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​What's the difference between RRSP and TFSA?

By: Hannah Logan

When it comes to saving money, Canadians often get caught up on choosing between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). In some ways, they are similar. Both are designed to help you save money and both will help you save on taxes, however, they do work differently and have their own rules. 

That said, you also don’t have to choose one over the other. Both are good choices depending on your goals and what you are saving for, so I would recommend that you have both. They trick is in strategizing how to best use them. Here’s what you need to know about the differences between an RRSP and TFSA and how to best use each account.

How your RRSP works


RRSP basics

  • Contribution room: Up to 18% of your income earned in the previous year (contribution room does carry over)
  • Are contributions tax-deductible: Yes
  • Tax rules: tax-sheltered growth
  • Investment options: Many
  • Are withdrawals taxed: Yes (at your marginal tax rate)
  • Expiration date: RRSPs must be converted into cash or a RRIF by the end of the year in which you turn 71
  • Consequences of withdrawing early: You will lose contribution room and be subject to tax on your withdrawals

RRSPs are best used for

Most of us know that RRSPs are a retirement savings account. But, there is more to it than that because a TFSA can be used for retirement savings as well. Generally speaking, you want to use your RRSP for long-term saving. So if you are in your 20s or 30s and working towards saving for retirement, it’s a good idea to open an RRSP. 

That said, there are a couple of other factors to keep in mind including your income. Those who make more than $50,000 per year will benefit more from the tax break offered by an RRSP than those who make less. In this case, you may want to use TFSA and, since the contribution room carries over, contribute that money to an RRSP later down the line when you can benefit more from the tax break. 

If you have a pension from your employer, an RRSP may not be the best choice since you’ll be getting guaranteed income when you retire. You may want to focus on your TFSA instead. Another thing to note is that you can use your RRSP to help buy a house with the Home Buyer’s Plan (HBP). The HBP allows you to withdraw money from your RRSP (penalty-free) for the purpose of buying a home. You then have 15 years to replace those funds. Keep in mind there are several rules in place to be able to utilize this strategy. Learn more here.

How to open an RRSP

Almost every financial institution in Canada, including online banks and credit unions, offer RRSP account options. Your best bet is to do some research ahead of time and look into things like fees, minimum investments, and customer service. You’ll also need to consider how you want to invest your money in your RRSP. As mentioned above, there are many options available to you. You can choose mutual funds, stocks, bonds, term deposits, exchange traded funds, and more. 

Once you have determined where you would like to open your RRSP, you can easily start the process online from the comfort of your own home. While creating your account you will need to provide some personal information, contact information, and you will be asked to fill out a quick survey to determine your risk tolerance. Once this is complete, you can link your bank account to fund your RRSP. 

How your TFSA works


​TFSA basics

  • Contribution room: Accumulated annually once you turn 18 (contribution room carries over)
  • Are contributions tax-deductible: No
  • Tax rules: Tax-sheltered growth
  • Investment options: Many
  • Are withdrawals taxed: No
  • Expiration date: No
  • Consequences of withdrawing: None

TFSAs are best used for

TFSAs are great for any reason really. Some people use it for short term savings when they know they’ll need the money soon such as home down payment or emergency fund. However, the real advantage of TFSAs is that any capital gains made within your account are tax free. You could basically play the long game and invest within your TFSA for 20+ years. When you eventually take the money out, you won’t have to pay any taxes.

How to open a TFSA

Like with an RRSP, a TFSA is a very common type of account that is offered by most Canadian banks and financial institutions. You do need to be 18 years of age and have a social insurance number (SIN) to do so, but it can be done easily online. Again, look for accounts that don’t have mandatory minimum investments, offer low fees, and have a good customer support system in place. 

As with RRSP, there are numerous options when it comes to investing your TFSA: GICs, bonds, mutual funds, stocks, and ETFs are all some of the most popular picks. Find what you are comfortable with, do a risk assessment if required, and when your TFSA account is set up you can link your accounts to fund it. 

When it comes to TFSA vs RRSP there is no clear ‘winner’. Both can work for your goals in different ways. The trick is to make sure you utilize them to best fit your needs. 

Hannah Logan is a freelance writer based in Ottawa, Canada. She specializes in finance and travel writing and has bylines at Greedy Rates, Young and Thrifty, Fodor's Travel, O Magazine, and more. She also runs two travel blogs, Eat Sleep Breathe Travel and Ireland Stole My Heart. You can find her on Instagram and Twitter @hannahlogan21