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TFSA vs RRSP: How To Choose Between The Two?

Investment is one of the biggest decisions that we take in our life because it involves putting our hard-earned money into a financial instrument with the hope that it will give us a return and help us live a comfortable lifestyle. The question arises when it comes to which option to choose for investment. In Canada, there are two of the most popular investment options known as Tax-free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). The battle between TFSA vs RRSP arises about which one to choose? Which one is better? Are there any other options? Well, let’s find out.

Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?

Importance of Tax-free Savings Accounts

The Government of Canada established a TFSA in the year 2009 in order to provide a flexible tool for investment to citizens. Just like the RRSP, TFSA is also one of the retirement savings options. The below point would help you understand the importance of TFSA.

  • You can start saving in a TFSA account if you are above the age of 18 and the best thing is that there is no expiry to that.
  • This is one of the most flexible tools available which is also tax free. You can contribute and make a withdrawal anytime you desire and that too with no penalties involved.
  • With TFSA, you can opt for tax-free withdrawal anytime you like for any purpose you want. You would have a thing called a contribution room which you can use to repay the money that you have withdrawn.
  • For the clawback option in the Old Age Security (OAS) pension, the government considers RRSP withdrawal but with TFSA, that is different which can benefit you.

Read: CPP Payments: How Much CPP Will I Get?

The Importance of Registered Retirement Savings Plans

The Canadian government introduced RRSP in the year 1957 in order to help people save for retirement.

  • If you have made a contribution to your RRSP account at pre-tax income then you have the right to claim a deduction for tax for the particular year that you are making the contribution.
  • You are likely to pay tax when you make a withdrawal.
  • It is needed for you to turn your RRSP into a Registered Retirement Income Fund by 31st December of the same year your age turns 71.
  • Ar maximum, you can contribute 18 percent of your gross income or an amount equal to $27,830 – consider whatever is the lowest amount. You can carry forward the contribution room the following year as well.

Read: The Top 7 Reasons Why Canadian Debt Is Raising!

If you have an RRSP account, apart from retirement there are two reasons that make you eligible to withdraw money. 

  1. Lifelong Learning Plan: Under this, you can withdraw $20,000 in total or $10,000 per year for schooling purposes which you will have to repay within 10 years.
  2. Home Buyers Plan: Under this, you can withdraw up to $35,000 in order to pay your down payment and you will have to give that money back within fifteen years.

Read: 9 Crucial Steps To Finding & Buying Your First Home


The major differences between these both are related to the limit of contribution, withdrawal limits, and the way tax is applied to them. The below table will help you understand the difference better and help you make an informed decision.

TFSA allows money withdrawn at any time for any type of need.In RRSP, you cannot withdraw money except for a Lifelong Learning Plan or if you are buying your first ever house.
TFSA provides tax shelter investment growth opportunities.RRSP also provides tax shelter investment growth opportunities.
You can make a direct contribution till $75,500 as of 2021.You can make a direct contribution amounting to 18 percent of last year’s income to $27,830 as of 2021.
Tax is not deducted from the contributions made.For RRSP, you have the eligibility to claim tax deductions for the contribution made during the year. You can also carry forward the same to the next year.
The annual contribution limit is different for each year, for 2021, it is $6,000. While the lifetime contribution is $75,500.It is 18 percent of last year’s income till $27,830 as of 2021.
For TFSA, there is no expiry date. You have to convert RRSP into a Registered Retirement Income Fund (RRIF) by 31st December of the year you turn 71.


A lot of time people think that the TFSA is a tax free instrument and they don’t have to pay tax while in the RRSP you have to pay a certain percentage of tax on your overall income. 

If you compare both there is not much difference as the fruit doesn’t fall too far from the tree. In TFSA, certainly the withdrawal is tax free but you pay taxes while making a contribution to the TFSA account. While for the RRSP, the contribution is tax-free but when you withdraw the amount a tax rate is applied. All in all, it makes both the investment instruments equal. Refer to the table below for more understanding.

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Income (Gross)$1,000$1,000
Tax Rate on Income at 30 percent $300$0
Total Contribution (Net)$700$1,000
The value after a period of 30 years $4,020$5,743
Withdrawal (30 percent tax)$0$1,723
Net Income You Will Get$4,020$4,020

Investment is Not Limited to This Instrument

It is important to do thorough research for making an investment decision but in the end, it comes to what are your requirements and how much return the instrument you trust will give you. 

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” 

— Phillip Fisher

You need to know the value of the asset you should choose for yourself. TFSA vs RRSP is definitely a good investment but you can diversify your portfolio by investing in a variety of instruments. 

Stocks: Stocks are a good way to invest if you know how to do fundamental analysis or you know which company holds value and would add value to you in the future. 

Mutual Funds and SIPs: This is just another instrument that lets you invest in a pool of investments and gives a good return over time. The same thing is with SPS known as Systematic Investment Plans where you can invest a small amount for a long time. 

Apart from this, there are other instruments called fixed income instruments which include Government bonds, commercial papers, certificates of deposits, etc. The return on these instruments is comparatively lower than the equity instrument mentioned above. Diversification is the key if you want to reduce your overall risk and explore investment options. Take your time, compare your needs, and based on that make the decision.

Read: Understanding Canada’s First Time Home Buyer Incentive

Also know: Canada Mortgage And Housing Corporation (CMHC): What is It?

Jason Cohen

Jason is a writer and personal finance expert at He is a finance enthusiast and loves to talk about Canadian Finances, Real Estate and Financial Freedom. He is an advocate for financial literacy and is helping to make a difference by educating Canadians on personal finance via his platform at

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