RRSP or TFSA: pay the tax now, or later?
Both accounts shelter your investments from tax. The difference is when you get the tax break.
How the two accounts work
- 1RRSP: you deduct the contribution from your income, so you get a tax refund now. The money grows sheltered, and what you withdraw is taxed as income.
- 2TFSA: you get no deduction now, but the growth and your withdrawals are tax-free.
- 3The rule of thumb: the RRSP wins if your tax rate in retirement is lower than your rate now, the TFSA wins if it is higher, and they tie if the rates match.
The comparison is only fair if both accounts cost you the same after tax, which means the RRSP refund has to be invested too.
A simple example
You put $1,000 into an RRSP and get a 40% refund of $400, so it really costs $600. The same $600 goes into a TFSA. Suppose both investments double.
The RRSP grows to $2,000 and the TFSA to $1,200. If your tax rate on withdrawal is 30%, the RRSP leaves you $1,400 and wins. At 40% it leaves $1,200, a tie. At 50% it leaves $1,000 and the TFSA wins. The numbers are round figures for illustration.
Which one fits me?
It leans RRSP if you
- Earn a high income now
- Expect a lower income in retirement
- Will invest the refund instead of spending it
It leans TFSA if you
- Earn a lower income now but may earn more later
- May need the money before retirement and want flexible access
- Want to avoid effects on income-tested benefits such as Old Age Security and the GIS (TFSA withdrawals do not count as income)
The honest catches
- Contribution room is limited. Check your RRSP and TFSA room in your CRA My Account before you contribute.
- Retirement income is hard to predict. Your future tax rate depends on pensions, other savings and the rules at the time, so treat the rule of thumb as a guide.
- Many people use both. You do not have to pick one. The calculator helps you decide which to fill first.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Compare them with your own numbers
Enter your income, province and how long you will invest to see which account leaves you with more.
Open the RRSP vs TFSA Calculator