TFSA vs RRSP: Which Is Better? A Complete Canadian Guide to Choosing the Right Registered Account

Choosing between a Tax‑Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) is one of the most common—and consequential—financial decisions Canadians face. Both accounts shelter investment growth from tax, but they do so in fundamentally different ways. The right choice depends less on which account is “better” in the abstract and far more on your income, your goals, and when you expect to need the money.

A TFSA (Tax‑Free Savings Account) and an RRSP (Registered Retirement Savings Plan) are registered Canadian savings accounts that offer tax advantages. A TFSA allows tax‑free investment growth and tax‑free withdrawals, while an RRSP provides tax‑deductible contributions and tax‑deferred investment growth until withdrawals are made. Understanding how each works—and how they interact—can help you keep more of what you earn and build wealth more efficiently.

What Is a TFSA?

A Tax‑Free Savings Account (TFSA) is a flexible, government‑registered account that lets Canadians 18 and older earn investment income—interest, dividends, and capital gains—without paying any tax, ever. You contribute after‑tax dollars, meaning you’ve already paid income tax on the money before it goes in. The trade‑off is that everything that happens inside the account is tax‑free, and when you withdraw, you pay no tax on the amount taken out.

Key features of a TFSA:

• Contributions are made with after‑tax income and are not tax‑deductible.

• Annual contribution room is set by the government and accumulates each year you are 18 or older and a Canadian resident. For 2025, the annual limit is $7,000. Unused room carries forward indefinitely.

• Investment options are broad—cash, GICs, bonds, stocks, ETFs, mutual funds, and certain other qualified investments.

• Withdrawals can be made at any time, for any reason, with no tax consequences. The amount you withdraw is added back to your contribution room on January 1 of the following year.

The TFSA is often misunderstood because of its name. It is not a savings account in the traditional sense. You can hold a wide range of investments inside it, making it suitable for short‑term goals, a house down payment, an emergency fund, or as a supplement to retirement savings.

What Is an RRSP?

A Registered Retirement Savings Plan (RRSP) is designed primarily to help Canadians save for retirement. Contributions are tax‑deductible, meaning they reduce your taxable income in the year you claim them, often generating a tax refund. The money inside the RRSP grows tax‑deferred: you pay no tax on investment earnings as long as they remain in the plan. When you eventually withdraw, usually in retirement, the amount is added to your taxable income and taxed at your marginal rate at that time.

Key features of an RRSP:

• Contributions are tax‑deductible. You can claim the deduction in the contribution year, or carry it forward to a future year when it might produce a larger tax benefit.

• Contribution room is based on 18% of your previous year’s earned income, up to an annual maximum ($32,490 for 2025), plus any unused room from prior years, minus any pension adjustments.

• Investment options mirror those of a TFSA—stocks, bonds, ETFs, mutual funds, GICs, and more.

• Withdrawals are fully taxable as ordinary income in the year you take them out. Early withdrawals also trigger withholding tax and permanently lose the contribution room used.

• Age limit: You can contribute until December 31 of the year you turn 71, after which you must convert the RRSP to a Registered Retirement Income Fund (RRIF) or purchase an annuity, and begin taking minimum annual withdrawals.

The RRSP’s core premise is tax deferral. You get a tax break when you’re in your peak earning years, and you pay tax later when you’re presumably in a lower bracket.

TFSA vs RRSP at a Glance

How TFSA Taxes Work

The tax treatment of a TFSA is simple: you fund it with money on which you’ve already paid income tax, and you never pay tax again on anything that happens inside the account.

• Contributions are not tax‑deductible. If you earn $60,000 and put $6,000 into a TFSA, your taxable income remains $60,000.

• Investment growth—whether from interest, dividends, or capital gains—is completely tax‑free while the money stays in the plan and when you withdraw it.

• Withdrawals do not count as income for any tax calculation, nor do they affect eligibility for income‑tested benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).

This structure makes the TFSA especially valuable for people who expect to be in the same or a higher tax bracket in the future, as they avoid paying tax on withdrawals at a higher rate. It also provides maximum flexibility: you can access your money at any age for any purpose without triggering a tax bill.

One nuance: dividends from U.S. stocks held inside a TFSA are subject to a 15% foreign withholding tax that cannot be recovered, because the TFSA is not recognized as a retirement account under the Canada‑U.S. tax treaty. This is a relatively small drag for most investors, but worth noting for those with significant U.S. dividend holdings.

How RRSP Taxes Work

The RRSP shifts the tax obligation from the year you earn the money to the year you withdraw it.

• Tax deduction: Contributions reduce your taxable income. If you earn $90,000 and contribute $10,000, your taxable income for the year drops to $80,000. This usually generates a refund, which you can reinvest.

• Tax‑deferred growth: Inside the RRSP, interest, dividends, and capital gains accumulate without triggering annual tax. This allows your money to compound faster than it would in a non‑registered account where a portion of each year’s gains is lost to taxes.

• Taxation on withdrawal: Every dollar taken out—whether original contributions, investment gains, or reinvested dividends—is added to your taxable income in that year and taxed at your marginal rate.

Example: Aisha earns $85,000 and contributes $8,000 to her RRSP. Her taxable income falls to $77,000. Assuming a combined federal‑provincial marginal rate of 33% on that portion, she saves roughly $2,640 in taxes—often received as a refund. The $8,000 grows inside the RRSP, and when she retires, she withdraws it at an average tax rate of, say, 25%, paying $2,000 in tax. She keeps the spread.

Withholding tax is applied to most RRSP withdrawals at the time of distribution: 10% on amounts up to $5,000, 20% on $5,001–$15,000, and 30% on amounts over $15,000. This is a pre‑payment of the final tax bill, not an additional tax.

For U.S. dividends, the RRSP is recognized under the Canada‑U.S. tax treaty, so no U.S. withholding tax applies—a small advantage over the TFSA.

TFSA vs RRSP: Key Differences

While both accounts protect your money from tax while it grows, they diverge sharply on timing and flexibility.

• Tax timing: A TFSA gives you no upfront tax break but allows tax‑free withdrawals; an RRSP offers an immediate tax deduction but taxes you later.

• Withdrawal flexibility: TFSAs can be tapped at any time with no tax or penalty. RRSP withdrawals are taxed immediately and permanently reduce your contribution room.

• Retirement planning: An RRSP is built for retirement, forcing conversion to a RRIF at 71. A TFSA has no age limit and no required withdrawals, giving you more control.

• Government benefits: RRSP withdrawals count as income, which can trigger OAS clawbacks or reduce GIS eligibility. TFSA withdrawals do not affect income‑tested benefits.

• Contribution room: TFSA room is restored after withdrawal; RRSP room is lost.

• Estate planning: Both accounts can pass to a spouse or beneficiary on death. With an RRSP/RRIF, the full value is included in the deceased’s income in the year of death unless rolled over to a qualifying survivor, while a TFSA can be transferred tax‑free with proper planning.

When a TFSA May Be Better

A TFSA often makes sense in these situations:

• You’re in a lower tax bracket. If your current marginal rate is low, the RRSP deduction is worth less. Saving inside a TFSA preserves your ability to withdraw tax‑free later, even if your income and tax bracket rise.

• You need financial flexibility. Saving for a home, a sabbatical, or a car? A TFSA lets you access the money without tax consequences, and the contribution room returns.

• You’ve already maxed out your RRSP or don’t have enough earned income to generate significant RRSP room.

• You want to protect income‑tested benefits in retirement. TFSA income is invisible to OAS and GIS calculations.

• You are retired but still have contribution room. There’s no age limit, so you can continue saving tax‑free.

When an RRSP May Be Better

An RRSP is often the stronger choice when:

• You’re in a high tax bracket. The immediate tax savings can be reinvested, amplifying long‑term growth.

• Your employer offers matching contributions. This is free money that should generally not be left on the table. Contribute enough to get the full match before directing money elsewhere.

• You’re saving specifically for retirement and are confident you can leave the money untouched until then.

• You expect your retirement income to be lower than your current income. This creates a tax‑rate arbitrage: you deduct at a high rate and withdraw at a low rate.

• You want to hold U.S. dividend‑paying stocks. The RRSP avoids the foreign withholding tax.

When Using Both Makes Sense

For many Canadians, the best strategy is not TFSA or RRSP, but TFSA and RRSP. Each account serves a different role, and together they provide tax diversification.

A common approach:

1. Contribute enough to your RRSP to capture any employer match.

2. Max out your TFSA if you are in a lower tax bracket or want flexibility.

3. Direct additional savings to your RRSP as your income rises.

4. Use tax refunds from RRSP contributions to fund your TFSA.

This combination balances upfront tax relief with future tax‑free withdrawals, and it gives you the ability to manage your taxable income in retirement by drawing from different pots.

Real‑Life Examples

1. University Graduate Earning $45,000

Mia, 23, earns $45,000 as a social worker. Her marginal tax rate is around 20%. A $5,000 RRSP contribution would save her about $1,000 in tax, but she expects her income to rise over her career. She decides to contribute to her TFSA instead. The $5,000 grows tax‑free, and when she needs it for a home down payment in five years, she can withdraw it all without tax, and the room resets. She will revisit the RRSP when her income—and marginal rate—is higher.

2. Professional Earning $95,000

Liam, 34, is an engineer earning $95,000. His marginal rate is about 43%. He has never opened an RRSP and has significant unused room. A $10,000 RRSP contribution reduces his taxable income to $85,000 and generates a refund of roughly $4,300. He reinvests the refund into his TFSA. By 65, assuming a 6% average return (hypothetical), the $10,000 could grow to over $57,000 in the RRSP, and the $4,300 in the TFSA could grow to nearly $25,000—both tax‑favoured.

3. Family Saving for Retirement

Jenna and Paul, both 40, have a household income of $150,000. Jenna’s employer matches RRSP contributions up to 4% of her salary. They prioritize Jenna’s RRSP to capture the match, then max out their TFSAs. Any remaining savings go to Paul’s RRSP. This layered strategy ensures they get the employer match, build a pool of tax‑free TFSA money for flexibility, and reduce their current tax bill through Paul’s contributions.

4. Self‑Employed Consultant

Raj, 50, runs his own consulting business and earns $120,000. His income varies year to year, so he values the flexibility of a TFSA. He contributes the maximum to his TFSA first, then uses his RRSP contribution room in higher‑income years to smooth out his tax liability. In a year where he earns $140,000, he makes a large RRSP contribution to bring his taxable income back to a lower bracket. He treats the TFSA as his flexible buffer and the RRSP as his tax‑planning tool.

Common TFSA and RRSP Mistakes

Frequently Asked Questions

1. Is a TFSA better than an RRSP?
Neither is universally better. A TFSA is ideal for flexibility and tax‑free withdrawals, particularly for lower‑income earners. An RRSP is more advantageous for high‑income earners who want a tax deduction and are saving specifically for retirement. Many Canadians use both strategically.

2. Can I have both a TFSA and an RRSP?
Yes. There is no restriction on holding both accounts simultaneously. You can contribute to both in the same year as long as you stay within your individual contribution limits. The combined limit is governed by your available TFSA room and your RRSP deduction limit.

3. Which account should I max out first?
It depends on your income and goals. A general guideline: if your income is below about $50,000, a TFSA may be more beneficial. Above $90,000, the RRSP’s tax deduction often provides a larger advantage. Always capture any employer RRSP match first.

4. Does an RRSP reduce taxes?
Yes, RRSP contributions reduce your taxable income for the year you claim the deduction, potentially generating a tax refund. The tax savings are a deferral, not an elimination—you will pay tax when you withdraw the funds, ideally at a lower rate in retirement.

5. Are TFSA withdrawals taxable?
No. All TFSA withdrawals—whether principal, interest, dividends, or capital gains—are completely tax‑free. They also do not count as income for federal benefits or tax credits.

6. What happens if I overcontribute to my TFSA or RRSP?
Excess TFSA contributions are subject to a 1% monthly penalty tax on the over‑contribution amount until withdrawn. RRSP over‑contributions above the $2,000 lifetime cushion also incur a 1% monthly penalty. The CRA may grant relief for genuine errors.

7. Can I invest in stocks inside a TFSA and RRSP?
Yes. Both accounts can hold qualified investments, including individual stocks listed on designated exchanges, ETFs, mutual funds, bonds, and GICs. The choice of investment is independent of the account type.

8. Can retirees contribute to a TFSA?
Yes. There is no maximum age for TFSA contributions. As long as you have available contribution room and are a Canadian resident, you can continue contributing and growing wealth tax‑free even in retirement.

9. Is RRSP contribution room carried forward?
Yes. Unused RRSP contribution room accumulates and can be used in any future year. There is no expiry on carry‑forward room. Your Notice of Assessment from the CRA shows your total available room.

10. What happens when I turn 71 with an RRSP?
By December 31 of the year you turn 71, you must convert your RRSP to a Registered Retirement Income Fund (RRIF) or purchase an annuity. You then begin taking minimum annual withdrawals, which are taxable as income.

11. Can I use my TFSA or RRSP to buy a home?
Yes, through different mechanisms. The Home Buyers’ Plan (HBP) lets you withdraw up to $60,000 from an RRSP tax‑free if repaid within 15 years. A TFSA can be withdrawn at any time for a home purchase with no tax and no repayment requirement.

12. Does a TFSA affect government benefits?
No. TFSA withdrawals and investment income are not counted as income for the purpose of determining federal benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). This makes it valuable for retirees.

13. What is the contribution limit for a TFSA in 2025?
The annual TFSA dollar limit for 2025 is $7,000. If you have been eligible since 2009 and have never contributed, your cumulative room is $109,000. The limit is indexed to inflation and may increase in future years.

14. How is RRSP contribution room calculated?
Your new RRSP room each year is 18% of your previous year’s earned income, up to an annual maximum ($32,490 for 2025), minus any pension adjustments, plus any unused room from earlier years.

15. Should I withdraw from my RRSP early to pay off debt?
Generally, no. Early withdrawals are fully taxed and permanently reduce contribution room. Unless you are facing extreme financial hardship, it’s usually better to use a TFSA, non‑registered savings, or a debt repayment strategy that doesn’t trigger a tax hit.

16. Can I transfer money between TFSA and RRSP?
Direct transfers between accounts are not allowed without tax consequences. You would need to withdraw from a TFSA (tax‑free) and then contribute to an RRSP, claiming a deduction, or vice versa (taxable withdrawal). Careful planning is needed to avoid unintended tax bills.

17. What happens to my TFSA or RRSP when I die?
With proper planning, you can name a spouse as successor holder for a TFSA, allowing the account to continue tax‑free without affecting their own contribution room. An RRSP can be rolled over to a spouse or financially dependent child on a tax‑deferred basis. Otherwise, the value is included in your terminal tax return.

18. Are there investment risks inside a TFSA or RRSP?
Yes. Both accounts hold investments whose value can rise or fall. The tax benefits do not eliminate investment risk. It’s important to choose an asset mix aligned with your time horizon and risk tolerance.

19. Can I hold U.S. stocks in these accounts?
Yes, but the tax treatment of U.S. dividends differs. In an RRSP, U.S. dividends are exempt from the 15% withholding tax under the tax treaty. In a TFSA, the withholding tax applies and cannot be recovered.

20. Do I need earned income to contribute to a TFSA?
No. TFSA contribution room is not based on income. You only need to be a Canadian resident, 18 or older, with a valid SIN. This makes it accessible to students, stay‑at‑home parents, and retirees.

Table 1 — TFSA vs RRSP Comparison

Table 2 — Tax Treatment Comparison

Table 3 — Contribution Rules

Table 4 — Withdrawal Rules

Table 5 — Investment Options

Both accounts allow similar qualified investments:

• Cash and savings deposits

• Guaranteed Investment Certificates (GICs)

• Government and corporate bonds

• Mutual funds and ETFs

• Stocks listed on designated exchanges

• Certain other securities

Investments that are not qualified (e.g., land, collectibles) are prohibited in both accounts and subject to penalty taxes.

Table 6 — Advantages and Disadvantages

Table 7 — Common Mistakes

Table 8 — Which Account Fits Different Situations?

Table 9 — Real‑Life Scenario Comparison

Table 10 — TFSA vs RRSP Decision Matrix

Disclaimer: This article is for educational and informational purposes only and does not constitute financial, tax, legal, or investment advice. TFSA and RRSP rules, contribution limits, and tax legislation may change over time. Individual circumstances—including income, age, province of residence, retirement goals, and tax situation—can affect which account is more suitable. Readers should consult the Canada Revenue Agency (CRA) or a qualified financial professional for guidance tailored to their personal circumstances.