There is a growing sentiment among Canadians that somehow RRSPs are a government scam because you’ll be forced to pay tax on any withdrawals in retirement. That leads many to (sometimes) incorrectly declare that TFSAs are the better savings vehicle for retirement due to the tax-free treatment of withdrawals.

Let’s start by clearing up one important fact in the RRSP vs TFSA debate: The accounts are mirror images of each other. When you put money in an RRSP and invest the tax refund, you’re using pre-tax dollars. The money grows inside a tax sheltered account and then you pay taxes on your withdrawals years later in retirement.

The opposite is true of a TFSA – you contribute after-tax dollars but won’t have to pay taxes when you take money out. If you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions, the RRSP and TFSA work out to be exactly the same.

RRSP vs TFSA Comparison

Here’s a simple chart that David Chilton used in The Wealthy Barber Returns to help drive this point home:

  TFSA RRSP
Pre-tax income $1,000 $1,000
Tax $400 n/a
Net contribution $600 $1,000
Value in 20 years @ 6% growth $1,924 $3,207
Tax upon withdrawal (40%) n/a $1,283
Net withdrawal $1,924 $1,924

Two important caveats to keep in mind:

1. You need to invest the tax refund in order for RRSPs to work out as designed. Unfortunately, most Canadians spend their refund and so they don’t end up with as much money in their retirement account.

2. A TFSA is flexible in that you can take out money at any time without penalty. For Canadians who use a TFSA as their primary retirement savings vehicle that means resisting the temptation to raid the account whenever “something” comes up.

Obviously for high income earners who expect to retire in a lower tax bracket, it makes more sense to contribute to an RRSP. For low income earners, or for young people with higher income potential later on in their careers, TFSA contributions make better sense.

Related: How much of your income should you save?

Another advantage in favour of RRSPs is its higher annual contribution limits – 18 percent of your income up to a maximum of $26,500 in 2018 – compared the TFSA contribution limit of just $5,500.

One potential downside is that withdrawals from a large RRSP portfolio could trigger higher clawbacks from means-tested government benefits such as Old Age Security and the Guaranteed Income Supplement. TFSA withdrawals in retirement, on the other hand, don’t count as earned income and won’t affect your eligibility for OAS and GIS.

Fans of the tax free savings account trumpet the “tax-free” withdrawal stage while conveniently ignoring that contributions were made with after-tax dollars. And anti-RRSP zealots look to the big tax liability in retirement while ignoring all the deductions and years of tax-sheltered growth.

Final thoughts

So who wins the great RRSP vs. TFSA comparison? It’s easy to say that you should max out both accounts every year, but realistically, unless you are blessed with a six-figure (plus) income, most of us will have to choose.

As Chilton concluded, it depends:

  1. If you go the RRSP route, don’t spend your refund.
  2. If you go the TFSA route, don’t spend your TFSA.
  3. Whatever route you go, save more!
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13 Comments

  1. John on February 12, 2018 at 7:11 am

    Great article Robb, thank you. And thank you Dave for making it clear in your little chart. I think a lot of people, including myself, starting out saving while they are in the low income tax bracket and grow into the higher tax brackets as we get older and our earning improve. So it feels like there’s a chance we are paying more taking it out than the savings achieved putting it in. Regardless though, both are great savings vehicles and everyone should take advantage of at least the tax free growth potential. Also it is very “expensive” to take the money out off your RRSP while you’re still working and you can’t put it back. You can with your TFSA.

  2. Marie on February 12, 2018 at 7:40 am

    Hi Robb,
    We are new retirees (56-58) of 5 months. We have a very small employer pension and will be getting the extra money from our savings. We’ve been getting different professional advice (3 different ones) and still not sure what’s the best option:

    1. Over the years, use our non registered money first, then TFSA and finally RRSP
    2. Use our RRSP first, then TFSA and last non registered money

    I’ve read a lot on retirement cash flow/income, government clawback, etc. and still not sure what’s best.

    What’s your take on this and why? Many people are facing the same situation…

    Thank you

  3. Murray on February 12, 2018 at 7:52 am

    Government has not educated people well on TFSA (and having word savings in there didn’t help). I’ve always looked at myself as normal earner, less when young, increasing to max earning years (50’s) and then decreasing. I feel TFSA for lower tax brackets is better (save RRSP room for max earning years), then RRSP. Best option (not feasible for most) max out both. Like most things in life one-size does not fit all. Will I push myself into clawbacks, etc. Like spousal RRSP (my wife is unable to work), it fits my life, but your mileage may vary.

  4. Loonie Doctor on February 12, 2018 at 8:53 am

    Very nicely done Robb. A concise rational balanced article on TFSAs/RRSPs that hits the nuances that could point you in one direction or the other if forced to choose (as most people are). It was surprisingly difficult to find that on the internet when I was researching it previously. Thanks!

  5. Dennis on February 12, 2018 at 10:55 am

    One thing I have never seen mentioned about RRSP’s is what might be termed “income conversion”. All income earned inside an RRSP is taxed at the taxpayer’s marginal rate on withdrawal. That means that if your RRSP includes capital gains or dividends, rather than “special” tax rates on capital gains and dividends, the taxpayer pays their marginal rates.

    • John on February 12, 2018 at 12:41 pm

      Dennis, You are absolutely right. As for the “special” tax treatments, I think this is how it works. In a TFSA you lose the dividend tax credit, but get your capital gains tax free. In an RRSP you pay full tax on both dividends and capital gains. In a non-registered account you get the dividend tax credit and pay tax on 1/2 of your capital gains.

      Also, I think your marginal tax rate is the wrong rate to use with this type of analysis. Your effective tax rate is more appropriate.

      Also this analysis is TFSA vs. RRSP. I think it should be TFSA vs. RRSP vs. Non-registered.

    • Grant on February 12, 2018 at 1:10 pm

      Dennis, actually, that is not true, because the government owns a portion of your RRSP, the amount depending on your marginal tax rate. Eg. Assume your marginal tax rate is 50% when you make a contribution and 50% when you take the money out. Say you contribute $20k. You get a $10K deduction, so in your RRSP you now have $10K that you own and $10K that the government owns, and has lent to you. Over the years your $10K and the governments $10K grows tax free. Say the total becomes $40K, twice what you put in. Then you take out the $40K. You then have to pay back the governments it’s $10K plus the growth (total of $20k) and you get to take out your $10K plus the growth (total of $20K) tax free. So even though it feels like you are paying 50% tax, you are actually paying no tax on the growth of your money. You are just paying back to the government the money it lent you plus the growth on it. Plus you also have your $10K tax deduction from when you put the money in plus the growth on it – it won’t be a total of $20K as will have been paying taxes on the income as it is a taxable account. So there is no “income conversion”. In fact you pay no tax at all of your portion of the RRSP. But you do have to give back what the government lent you plus the growth on that loan. That’s why it feels like you paying a lot of tax, but in fact you are not paying any tax on the part of the RRSP you own.

  6. Vern on February 12, 2018 at 11:16 am

    My take on this topic is simple. Max out your RRSP’s and take your refund and max out your TFSA’s. It is also important to save cash. When you retire withdraw on your RRSP’s to keep you at a minimum tax bracket and use your cash to top up your needed income. Spend your TFSA’s last.

  7. Cheryl on February 12, 2018 at 11:25 am

    I don’t understand the after tax dollars to a TFSA and before tax dollars to an RRSP. I don’t see how a person decides that. When I get my paycheque, the income tax, CPP and EI have all been deducted and the remaining dollars are auto deposited into my chequeing account as my take home pay. The way I see it that is my after tax dollars. If I use the money from that account to fund either my RRSP or my TFSA either way it’s after tax dollars. Same if I use that money to pay rent, buy groceries, or whatever else I spend it on, it’s all after tax dollars.

    What am I missing here? When I look at the above chart with $1000 in both TFSA and RRSP. The next line is tax and that shows $400 in the TFSA and nothing in the RRSP.

    But I don’t get taxed on the monies I transfer into my TFSA.

    The money I put in there is the money that’s in there. So the next line that shows net contribution of $600 I don’t understand. Where did that $400 go? I’ve never had a percentage of money in my TFSA just go missing.

    I also saw that chart in the Wealthy Barber Returns and I didn’t get it all. And apparently still don’t. Whether or not I fund my TFSA or my RRSP from the pay that’s deposited to my account, it’s all after tax dollars to me. I don’t see the benefit of choosing an RRSP over a TFSA. I’m already using after tax dollars going in, and I get taxed again when I take the money out. With the TFSA I’m also using after tax dollars to contribute, but I don’t get taxed a 2nd time taking the money out.

    Is my reasoning off? The first 3 lines in that chart throw me off.

    • Echo on February 12, 2018 at 3:58 pm

      Hi Cheryl, it’s all to do with the tax refund from your RRSP contribution. Since an RRSP contribution reduces your total income you should get a tax refund at your highest marginal rate. This example uses a 40% tax rate.

      The key to the whole debate is that someone who contributes to his or her RRSP should also then reinvest the tax refund into their RRSP. When it comes time to take money out of your RRSP in retirement you pay taxes on those withdrawals – essentially paying back the taxes you saved when you made the contributions in your working years.

      Does that make sense?

  8. Gert on February 13, 2018 at 7:41 am

    Thanks again Robb for a great article. Any feedback on my approach is appreciated .
    Since retiring I have withdrawn all my Non-Registered and reinvested it into my TFSA, since I can no longer contribute to my RRSP. Now I withdraw from my RRSP (the max amount of just under $12K) to which I am not taxed. I’ve been told by my advisor that this strategy will provide me with income much longer. Of course from the about $12K I transfer the max allowed to my TFSA.
    This works for me because I don’t need the income just yet because my wife still works with enough to sustain us. When she finally retires things will likely change.
    ‘The Wealthy Barber’ also provides many tricks (alternatives) to favor ‘US’ the tax payer.

    • Echo on February 13, 2018 at 10:59 pm

      Hi Gert, without knowing your entire financial picture that sounds like a good approach to take. People seem to forget that just because they are forced to withdraw a minimum amount from their RRIF doesn’t mean they have to spend it. Stashing some of it inside your TFSA is a good strategy for when you need some tax free money later in life.

  9. sebastian on February 22, 2019 at 8:25 pm

    I have a TFSA, RRSP investerline acvount Can I put the investerline iin the TFSA ?

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