Skip to main content

Retirement TFSA or RRSP: Which one is a better choice for you?

The registered retirement savings plan (RRSP) is one of the best-known tax shelters available to Canadians, particularly in the weeks before the annual contribution deadline, which is March 1 this year.

But financial experts say a tax free savings account (TFSA) is often a better choice over the long run.

The problem is, many people don’t know what make a TFSA different from an RRSP. A report by Bank of Montreal estimates that 32 per cent of Canadians are in that camp.

Story continues below advertisement

Jason Pereira, a partner at Woodgate Financial Inc. in Toronto, says TFSAs are generally the better choice for people with modest or low annual income.

“As for where to draw the line, it’s debatable,” Pereira says.

As a rough guideline, Pereira suggests people who earned $40,000 or less last year would generally get a better result with a TFSA than an RRSP.

One reason, he says, is that money that’s withdrawn from an RRSP will be considered taxable income — potentially disqualifying a retiree from the guaranteed income supplement (GIS) paid to people with modest means.

“There are a lot of different things that are income-tested in the current system . . . and, especially if you’re a lower income Canadian, you do not want to give up on those,” Pereira says.

The big advantage of an RRSP is that contributions will defer tax payments into the future — something that the TFSA doesn’t do.

“If you’re a very high-income earner, there is a great advantage in not paying tax today,” says Catherine Wood, a senior vice-president of Aviso Wealth.

Story continues below advertisement

“If you need the money in the short-term, and the flexibility, the TFSAs make some sense,” Wood says.

Wood notes that both plans have a key similarity — interest, dividends or capital gains aren’t taxed while it’s inside an RRSP or TFSA.

But there are key differences when funds move into and out of the accounts.

RRSP contributions will reduce your tax bill when you put the money in the account, but you will be taxed on the money when you withdraw it.

TFSA contributions won’t reduce your tax bill when you put the money in, but you won’t be taxed on any investment gains when the money is withdrawn.

Because RRSP contributions result in a bigger refund for people paying a higher tax rate now, they are more likely to benefit from the registered retirement savings plan than would a low-income earner.

Story continues below advertisement

But because withdrawals from an RRSP are taxed, high income earners could also find themselves in a painfully high tax bracket if the money is withdrawn while they’re working.

“Where even high income earners get into trouble ... is that they need that money two years from now for some other purchase — whether it’s their children’s education, a new car or whatever,” says Peter Katevatis, a senior investment advisor with Canaccord Genuity Corp. in Vancouver.

“RRSPs are truly for retirement savings — money you won’t touch until it turns into a RRIF (registered retirement income fund) and you draw it down.”

He notes that each type of account is also subject to a contribution limit that depends on the individual.

In an RRSP account, you are allowed to contribute up to 18 per cent of your previous year’s earned income, to a maximum of $26,230 for 2018. However, contributions to a workplace pension plan reduce your RRSP contribution room.

TFSA limits aren’t affected by income. The annual contribution limit this year is $6,000. If you were at least 18 when TFSA accounts began in 2009 and have never made a contribution, you could contribute $63,500.

Story continues below advertisement

But Katevatis notes RRSP contribution room can’t be restored after a withdrawal, as they can be with TFSAs.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter