TFSA vs RRSP: Which Account to Use?

Last updated on February 2nd, 2021 at 12:36 am

Around this time of the year, Canadians are comparing their TFSA vs their RRSP and asking, “which account should I contribute to?” Well, the answer is a little complicated and may depend on your income level. In this guide, we’ll go through a few different scenarios to help you understand which account is the ideal investment vehicle for your retirement.

Comparing TFSA and RRSP Contributions

Both your TFSA and your RRSP are powerful, wealth-building accounts. Each will allow your investments to grow tax-free; income earned from your investments will not be taxed, and selling holdings in your account will not trigger a taxable event. However, there are some key difference between these accounts:

  • TFSA contributions are made with post-tax income and are not taxed on withdrawal.
  • RRSP contributions are made with pre-tax income and are taxed as income on withdrawal.

Contributions to an RRSP being “pre-tax” means that those contributions reduce your taxable income for the year. Having a reduced income will reduce your income taxes and may generate a tax refund. The size of the refund you receive will be equal to your marginal tax rate multiplied by your contribution. So, if your marginal tax rate is 20%, a $12,500 deposit into your RRSP would generate up to a $2,500 refund at the end of the year.

Optimizing Your RRSP Tax Refund

It’s important to understand that your refund may be less than your marginal tax rate would imply. That can happen if your contribution reduces your income enough to reduce your marginal tax rate. For example, let’s say contributing $10,000 kept you within the 20% tax bracket, and the next dollar dropped you into a 15% tax bracket. The next $2,500 you contribute will yield a refund of $375. That’s much less than the $500 you would have received if you were still fully within the 20% income tax bracket. For that reason, it’s best to use an income tax calculator to determine how much to contribute to your RRSP to receive the maximum tax benefit.

If you plan on making RRSP contributions throughout the year, you can choose to fill out form T1213 Request to Reduce Tax Deductions at Source. This form instructs your employer to not withhold taxes on a specific amount of income that you plan to contribute to your RRSP. As a result, instead of receiving a refund when completing your tax return, you will avoid paying that amount of income taxes over the course of the year.

The Impact of Marginal Tax Rates

The fact that RRSP contributions are made with pre-tax income – and that contributions are taxed as income on withdrawal – has a huge impact on whether the TFSA or the RRSP is the right investment vehicle for your retirement. Consider an investor with a 20% marginal tax rate who expects to have a 20% marginal tax rate in retirement. Let’s also assume that they’ve submitted a T1213 form to their employer to avoid having to wait for a tax refund from their RRSP contributions. The net benefit of the two accounts after 25 years – assuming an 8% return – looks like this:

TFSA vs RRSP: Equal marginal tax rate.
TFSA vs RRSP: 20% marginal tax rate while contributing and 20% in retirement.

We can see that the TFSA and RRSP perform the same if your marginal tax rate in retirement is the same as your marginal tax rate when contributing. However, this situation doesn’t apply to everyone. Many Canadians can expect to have a different income tax rate in retirement than they have in their working years.

When to Contribute to an RRSP

Consider an investor who expects a 20% marginal tax rate in retirement and has a 30% marginal tax rate during their working years:

TFSA vs RRSP: Decreasing marginal tax rate.
TFSA vs RRSP: 30% marginal tax rate while contributing and 20% in retirement.

This investor is 14% better off in retirement by contributing to their RRSP instead of their TFSA. Even with just $10,000 invested, the extra benefit of using their RRSP was $9,783 after 25 years. This makes it clear that estimating your marginal tax rate in retirement and contributing appropriately based on rate today can yield huge benefits in retirement.

When to Contribute to a TFSA

There are plenty of reasons why contributing to a TFSA is a better choice than contributing to an RRSP. The main reason is that money invested in a TFSA is still totally accessible without penalty. But, for the sake of our discussion, let’s consider when a TFSA is a superior choice from the perspective of marginal tax rates. Consider an investor with an expected 40% marginal tax rate in retirement and a 20% marginal tax rate while contributing:

TFSA vs RRSP: Increasing marginal tax rate.
TFSA vs RRSP: 20% marginal tax rate while contributing and 40% in retirement.

Because their tax rate is higher in retirement than when they contributed, this investor is 12.5% worse off by choosing to invest in their RRSP instead of their TFSA. This amounts to an effective loss of $8,561 compared to simply investing in their TFSA.

TFSA vs RRSP: Income Level Comparison

With our investigation into marginal tax rates in mind, let’s dig into which account is generally better for Canadians at different income levels.

Low-Income Earners: Prioritize TFSA Over RRSP

The simple answer for low-income Canadians is that it’s always better to contribute to a TFSA instead of an RRSP. That’s because their marginal tax rate in retirement is often the same or higher than in their working years. CPP, OAS, and GIS all count as taxable income in retirement. These income sources often push low-income Canadians into a higher tax bracket than when they were working.

If your income is low enough that you’re not paying income tax, contributing to an RRSP will not yield any tax refund at all. Instead, contributing to a TFSA – where your money can grow tax-free and not be subject to income tax in retirement – is superior to contributing to an RRSP.

Middle-Income Earners: TFSA and RRSP

If your income is moderate, the best strategy is to contribute to your RRSP until your marginal tax rate is the same as your expected rate in retirement. Any additional contribution would be better invested in your TFSA. If you’d like to make additional contributions and your TFSA is full, contribute that money to your RRSP. The benefit may be reduced if your marginal tax rate falls below your rate in retirement. However, the benefit of tax-deferred and tax-sheltered growth is almost always superior to investing in a taxable account.

The answer is a little different if you expect that your working income will increase substantially in the future. In that case, the best strategy may be to contribute to your TFSA first. Later, once your marginal tax rate increases significantly, you could start contributing to your RRSP.

High-Income Earners: TFSA and RRSP

High-income Canadians are the best positioned to get the most benefit from their TFSA and RRSP accounts. The ideal strategy is to work on maxing your TFSA while also contributing enough to your RRSP each year to reduce your marginal tax rate to be close to your rate in retirement. Once your accounts are full, it’s best to continue maxing both accounts every year. That way you can take full advantage of tax-free and tax-deferred growth.

When a Taxable Account is Superior

Despite these general rules, it’s still important to estimate your marginal tax rate in retirement. That’s because there are indeed situations where investing in a taxable account is superior to investing in your RRSP. It can sometimes happen if you’re investing in tax-advantaged assets like equities, and your income in retirement is much higher than your income while contributing, or your retirement is relatively soon.

Consider an investor who contributes at a 30% marginal tax rate and has a 50% tax rate in retirement. Let’s assume they’re only investing in equities (which are taxed at half of their marginal rate). To keep things simple, let’s also assume that their portfolio generates no dividend income and requires no rebalancing.

RRSP vs Taxable: Increasing marginal tax rate.
RRSP vs Taxable: 30% marginal tax rate while contributing and 50% in retirement.

In this example, using a taxable account was a slightly better choice than investing in an RRSP. However, for the vast majority of Canadians, this contrived scenario won’t apply.

TFSA vs RRSP: An Example

As someone with a relatively high income, I am working on maxing my TFSA while also contributing to my RRSP. I try to contribute enough to my RRSP to take me out of the highest tax bracket I’m in – approximately 40%. I then contribute the rest of my money into my TFSA. Eventually, once my TFSA is maxed, I’ll focus on maxing my RRSP to take advantage of tax-deferred growth and potentially receive larger Canada child benefit payments.

My wife earns a moderate income and expects to be in a higher-paying job in the future. So, her strategy has been to contribute to focus on contributing to her TFSA. Hopefully, by the time her TFSA is maxed, she’ll be in a higher-paying job and will be able to extract the maximum benefit from her RRSP.

Thanks for Reading!

Thank you so much for reading! I hope that my analysis and real-world examples help you decide whether to contribute to your TFSA or your RRSP. If you’d like to read more of my content, please check out my article on home office expenses. Or, if you’d like to read more about investing, read my review of the best Canadian dividend ETFs! Follow me on my journey towards financial independence by following AnotherLoonie on social media or signing up for my monthly newsletter!

Do you prioritize contributing to your TFSA or to your RRSP? I’d love to hear about your contribution strategy and whether it has changed over the years!


  1. Another couple more niche thoughts on the RRSP decision. Perhaps you have a pension and might choose to commute the value later on. Having extra RRSP room available will save you a bunch of tax. Same thing goes if you plan to be a Real Estate investor, you may have a large capital gain in the future, and you can use RRSP room to mitigate taxes there too.

    You highlighted that it is the tax arbitrage that is THE most important factor in the decision. Generally most people don’t spend enough time understanding this. It’s too bad RRSP are constantly promoted that you get a tax refund. Wrong, it’s a tax credit.

    1. Great points, Mr. Money Mechanic. Way too many people don’t understand the whole tax arbitrage benefit of using an RRSP. I hope my article makes that a little more clear for people!

      I wonder if the Accountant plans to use his RRSP in that way; to save taxes on selling a property. Actually, maybe he already has? I vaguely remember him mentioning it in one of your podcast episodes… Either way, those are some other great uses for your RRSP contribution room! Thanks for sharing.

  2. Great article breaking down the differences between RRSP & TFSA. Other pieces people don’t realize is that you can actually contribute to your RRSP and take the deduction in a future year. Spousal RRSPs can also be beneficial if planned correctly, to fund the lower-income earner and take advantage of that tax arbitrage later on.

    1. Those are great points, FMS! Spousal RRSPs can be so important for single-income families to help even out income in retirement. I’m actually taking advantage of your first point this year; I contributed a little too much to my RRSP in 2020, so I’m carrying forward around $3k to next year to maximize my tax credit.

  3. Excellent overview on the differences between TFSA vs RRSP. I agree that it makes sense to max out your TFSa first, unless you earn a very high income. As I mentioned on Twitter, depending on your investment strategy and income, another factor to consider is tax on dividends. If you hold USD stocks in a TFSA, you will incur withholding tax because the U.S. does not recognize the account. If you hold USD stocks in a RRSP, there is no tax on dividends. Just something to consider for those who buy individual stocks. Thanks for sharing! 🙂

    1. That’s a great point, RTC! I recently wrote an article specifically on that topic. It’s here: I also hold some USD assets in my RRSP. It’s nice to avoid withholding tax when you can. Still, since it’s a relatively small cost for an ETF investor like me, I don’t let it control my overall allocation. If you’re big into dividend stocks, withholding tax is certainly something to try to plan around when possible. Thanks for sharing your perspective!

  4. Nice post! One thing to keep in mind when estimating tax rates is that it’s extremely rare to have a higher tax rate in retirement than you had during your working years. Retirees get all kinds of tax advantages, like the pension income tax credit, income splitting opportunities with defined benefit pensions (any time) and RRIF income (at 65 and beyond).

    Furthermore, retirees could start melting down their RRSP in their 60s while deferring CPP and OAS to age 70. This helps reduce the RRIF balance and the minimum mandatory withdrawals that begin after age 71.

    More likely, your tax rate will be lower in retirement. At worst, it will be the same. Just look at how wide the federal tax bracket spreads are:
    20.5% on $48,535 up to $97,069,
    26% on $97,069 up to $150,473, and
    29% on $150,473 up to $214,368

    1. Those are all really great points, Robb. Thank you so much for sharing!

      It is indeed quite hard for me to imagine a regular Canadian with a higher marginal tax rate in retirement than when they were working. I guess it could happen if they earned an unexpected windfall in their RRSP, and converting that into an RRIF gave them a huge income. Or perhaps a DB pension that was indexed to inflation a little too well, you know? Certainly, these are “problems” we’d all dream of having!

      Your comment on the tax planning strategies retirees can employ is especially interesting to me. Being able to income split a defined pension is something I hadn’t considered.

  5. Good post.
    I can summarize this debate in a few lines 🙂
    TFSA – tax-free investing is something every adult Canadian should strive for, for wealth-building.
    RRSP – tax-deferred investing is something that most Canadians should consider, for wealth-building. The most important part (for me) when it comes to the RRSP vs. TFSA investing debate is not really the marginal rate (although very important). It’s about reinvesting the RRSP-generated tax refund. If investors do not do that, consistently, then they will fail to generate meaningful wealth when compared to TFSA. If you spend your RRSP-generated tax refund, you are essentially spending that government loan today and you’ll need to pay it back when you take $$ out of the RRSP account. Not smart!!

    1. Great summary, Mark! And you’re totally right! I tried to keep this as a comparison between “equivalent contributions” to a TFSA and RRSP. Hopefully it’s not lost on people that if they squander the tax refund generated by their RRSP contribution, they’ll come out far, far behind compared to if they had just used their TFSA.

      The RRSP essentially being “borrowed money” is an interesting perspective. With this in mind, I wonder if I should be adjusting my net worth a little to try to account for the taxable nature of my RRSP… Something to think about.

  6. Some really great points in the comments.

    Another benefit of the RRSP is that you don’t have to wait until a certain age to start with drawing from it. As a real estate investor I use my RRSP to help manage my marginal tax rate now. And will eventually be able to be work optional earlier and draw down from it before my properties are paid off.

    With some smart planning the combination of both accounts can be very advantageous. But it’s not always a one size fits all approach.

    1. You’re so right! This is one of those posts where all the hottest advice is in the comments (ha)!

      I haven’t explored how the RRSP fits in for a dedicated real estate investor like yourself. I imagine you could also use RRSP room to offset capital gains down the road when you sell a rental property. But what you’re suggesting, drawing down earlier, is something I hadn’t considered. Cool stuff! Thanks for sharing Maria.

  7. At lower incomes, a taxable account with eligible Canadian dividend payors can actually work out better than a TFSA. The Dividend Tax Credit is an element that needs to sit beside TFSA and RRSP on the strategy list.

    My strategy is three-pronged: ( 1 ) eligible Canadian dividend payors in my taxable account ( 2 ) other Canadian income payors in my TFSA ( 3 ) US dividend payors in my RRSP

    1. That’s quite interesting. So are you trying to first maximize your dividend tax credit in your taxable account before maxing your TFSA and RRSP? U.S. dividend stocks in an RRSP makes a lot of sense to me. I have some USD assets in my RRSP because I like not having to pay that pesky withholding tax!

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