The TFSA and RRSP both let your investments grow without annual tax. The difference is timing. An RRSP gives you a tax deduction now and taxes the money when you take it out. A TFSA gives you nothing up front, but every dollar comes out tax-free. Which is better mostly depends on whether your tax rate today is higher or lower than it will be when you withdraw.
Side by side
| TFSA | RRSP | |
|---|---|---|
| Contributions deductible? | No | Yes |
| Withdrawals taxed? | No | Yes, as income |
| 2026 new room | $7,000 | 18% of 2025 earned income, up to $33,810 |
| Needs earned income? | No | Yes |
| Room after withdrawal | Restored next January | Lost for good (except HBP/LLP) |
| Affects benefits like OAS/GIS? | No | Yes, withdrawals count as income |
| Age limit | None | Must convert by end of the year you turn 71 |
The basic rule
- Higher income now than you expect in retirement: the RRSP usually wins. You deduct at a high rate and withdraw at a lower one.
- Lower income now than you expect later: the TFSA usually wins. Paying tax now at a low rate beats deducting at a low rate and withdrawing at a higher one.
- About the same: they're roughly equal on tax, so flexibility tips it toward the TFSA, as long as you reinvest any RRSP refund if you choose the RRSP.
A worked example
Take $5,000 of pre-tax income, a 30% tax rate today, and 25 years of 6% growth.
- TFSA: after 30% tax you have $3,500 to invest. It grows to about $15,020, all tax-free.
- RRSP: the full $5,000 goes in thanks to the deduction. It grows to about $21,460. Withdrawn at a 30% rate, you keep about $15,020. Withdrawn at a 20% rate, you keep about $17,170.
When rates are equal, the outcome is identical. The RRSP only pulls ahead if your retirement tax rate is lower, and only if you actually invested the full amount, including the refund.
When the TFSA is the better first choice
- You earn under about $55,000, where the RRSP deduction is worth relatively little
- You might need the money before retirement: an emergency fund, a car, a sabbatical
- You expect to receive the Guaranteed Income Supplement in retirement, which RRSP withdrawals would reduce
- You've already maxed your RRSP or have a generous workplace pension
When the RRSP is the better first choice
- You're in a high bracket now and expect a lower income in retirement
- Your employer matches RRSP contributions. That's free money, so take it first
- You plan to use the Home Buyers' Plan, though the FHSA is usually better for a first home
- You want the barrier: RRSP withdrawals are taxed, which discourages dipping in
Using both
Many people don't have to choose. A common approach is to contribute to the RRSP, then put the tax refund into a TFSA. If you're saving for a first home, the FHSA usually belongs ahead of both.
Frequently asked questions
Is a TFSA better than an RRSP?
Neither is better for everyone. The TFSA tends to win at lower incomes and when you need flexibility; the RRSP tends to win when your tax rate now is higher than it will be in retirement.
Can I have both a TFSA and an RRSP?
Yes. They have separate contribution room and many Canadians use both.
Do TFSA withdrawals affect Old Age Security?
No. TFSA withdrawals aren't income, so they don't affect OAS, GIS or other income-tested benefits.
Sources
- Canada Revenue Agency, Tax-Free Savings Account
- Canada Revenue Agency, RRSP and TFSA dollar limits