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TFSA vs RRSP: which should I contribute to?

With a tax-free savings account (TFSA) available for saving in a tax-free environment, does it still make sense to contribute to a registered retirement savings plan (RRSP)?

Tax-Free Savings Account (TFSA) – The TFSA program began in 2009. It is a way for individuals age 18 or older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Investment growth is sheltered from tax while inside the TFSA.  Funds contributed to a TFSA are not deductible for income tax purposes.  Withdrawals are tax-free.

Registered Retirement Savings Plan (RRSP) – An RRSP is a savings plan, registered with the Canadian federal government you can contribute to for retirement purposes.  Investment growth is sheltered from tax while inside the RRSP.  Funds contributed to an RRSP are tax-deductible against your income.  Withdrawals are taxable.

RRSPs work very well if you contribute while you’re in a high tax bracket and withdraw when in a lower tax bracket. You can generate a higher net rate of return with an RRSP when the effective tax rate at the time of withdrawal is lower than the effective tax rate at the time of contribution. A TFSA can provide a higher return if the reverse occurs.

For example, if you contribute $10,000 to an RRSP when you are in a 40% tax bracket, your net cost is $6,000 after tax savings.  If you are in the same tax bracket in retirement when you make a withdrawal from your RRSP, you will have still benefitted from the tax-sheltered investment growth along the way.  However, if you are in a lower tax bracket (say 20%) when you make a withdrawal, then your net amount will be $8,000 after taxes are paid.

There is a deadline of March 1st, 2023 for RRSP contributions in the 2022 tax year. You can contribute to a TFSA at any time through the year.

Should I use a TFSA, RRSP, or both?

Low income

A TFSA can be an ideal savings vehicle if you’re in a low-income tax bracket. RRSPs may not be well suited to low-income Canadians. The RRSP tax savings may be less significant and you may be in a higher tax bracket when you make withdrawals, as the earlier example demonstrates. You may also want to consider that TFSA withdrawals don’t impact income-tested benefits and credits, such as child tax benefits and credits, Old Age Security, or Guaranteed Income Supplement.

If you find yourself in a lower tax bracket, such as when on maternity leave, and made RRSP contributions in the past, you may want to consider withdrawing from your RRSP to make a TFSA contribution. However, remember that funds withdrawn from your RRSP can’t be re-contributed later.

Middle income

One strategy would be to contribute to your TFSA now and accumulate RRSP room to be used later when in a higher tax bracket to optimize the tax benefits.

High income

This is a situation where you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or refund received from the RRSP contribution could be used to fund the TFSA.

Which option is better with the HBP and LLP?

If you’re saving for a down payment on a house, a TFSA might be a better option than saving in an RRSP and withdrawing under the Home Buyers’ Plan (HBP) for several reasons:

  • You have the flexibility to recontribute to the TFSA withdrawal without time limits. If HBP repayments aren’t made on time, the annual repayment amount is added into your income and any missed repayment amount means the RRSP room is lost forever.
  • There’s no restriction on how much you can withdraw from your TFSA, while the HBP restricts you to $35,000 from each of your RRSP and your spouse’s RRSP. Alternatively, you could each contribute $5,000 a year for seven years to a TFSA and then withdraw $35,000 plus any investment earnings tax free and with no required repayments.
  • There are no conditions on TFSA withdrawals, whereas the HBP requires you to be a first-time home buyer.

Similar logic could be applied to the Lifelong Learning Plan (LLP). By using a TFSA to save and fund continuing education, contributors can gain increased withdrawal flexibility while eliminating any enrollment requirements or repayment conditions.


Whether to save in a TFSA, RRSP, or both depends on your savings needs, your eligibility for income-tested benefits, and your current and expected future financial situation and income level. The best way to know is to talk to your Arbutus Financial advisor.

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