TFSA vs RRSP in Canada
Educational only — not financial advice. Updated 2025.
1. Overview
Canadians have two main tax-advantaged accounts for investing: the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). Both encourage long-term saving, but they differ in when you pay taxes.
2. TFSA Basics
Contributions to a TFSA are made with after-tax dollars, and all future growth and withdrawals are tax-free. It’s flexible—you can withdraw anytime and recontribute the next calendar year.
3. RRSP Basics
RRSP contributions are tax-deductible in the year you make them. The investments grow tax-deferred, and withdrawals are fully taxable as income. It’s primarily designed for retirement, when your income may be lower.
4. TFSA vs RRSP: Key Differences
The main difference is timing of taxation: TFSA = pay tax now, withdraw tax-free later; RRSP = deduct now, pay tax later. For most Canadians, the right mix depends on income level and future retirement plans.
5. When to Use Each
Use the TFSA if you expect your income to rise or need flexibility for shorter-term goals. Use the RRSP if you’re in a high tax bracket now and expect lower income later. Many Canadians use both.
6. Common Mistakes
Overcontributing leads to penalties (1% per month). Double-check contribution room via CRA MyAccount. Avoid frequent withdrawals from RRSPs before retirement unless using the Home Buyers’ or Lifelong Learning plans.
7. Combining Accounts
Some investors fund the RRSP first to get the tax refund, then invest the refund into the TFSA. This ‘RRSP-to- TFSA loop’ maximizes long-term compounding.