Investing » TFSA

TFSA or RRSP: The new debate

For as long as I have been in the business, the biggest debate about RRSPs has been the debate over which is better: buying RRSPs or pay down your mortgage. There has been lot’s written on this topic, here are a few that have tackled the debate:

Debate: RRSP vs Mortgage by Million Dollar Journey

Contribute to RRSP or Pay Down Mortgage from MapleMoney

I even tackled this topic in my article called The Great RRSP Debates

TFSAs created a new debate

There’s a new debate that began in 2008 when Finance Minister Jim Flaherty, announced what he considered to be historical significance in introducing Tax-Free Savings Accounts (TFSA). This year, tax expert Jaime Golombek is really bringing some real attention to this debate because he is suggesting that more people may want to look at putting money into Tax-Free Savings accounts (TFSA). In fact, in some cases, he suggests that TFSAs might even be more beneficial than RRSPs.

Just recently, I cautioned people from thinking that TFSAs are better savings vehicles that RRSPs for retirement where I shared two reasons why TFSAs will not replace the RRSP as the primary way to save for retirement.

The ins and outs of RRSPs and TFSAs

In this article, I would like to share some of the math when it comes to debating the use of RRSPs or TFSAs for retirement savings. RRSPs are attractive because you get an immediate tax deduction for the contribution and any investment earnings are tax-sheltered as long as the money stays in the RRSP. Depending on your marginal tax rate, a $5000 contribution might translate to a $1250 to $2000 tax savings as a result of the immediate tax deduction. The TFSA does not give you this tax deduction which makes the RRSP deduction pretty appealing.

However, you can’t properly compare TFSA with the RRSP by just looking at the tax savings going into the plans. You also have to look into the future when the money comes out of the plans. With the RRSP any withdrawal is fully taxable. That means a withdrawal of $5000 might only net you $3000 to $4000 after tax depending on your marginal tax rate. TFSAs may not give you a deduction when you put the money in but you also don’t have to pay tax when you take the money out. If you take out $5000, you get the full $5000.

In both TFSAs and RRSPs, you do not have to pay tax on any investment earnings or growth. You get the benefit of tax-sheltered investment growth.

Marginal tax rates make all the difference

If you are debating putting money into the RRSP or TFSA, take a look at your marginal tax rates. The bottom line is RRSPs still make sense if you are saving long term for retirement and your income at the time of withdrawal is in a lower tax bracket than your income at the time of contribution into the RRSP. Here’s a great rule of thumb to follow:

  1. If your marginal tax rate at the time of contribution is greater than your marginal tax rate and the time of withdrawal, then RRSPs have the advantage.
  2. If your marginal tax rate at the time of contribution is less than your marginal tax rate and the time of withdrawal, then TFSAs have the advantage.
  3. If your marginal tax rate at the time of contribution is equal to your marginal tax rate and the time of withdrawal, then neither has the advantage.

This is the same logic I apply to the one formula approach to making RRSP decisions.

My two cents

RRSPs and TFSAs both have a place for savings. If you have the money, you should do both.

If you don’t have the money to do both, then start by looking at what you are saving for. If you are saving to buy a car, go on a holiday or for an emergency, then the TFSA is probably the way to go.

If you are saving for retirement, then my advice is to start with the RRSPs and see if the tax implications now and in retirement work in your favor. If not, then move to the TFSA. When you are not saving for retirement, the TFSAs become much more advantageous simply because there is no tax at withdraw.


  1. Art Ford

    I came across your blog today. Do you have any articles you could point me to that might recommend whether at age 65 I should maximize my RRSP or put investment monies into unregistered vehicles. Will do TFSA no matter what. I anticipate retirement income to be at lower tax rate than today.

  2. Jim Yih

    Hi Art, Thanks for the comment. At 65 you can still contribute to a RRSP but I would only do so if it makes sense. I believe that RRSPs make sense if you can use them to your advantage by simply putting them in when you are in a higher tax bracket than when you take them out. The other thing you must take into consideration is how added taxable income affects income tested programs like Guaranteed Income Supplement and Old Age Security as examples. The article I would point you to is my one formula solution to RRSPs.

    Good luck!

  3. Rick

    Another consideration for contributing to a TFSA in retirement as opposed to an RRSP is that the money would not be taxable in the case of death. The RRSP, on the other hand, would be probably taxed at the highest rate plus probate fees.

  4. Kevin Cahill

    I personally believe RRSP’s are the most selfish product invented, but just because the banks do not offer it, does not mean one should overlook Permanent Cash Value Life Insurance.

    • Denise

      Kevin, I just read the article that you are referring to. Please clarify the statement that dividends earned in a TSFA are taxable. I have never heard of this and would like for you to point me to the CRA website that supports that statement. Thank you in advance.

      • Nathan

        Here is what the CRA says: “Generally, interest, dividends, or capital gains earned on investments in a TFSA are not subject to tax-either while held in the account or when withdrawn.” There is no mention or list of exceptions. I would also like to hear about what dividends are taxable.

        • Denise

          Thanks Nathan. While reading through the website links, I noticed it basically says taxes are due on over contributions to your TFSA, investments that are not at arms length, and contributions made to your TFSA while you were not a resident of Canada. Good to know that….

  5. fritz

    For us early retirement people. it makes more sense to withdraw low amounts of the rrsp while we are still under the age of old age pensions.
    for example: age 40-60 I withdraw 25,000 rrsp/year. and will receive all the withholding tax back.
    after age 60 when rrsps are exhausted i use the tfsa to supliment my pensions.
    thus living tax free as much as possible.
    (need $500,000 in rrsp though for it to work for you)

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