Investing » TFSA

TFSA vs RRSP: Why not do both?

Since TFSAs were introduced in 2009, there has been a lot of great debates over the RRSP and the TFSA. Here are some examples of the TFSA vs RRSP debate:

  • My article on the new debate between RRSPs and TFSAs
  • Canadian Capitalist surprised by some recent reports that suggest that a lot of Canadians would be better off contributing to a TFSA instead of a RRSP. These arguments forget to take into account the unique advantages offered by RRSPs.
  • Jon Chevreau of the National Post writes about how some RRSP buyers might be blinded by the tax refund
  • More recently, Jon Chevreau talks about the rising power of the TFSA
  • Rob Carrick from the Globe and Mail, writes about why young people should not choose the RRSP
  • MapleMoney gives 5 reasons to skip the RRSP contribution this year.
  • Globe and Mail added one more article on the merits of the TFSA over the RRSP

Related article: Understanding the basics of the TFSA

It’s not mutually exclusive

One of the problems with the outcome of the TFSA or RRSP debate is it seems like people have to make the choice between one or the other which really is not the case. Both the TFSA and the RRSP have merits so which is better?

They are both good

Let’s go back to the old debate between RRSPs versus paying down your mortgage. Some people think paying down the mortgage is better while others think buying RRSPs is better. Here’s the deal . . . both strategies are good. You can look at the math and the arguments on both sides and at the end of the day, either is a good financial use of your money. They are both productive ways to get ahead financially.

As a result, many pundits including me, suggest that one good strategy is to do both. One way to do this is to buy the RRSPs and then use the tax refund to pay down the mortgage. If that has become such a universally applied strategy then maybe we can apply it to the TFSA or RRSP debate as well.

Related article: TFSA or RRSP case study

Why not do both?

Let’s say you have $5,000 to invest. You could put the entire $5000 into the TFSA and be really happy about a liquid tax-free account.

On the other hand, you could put $5000 to the RRSP which will generate a tax savings based on your marginal tax rate. If we assume a marginal tax rate of 35%, that translates to a tax savings of $1750. You could then take the $1750 of tax savings and put that into an investment in the TFSA.

Essentially, you now got $6750 of use out of $5000. Let the government contribute to your TFSA so you can get more money working for you.

Not sure which is better, start with the TFSA

The TFSA will give you more flexibility. If you put money into the RRSP, you can’t get the money out without tax consequences. That also means you can’t move the money to the TFSA if you decide later, that was a better course of action.

On the other hand, if you put the money into the TFSA, you can always move the money to the RRSP later without tax consequences. As many of the experts above have pointed out, this may be ideal when you are younger and just starting out or in a lower tax bracket.

RRSPs are better for retirement

I like the TFSA. I think they have great merit but my concern has always been that they are too easy to access which makes them great spending accounts or emergency funds but not necessarily great retirement accounts.

Don’t get me wrong, they can be good retirement accounts for disciplined savers but statistics show that disciplined savings is lacking.

More often than not, when I sit down with people to go over the math, more people should buy RRSPs for retirement than those that should not. Don’t count out the RRSP as a way to save money for retirement especially through a group RRSP plan where the employer matches your contributions. Make sure you do the proper analysis.

“Better” is personal

All financial planning is personal. Just because the average Jane thinks TFSAs are better than RRSPs does mean that applies universally to everyone, especially you. Just because I say I like the RRSPs better for me, does not mean you should blindly follow my personal strategy. Here’s three rules of thumb to help you analyze your personal situation to make good decisions

  1. Use my one formula approach. If your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal, then the RRSP makes sense.
  2. If you are not sure which way to go, the safer course of action is to buy the TFSA because it gives you the most flexibility in the future.
  3. If you can, do both. They are both great financial accounts so the ideal strategy is to have both. One way to do that is to buy the RRSPs first and get the government to put money into the TFSA for you.


  1. Canadian Capitalist

    “If you can, do both. They are both great financial accounts so the ideal strategy is to have both.”

    True dat. If either account is too successful, it is a very nice problem to have!

    Thanks for the mention!

  2. youngandthrifty

    Love the TFSA vs RRSP round up!
    Thanks for including me.

    Glad to put an end to this debate 😉

    Both= good!

  3. Win

    Jim, great post! I love the idea of getting the government to invest in the TFSA for us.

    I have a question though, I have $5000 in the TFSA already (because I’m young and I wasn’t sure what to do with the money.) If I move this money into RRSP, isn’t this $5000 already after-tax, which means I don’t benefit from the tax-deferring effect of the RRSP?

    • Steve

      Any money put into an RRSP can be used as a tax deduction, TFSA’s included.


    Yes, if you are just starting out, do both to the max.
    Having said that, there are not that many (1%) who can afford to max out both especially when they are starting out.
    And if you started young enough and you earn that six figure salary (so you can truely put the max in) then there may come a time when it is not that wise to keep building your RRSP for the simple reason that it is taxable income when withdrawn. In those cases you may want to consider a non-registered account paying dividends that are taxed at a lesser rate that withdrawals from a RIF.
    Different strokes for different folks and especially for different portfolio values.


  5. KC

    I’m in the unique situation where I can also contribute to the RDSP, so I contribute enough to get the government matching program, use the RRSP to take advantage of the employer’s matching program which I then use the refund and put that into the TFSA.

  6. HeyFlo

    The more important question, which is rarely addressed in these stories… is what to do with the money once it has been contributed to either of these accounts. I know many people with TFSA accounts with nothing but ‘high interest’ savings… high being less than 1%. People are discouraged when the money in registered accounts is not growing. The stories emphasize tax savings, but it’s the follow up with intelligent investing for decent returns and manageable risk that needs most attention.

  7. Dividend Earner

    I don’t think the debate will ever go away … and unfortunately, forecasting your tax bracket 40 years later requires a very good understanding of oneself.

    I think we should start offering suggestions around TFSA and RRSP based on the type of jobs people have. That should offer a decent guideline and take into account pension plans.
    – Teacher
    – City Employee
    – Automotive

    – Lawyers
    – Engineers

    For the most part, it’s really hard to change work after 20+ years so once you are in, you pretty much are doing it until retirement. Those jobs have estimated income that are accessible (schools have it to show students and income relationship).

    People have a hard time looking at numbers and extrapolating but I don’t think it’s too hard to paint the picture based on the type of job and expenses. If the person looking at it realize they don’t invest enough, then they can question themselves.

    Then there is the strategy of just buying TFSA for the first 10 years maybe until you reach the top tax bracket and then in one swoosh, you transfer all your TFSA over to your RRSP, get the tax refund and put it in your TFSA or RRSP … Which do you do?

    Time and time again, I realize most people cannot do the math and forecasting so they need it spelled out according to their life situation. The only way I can think of is to use the job category to show the best optimal path because it defines the income.

  8. Dan Galarne

    no brainner for me, here is an exemple….max your RRSP and you put the tax return to an TFSA. Even if 40 years down the road you are still at the same tax bracket ( I doubt it) you still used 40 years worth of tax money to pay yourself in a TFSA. With split income on retirement your tax level will be very low on your RRSP and even after that, there is going to be a big chunk of money left in RRSP as well as in the TFSA. Trouble is where are we going to vacation LOL

  9. Bert

    I consider my level of financial acumen to be low so please forgive my naivety or compete lack of insight here. It seems that the key is to use the tax rebate of any RRSP contribution as a TFSA contribution otherwise a TFSA may be better than RRSP. I am retired, age 69, but would like to,advise my sons so please point outs any flaws in my thinking.

    I did some rough calculations based on. $2000 RRSP contribution. That will garner a $700 (35%) refund. If that $2000 is invested in a TFSA for 35 years at an average return of 4% it will be worth $7900 and wil be tax free. If however it is in an RRSP that $7900 will be taxable and at a 20% rate means a tax of $1578 or about double the initial refund. If however that initial refund is invested in a TFSA in 35 years it will be worth about $2700. More than enough to pay the tax from the RRSP .

    Am I missing something here?

    • Greg

      You are missing an important thing:
      The money you are doing in your RRSP is not taxable unless you want to withdraw it.
      So your $1578 deduction does not exist.
      You will be making the same money in both TFSA & RRSP.
      RRSP main advantage is the the 30% tax return.

  10. Dan Galarne

    Bert, you are 1/2 right but push your calculations a step further. $2000. @ 4% = $7892. in 35 years ( RRSP OR TFSA if invested in the same funds). Both will return the same , $7892.minus $1578 in tax leaves you with $6314. What you forgot is that $700. tax return that you invested in TFSA will give you $2762. in 35 years. So add $6314. + $2762. = $9076.therefore about $1184. more for the same investment. Multiply this by 35 if you invest the same over the 35 years and you end up $$$$$. more than just going with the straight TFSA. Hope this makes sense

    • Bert Finster

      Thanks. Dan. Yes I follow, I think we said the same think in different ways. 🙂 . As I said the key is to invest that $700 refund in a TFSA to get the $2762 (rounded of all the numbers) which more than pays for the tax on the RRSP.

      However, I do not get your 2nd last sentence “Multiply this by 35 if you invest the same over the 35 years and you end up $$$$$ ” You already calculated the 35 yr return on the $2000 initial investment and also the $700 refund. What else are you talking of investing for 35 years?

      • Dan

        You repeat the same investment every year for 35 years. Of course everything would be prorated (all subsequent investment will return less as they won’t the same amount of time to grow) giving that we always play with the same numbers after 35 years (or even one year) you are better to do it this way. Another example is you dont pay tax now on the 2000 so the full amount grow (the 2000 in TFSA would cost you $2700. after tax. The return is found not taxable money that goes to the TFSA

  11. Mubbin Jamal

    Wonderful article. Upon retirement, is it better to withdraw from TFSA first, or from RRSP first? Thanks very much

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