Can you save for the future and get a tax break? The TFSA and RRSP offer tax advantages that can help you achieve your long-term financial goals.
Ideally, your savings plan should include both types of accounts, but if you must choose one over the other, it’s important to understand their differences. In this blog, we’ll cover the benefits of the TFSA vs RRSP and help you which account (or mix of accounts) will help you save the most taxes.
A Quick Comparison of TFSA vs RRSP
| RRSP | TFSA | |
| Need earned income to Contribute | ✔ | ✘ |
| Tax-deductible contributions | ✔ | ✘ |
| Tax-free withdrawals | ✘ | ✔ |
| Age limit for making contributions | ✔ | ✘ |
The main difference is the timing of taxes. An RRSP lets you defer taxes – an advantage if your current tax rate is higher now than it will be in retirement. Whereas with a TFSA, you’ve already paid tax on your contribution – an advantage because you don’t have to pay taxes when you withdraw funds.
When To Use an RRSP
With an RRSP, your contributions are tax-deductible. If you make $100,000 a year, but add $10,000 to your RRSP, you’ll be taxed as if you made $90,000. If your income tax rate is around 40%, you will be getting a refund for ~$4,000 when you file your taxes.
The idea is to contribute to your RRSP when your tax bracket is high, and withdraw from your RRSP when your tax bracket is low (i.e. in retirement).
You should generally invest in an RRSP if:
- You are making over $90,000 a year and are investing for retirement.
- You are making more than $50,000 per year and…
… you dont expect your income to grow significantly.
… you are investing towards your first home and plan to use your RRSP for a Home
Buyers Plan (HBP).
… you are investing towards your education and plan to use your RRSP for a
Lifelong Learning Plan (LLP).
When To Use a TFSA
With a TFSA, your contributions are made with after tax dollars. Because you’ve already paid taxes, you can take money out at anytime – tax free.
You should invest in a TFSA if:
- You are investing towards an objective that is sooner than retirement like a car, home, wedding, vacation etc.
- You are investing for retirement and are making less than $50,000
- You are investing for retirement, are making more than $50,000, but expect your income to go up significantly. This is to take advantage of the tax deduction when you are at a higher tax bracket.
TFSA and RRSP Contribution Room in 2023
For 2023, TFSA contribution room remains at $6,500. If you have been eligible to contribute to a TFSA since it was introduced in 2009, your total contribution room is now $88,000.
The RRSP contribution limit for the 2023 taxation year is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $30,780. For the 2024 taxation year, the RRSP contribution limit would be a maximum of $31,560.
Can You Save More With an RRSP or a TFSA?
That depends on your individual circumstances, tax situation and when you plan to take money out.
We recommend checking out our TFSA vs. RRSP Savings Calculator to get a better idea of how each account can help you achieve your unique financial goals.
For more financial calculators, check out our calculators page, which has everything from mortgage to retirement calculators.
