TFSA as soon as you turn 18, and there's no expiry.
- You can make tax-free withdrawals from your TFSA anytime, for any purpose. You can only replace the amount of the withdrawal in the same year if you have available TFSA contribution room (unless you want to pay a penalty). The contribution room is returned the following calendar year.
- When you retire and start pulling money out of your RRSP and TFSA accounts, the government takes your RRSP withdrawals into consideration when “clawing back” your OAS. But this is not the case when withdrawing from TFSA — a big bonus.
- Some employers only offer pension-match contributions for RRSP contributions. If this is the case, go with an RRSP vs. TFSA!
The Basic Lowdown on the RRSP
The RRSP was introduced in 1957 to help Canadians save for retirement. Here are the top 6 points to remember about RRSPs:
- Since contributions are done with pre-tax income, you get a tax deduction in the year you make a contribution. If you don’t re-invest your tax refund, then you lose out on the pre-tax advantages.
- Unlike a TFSA, you will have to pay tax when you make a withdrawal. RRSP must be taken out when you turn 71 via the Registered Retirement Income Fund (RRIF).
- The maximum RRSP contribution is 18% of your gross income or $26,230, whichever is lower. Any unused contribution room can be carried forward to the next year.
- There are two exceptions that allow you to withdraw from your RRSP for purposes other than retirement. However, you will need to repay the amount:
- Home Buyers Plan (withdraw up to $25,000 for a down-payment on your first home, and repay over 15 years)
- Lifelong Learning Plan ($10,000 per year to a maximum $20,000 for school, and repay over 10 years)
- RRSPs are a great place to park US-based equities (read our in-depth explanation).
- RRSPs are especially beneficial for Canadians in a high tax bracket. If you aren’t making much money in a given year (e.g. if you are a student), there isn’t too much point in chasing a big tax refund via an RRSP contribution. You already aren’t taxed very much (if at all), so you won’t get much of your taxes paid back. Go for a TFSA!
Comparison of the Best TFSA and RRSP Accounts 2019
Investing your TFSA or RRSP is always a good idea. But if you need quick access to cash, a smart strategy is to keep some savings stashed in a TFSA or RRSP savings account to complement your investments. One option is to open a Tax-Free Savings Account or RRSP savings account with a bank that offers a high-interest rate.
|Institution||TFSA Rate||RRSP Rate||More Info|
|Tangerine||Earn 2.75% for the first 6 months|
|Earn 2.75% interest for 6 months|
|Motive Financial||2.40%||$0-$2,500: 0.25%|
|Implicity Financial||2.40%||2.40%||Learn More|
Tangerine has some of the most impressive interest rates in the country. When you open a Tangerine TFSA or RRSP savings account, you'll get an amazing rate of 2.75% interest for the first 6 months — a great way to kick start your savings. With no fees and outstanding customer service that's available 24/7, it's no wonder Tangerine snags our top spot as the best online bank in Canada.
The bottom line: you should have both a TFSA and an RRSP. The TFSA makes sense for virtually everyone, but the RRSP becomes increasingly relevant if you’re at a high income or your TFSA is maxed out.
How to Invest Your TFSA or RRSP
I can’t emphasize this enough: to really supercharge your RRSP or TFSA, make sure to open an investment account. Do not be fooled by the word “saving” in either name – these are investment accounts!
Thanks to the internet, it's really easy to invest your TFSA or RRSP. To open a TFSA or RRSP investing account, you have several options:
- Savvy investors who are comfortable with DIY trading can open a TFSA or RRSP investing account with an online discount brokerage to buy low-fee ETFs.
- If you're looking for low fees and a little guidance, open a TFSA or RRSP investing account with a robo advisor so you can choose a portfolio of ETFs that matches your risk profile.
The TFSA or RRSP is best used for investing rather than saving. If you use the TFSA or RRSP to invest in long-term equities, you can shelter a substantial amount of investment earnings. Would you rather shelter the 1% you are getting in a high-interest savings account or the 7-8% a balanced index ETF portfolio could snag you?
If you’re looking for growth, low fees, and some investing guidance, Canada’s robo advisors are a great option for investing your TFSA or RRSP that follows the couch potato investment strategy. Here's how it works: when signing up for a robo-advisor, you answer a series of questions and then the computer algorithm suggests a portfolio that matches your financial goals and risk tolerance. Then, just set up pre-authorized contributions and let the robo advisor do the work of monitoring and re-balancing your portfolio – at a much lower fee than what traditional financial advisors and mutual funds charge.
|ROBO ADVISORS COMPARISON CHART|
|Online Investing Platform||Best For||Young and Thrifty Readers Promo||More Info|
|Wealthsimple Review||Best Overall Robo Advisor in Canada||Get your first $10,000 managed for free for a year||Learn More|
|BMO SmartFolio Review||Human Touch||Get your first $15,000 managed for free||Learn More|
|Questwealth Portfolios||Competitive Fees||None||Learn More|
|Modern Advisor Review||Expert-Assembled Portfolio||Receive $50,000 managed for free for one year||Learn More|
|Nest Wealth Review||Mature Investors||Try Nest Wealth free for the first 3 months||Learn More|
|Just Wealth Review||Investment Variety||Receive a cash bonus of up to $500 when you open a new Justwealth account||Learn More|
There are a lot of options, but there's one that really stands out above the others. With its low fees, easy-to-use platform, and excellent customer service, Wealthsimple is our top choice for the best robo advisor in Canada. However, if you want to compare robo advisors in Canada head-to-head, check out our handy chart below and read our Complete Guide to the Best Robo Advisors in Canada.
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If you're comfortable with DIY investing, you can create your own retirement investment plan or replicate some of the portfolios that robo advisors have. All you have to do is set up a TFSA or RRSP investing account with an online brokerage (which is super easy) and then make the trades on your own. Yes, it's true that you must pay for some of your transactions, but overall, the management expense ratio would likely be lower than robo-advisors. Questrade is our top pick for the best online brokerage in Canada and you can read our full Questrade review to find out why.
Get $50 in free trades when you start investing with Questrade.
TFSA Savings Account
Lastly, if you're looking to stash some cash for the short-term, consider opening a TFSA or RRSP savings account with a bank that offers a high-interest rate. Our top choice is Tangerine, and you can read all the reasons why in our Tangerine review.
RRSP vs. TFSA? Ideally, you should spread out your savings and contribute to both. Whether you choose the RRSP or TFSA (or both), you'll likely come out with the same amount of money because of the tax structure. The important thing is to start saving now and make regular contributions to a TFSA or RRSP. That way, you know you have all your bases covered when it's time to retire. Now go forth and prosper!
Editor's note: This article was originally published in 2017 and has been updated to represent the current changes in 2019.
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