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TFSA vs RRSP: Learn the major differences

If you’re looking for the best way to save your money, here’s what you need to know about Tax-Free Savings Accounts and Registered Retirement Savings Accounts

Updated

5 min. read

Registered Retirement Savings Plans (R R S Ps) and Tax-Free Savings Accounts (T F S As) are two great ways to save for retirement, and both offer tax advantages that can help you reach your financial goals.

So, which is best for you? It can depend on everything from your long-term financial goals to your short-term plans and risk tolerance. Let’s start by getting more familiar with T F S As and R R S Ps– what each can do, how they’re different and any limitations to consider. Then, you can make a choice that works best for you.

Learn the basics of R R S Ps vs T F S As

Let’s start at the beginning. Here’s a breakdown of some of the most important features and elements of both products. First, take a look at what R R S Ps can offer:

R R S P basics

RRSPs are designed to help you save for retirement
You can contribute to an R R S P until you turn 71
Contributions to R R S Ps are tax-deductible (they can lower your taxable income)
Withdrawals from your R R S P are taxed
You must have earned income to contribute to an R R S P

T F S A basics

Here are some TFSA basics:
T F S As can help you save for big purchases, an emergency fund or for retirement
You can contribute to your T F S A after you retire
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Contributions to your T F S A are not tax-deductible
You do not need to earn income to contribute to a T F S A

How are T F S As and R R S Ps different?

The biggest difference between a T F S A and R R S P is how contributions and withdrawals are taxed. Many people will make their choice based on their income and how much a change in tax rate would help their bottom line.

Here’s how it works:

The money you put into your R R S P is tax-free, but taxed when you take it out. This means that your R R S P contribution lowers the tax you pay on your earned income.

Since R R S Ps plans let you defer tax payments on your contributions until you retire—when your tax rate will probably be lower—your current and overall tax bill will be lower. This makes an R R S P a great option for those who earn a higher income, and pay higher taxes.

“The biggest difference between TFSAs and RRSPs is how contributions and withdrawals are taxed.”

T F S As work differently. The money you put into your TSFA is taxed before you put it in (that is, your contribution won’t lower your taxable income), and it’s tax-free when you take it out.

If you’re younger, just starting your career or have a low to moderate income, a TFSA could be the better choice for funding long-term goals, like retirement savings. With a T F S A, you won’t be taxed on the investment income your contributions earn.

Paying the taxes now, when your marginal tax rate is lower, will give you more money in the long run. But remember that the money you put into a T F S A is not tax-deductible.

How much can I contribute?

With R R S Ps, your contribution limit depends on your income: You can contribute 18% of your previous year’s earned income, up to a maximum of $32,490 in the 2025 tax year. If you don’t use all your contribution room, the unused room carries forward.

For T F S As, the maximum you can contribute in 2025 is $7,000. Unused T F S A contribution room from previous years carries forward, even if you haven’t opened an account before. In other words, if you were eligible to contribute to a T F S A in 2009 (when they first became available), you could contribute a maximum of $102,000 today.

What types of investments can I make?

For the most part, R R S Ps and T F S As let you hold similar investment products. Mutual funds, G I Cs, stocks, bonds and E T Fs are all good options to consider.

However, there’s one significant difference between them: If you hold U . S . stocks, you don’t have to pay withholding taxes when you hold them in your R R S P. A withholding tax can reduce your total investment by taxing your withdrawal.

On the other hand, dividends on U . S . listed securities that sit in a T F S A will be subject to a 15% withholding tax.

T F S A vs. R R S P: What’s right for me?

If you’re at the peak of your career and don’t need the funds until retirement, an R R S P is a longstanding, familiar investment product that may be the best option for building your retirement savings.

On the other hand, since T F S As were introduced in 2009, their popularity has skyrocketed. More than half (54%) of Canadians now say they prefer T F S As to R R S Ps, a 7% increase since 2014.^{footnote 11} It’s easy to understand why we like them – you can withdraw your money at any time, tax-free, and if you change your mind, you can re-contribute the money the following year.

TSFAs are also a good way to save for retirement, especially if your income is lower. In fact, a recent study shows that half of all Canadians with a T F S A are using it to save for retirement.^{footnote 11}

The bottom line

Whether you choose an R R S P, a T F S A or both, the best investment strategy is to invest regularly and consistently, and to contribute the maximum amount—or as much as you can—every year.

Still have questions? Speaking with a B M O investment professional can help clear up any questions you might have about banking and investment products to help you meet your financial goals.