The two main ways to save for retirement in Canada are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Both help your money grow without yearly tax. The difference is when you get the tax benefit.
How they work
| RRSP | TFSA | |
|---|---|---|
| Tax when you put money in | You get a deduction, so you pay less tax this year | No deduction |
| Tax on growth | None while it stays in the plan | None, ever |
| Tax when you take money out | Taxed as income | Not taxed |
| 2026 limit | 18% of last year's earned income, up to $33,810 | $7,000, plus unused room from earlier years |
| Withdrawal room | Not given back | Added back on January 1 of the next year |
| End date | Convert by the end of the year you turn 71 | None |
The core question
Is your tax rate now higher or lower than it will be in retirement?
- If it is higher now, the RRSP deduction is worth more today than the tax you will pay later. The RRSP tends to win.
- If it is lower now (early career, low income), paying tax now and withdrawing tax-free later can win. The TFSA tends to win.
- If it is about the same, the two work out about equally.
The refund is part of the picture
If you put money in an RRSP and invest the tax refund too, an RRSP and a TFSA with the same after-tax cost give similar results when your tax rate stays the same. The refund is what makes the comparison fair, so do not spend it and forget it.
How they affect your retirement benefits
RRSP withdrawals and RRIF payments count as income. That raises your taxable income and can push you toward the Old Age Security recovery tax. Money you take from a TFSA does not count as income. Plan for this with the OAS clawback calculator.
Which first?
A common order of thought:
- Get any employer match in a workplace plan.
- High income now? Lean RRSP, and invest the refund.
- Lower income now, or expecting higher later? Lean TFSA.
- Want flexibility? The TFSA lets you take money out and get the room back next year.
- Use both if you can. Many people do.
Check your room first. The TFSA room calculator and the RRSP calculator estimate it, and your CRA My Account shows your room as of last year. Add this year's contributions from your own records.
Avoid these mistakes
- Over-contributing. Going over your TFSA room, or over your RRSP room by more than $2,000, can bring a monthly tax.
- Forgetting the 60-day rule. RRSP contributions in the first 60 days of the year count for the previous year.
- Spending the refund. Reinvest it.
Sources
- Canada.ca: Tax-Free Savings Account (TFSA)
- Canada.ca: Calculate your TFSA contribution room
- Canada.ca: How contributions affect your RRSP deduction limit
- Canada.ca: RRSP, TFSA and related limits
This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.