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TFSA vs RRSP: Learn the major differences

If you’re looking for the best way to save your money, here’s what you need to know about Tax-Free Savings Accounts and Registered Retirement Savings Accounts

Updated

5 min. read

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are two great ways to save for retirement, and both offer tax advantages that can help you reach your financial goals.

So, which is best for you? It can depend on everything from your long-term financial goals to your short-term plans and risk tolerance. Let’s start by getting more familiar with TFSAs and RRSPs– what each can do, how they’re different and any limitations to consider. Then, you can make a choice that works best for you.

Learn the basics of RRSPs vs TFSAs

Let’s start at the beginning. Here’s a breakdown of some of the most important features and elements of both products. First, take a look at what RRSPs can offer:

RRSP basics

RRSPs are designed to help you save for retirement
You can contribute to an RRSP until you turn 71
Contributions to RRSPs are tax-deductible (they can lower your taxable income)
Withdrawals from your RRSP are taxed
You must have earned income to contribute to an RRSP

TFSA basics

Here are some TFSA basics:
TFSAs can help you save for big purchases, an emergency fund or for retirement
You can contribute to your TFSA after you retire
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Contributions to your TFSA are not tax-deductible
You do not need to earn income to contribute to a TFSA

How are TFSAs and RRSPs different?

The biggest difference between a TFSA and RRSP is how contributions and withdrawals are taxed. Many people will make their choice based on their income and how much a change in tax rate would help their bottom line.

Here’s how it works:

The money you put into your RRSP is tax-free, but taxed when you take it out. This means that your RRSP contribution lowers the tax you pay on your earned income.

Since RRSPs plans let you defer tax payments on your contributions until you retire—when your tax rate will probably be lower—your current and overall tax bill will be lower. This makes an RRSP a great option for those who earn a higher income, and pay higher taxes.

“The biggest difference between TFSAs and RRSPs is how contributions and withdrawals are taxed.”

TFSAs work differently. The money you put into your TSFA is taxed before you put it in (that is, your contribution won’t lower your taxable income), and it’s tax-free when you take it out.

If you’re younger, just starting your career or have a low to moderate income, a TFSA could be the better choice for funding long-term goals, like retirement savings. With a TFSA, you won’t be taxed on the investment income your contributions earn.

Paying the taxes now, when your marginal tax rate is lower, will give you more money in the long run. But remember that the money you put into a TFSA is not tax-deductible.

How much can I contribute?

With RRSPs, your contribution limit depends on your income: You can contribute 18% of your previous year’s earned income, up to a maximum of $31,560 in the 2024 tax year. If you don’t use all your contribution room, the unused room carries forward.

For TFSAs, the maximum you can contribute in 2024 is $7,000. Unused TFSA contribution room from previous years carries forward, even if you haven’t opened an account before. In other words, if you were eligible to contribute to a TFSA in 2009 (when they first became available), you could contribute a maximum of $95,000 today.

What types of investments can I make?

For the most part, RRSPs and TFSAs let you hold similar investment products. Mutual funds, GICs, stocks, bonds and ETFs are all good options to consider.

However, there’s one significant difference between them: If you hold U.S. stocks, you don’t have to pay withholding taxes when you hold them in your RRSP. A withholding tax can reduce your total investment by taxing your withdrawal.

On the other hand, if you hold U.S. stocks in a TFSA, you’ll have to pay a 15% withholding tax when you withdraw funds – something to consider when you’re making your choice.

TFSA vs. RRSP: What’s right for me?

If you’re at the peak of your career and don’t need the funds until retirement, an RRSP is a longstanding, familiar investment product that may be the best option for building your retirement savings.

On the other hand, since TFSAs were introduced in 2009, their popularity has skyrocketed. More than half (54%) of Canadians now say they prefer TFSAs to RRSPs, a 7% increase since 2014.^{footnote 11} It’s easy to understand why we like them – you can withdraw your money at any time, tax-free, and if you change your mind, you can re-contribute the money the following year.

TSFAs are also a good way to save for retirement, especially if your income is lower. In fact, a recent study shows that half of all Canadians with a TFSA are using it to save for retirement.^{footnote 11}

The bottom line

Whether you choose an RRSP, a TFSA or both, the best investment strategy is to invest regularly and consistently, and to contribute the maximum amount—or as much as you can—every year.

Still have questions? Speaking with a BMO investment professional can help clear up any questions you might have about banking and investment products to help you meet your financial goals.