TFSA vs. RRSP | What’s The Difference?

 In Canada, Tax-Free Savings Accounts (TSFA) and Registered Retirement Savings Plans (RRSP) are the two most popular ways to invest money and minimize taxes. However, deciding which one is right for you can be confusing, especially if the differences are unclear to you. Let’s delve deeper into the TFSA vs. RRSP debate to help you make the right investment decision for your future. 

TFSA vs. RRSP

Are you short on time? Here’s a snapshot of the major differences between TFSAs and RRSPs. 

What Is A TFSA?

Short for Tax-Free Savings Account, a TFSA is a standard financial account that your bank or credit union will offer you after you’ve turned 18. As its name suggests, the main benefit here is that you won’t have to pay tax on the interest the account accumulates over time. Plus, any money you withdraw from the account is tax-free.

Despite its name, the TFSA should be handled more like an investment nest egg, rather than a traditional savings account. While you can dip into it whenever you want, the most ideal results occur when you leave your money in the account for a long time. This way it can generate interest and be put to use later in life. 

Although income is what most consumers contribute to their account, you can also put other kinds of financial assets into your TFSA, such as:

• Guaranteed Investment Certificates
• Stocks & Bonds
• Regular Savings Accounts

The federal government has imposed limits on how much you’re allowed to deposit into your TFSA annually. The maximum contribution amount can be different every year. Check with the CRA to verify your yearly contribution room and also your total available contribution room. Overcontributions are penalized. 

What Is An RRSP?

A Registered Retirement Savings Plan is another type of government-sponsored investment account that you can activate through your financial institution or any other investment platform, which also has a specific annual contribution limit. Essentially, RRSPs were created as a way to prompt Canadians into investing toward their eventual retirements and provide them with various tax advantages along the way, such as smaller yearly income tax bills.    

However, unlike a TFSA, an RRSP account is not tax-free but rather “tax-deferred”, meaning you don’t have to pay income taxes on your contributions during the year you deposited them. Instead, they’ll be taxed later on when you make a withdrawal. This is beneficial for retirees as they’ll be in a lower tax bracket when they make the withdrawals. 

The annual RRSP contribution limit that you have to follow is set by the Canada Revenue Agency. 

The Differences Between A TFSA And An RRSP

It’s true that both TFSAs and RRSPs are sanctioned by the federal government and have specific contribution limits that you must follow to avoid any penalties. However, there are a few key differences that you should know about, including but not limited to:

The Tax Advantages

Both TFSA and RRSP accounts have different tax benefits:

• TFSAs Are Tax-Free – Remember, if you remain within the designated annual contribution limits, any funds you withdraw from your TFSA won’t be taxed. Similarly, any income earned in the account is tax-free as well. 
• RRSPs Are Tax-Deferred – All RRSP contributions (up to the RRSP deduction limit) can be used to deduct your income tax. While you must declare your contributions during tax season, they won’t be taxed until you withdraw from your RRSP. 

Foreign Withholding Tax

When investing in foreign stocks and funds, you may be subject to a small amount of taxation depending on several factors, including the country of the stock and the type of investment account. 

• TFSA – With TFSAs, you may be subject to a tiny amount of taxation when you are holding foreign stocks and funds. For example, if you have U.S. stocks or funds, 15% of the dividends paid to you will be withheld. 
• RRSP – On the other hand, investors can avoid this by investing in U.S. ETFs or stocks in an RRSP or an RRIF. This is because investors are usually exempt from withholding tax when these U.S. foreign stocks are directly held in an RRSP.

How Much You Can Contribute?

For 2025, the annual TFSA and RRSP contribution limits in Canada:

• TFSA Annual Maximum – $7,000 (varies from year to year). If you over-contribute, you’ll be penalized. 
• TFSA Lifetime Maximum – $102,000 (for contributors who turned 18 before 2009)
• RRSP Annual Maximum – $32,490 or 18% of your earned income from the previous year (whichever amount is lower)

Currently, there is no lifetime maximum contribution limit for RRSP accounts. 

How Much You Can Withdraw? 

Here are the withdrawal rules imposed by the federal government and the CRA: 

• TFSA – You can withdraw any amount from your TFSA at any time, tax-free. You can only recontribute the amount you withdrew if you have contribution room left or you will have to wait until the next tax year. 
• RRSP – Technically, you can also withdraw at any time, in any amount. However, all withdrawals, including your eventual cash-out, will be taxed as income (based on the tax bracket you’re in at the time of withdrawal). Additionally, if you withdraw before age 71, you will lose that extra contribution space. 

The Expiry Date

TFSAs and RRSPs also have different account expiration conditions:

• TFSA – Your account does not have an expiry date.
• RRSP – By December 31st of the year that you turn 71, you must withdraw the funds from your RRSP. If not, you need to arrange for your account to be converted into a Registered Retirement Income Fund (RRIF) or used to purchase an annuity. 

Should You Invest In A TFSA Or An RRSP?

There are plenty of reasons why you should contribute to a Tax-Free Savings Account or a Registered Retirement Savings Plan. If you have the financial power, it can even be a great idea to regularly contribute to both types of accounts annually.

All that said, you may only have room in your life for one investment account. In that case, the one you choose depends on factors such as your:

Current And Future Income

Canadians earning moderate to high incomes may be better off investing in an RRSP. The more money you contribute to your RRSP, the more it can help reduce your income tax bill. 

If your income surpasses your RRSP’s yearly contribution limit by a large amount, it can’t hurt to consistently deposit a portion of it into a TFSA for safekeeping.  

Savings Goal(s)

Since penalties can apply for withdrawing and there’s a lot of extra paperwork involved, an RRSP can be a safer choice when you’re trying to save up for more important long-term goals, such as financing a house, your education or your retirement. 

Then again, a TFSA may be more convenient because you can withdraw whenever you want, in whatever amounts, without penalty. This can make your TFSA a better choice when you’re making a down payment on a house or vehicle, building an emergency fund or covering short-term expenses (major appliances, renovations, etc.). 

Age

If you’re relatively young and expect to move to a higher tax bracket when you make a better income, it can be a good idea to store your savings in a TFSA. That way, you can transfer them into an RRSP later in life and receive better tax benefits someday.

As a senior, investing in a TFSA can also be great because it has no age limit or expiry date, unlike an RRSP, where you must start withdrawing after you turn 71. Plus, your Guaranteed Income Supplement (GIS), Old Age Security (OAS) or other retirement benefits may be withheld if you contribute to or withdraw from your RRSP or RRIF. 

How Do You Invest With A TFSA vs. RRSP?

In Canada, there are a number of financial institutions and platforms that can help you open and invest in a TFSA or an RRSP, such as:

Robo-Advisors

If you prefer to automate your investments with little to no involvement from you, then robo-advisors are a great option. They use algorithms to create and manage investment portfolios based on your financial goals and risk tolerance. 

All you have to do is answer several financial questions and the robo-advisor will create an investment portfolio for you. You can then choose to open a TFSA, RRSP or both and set a pre-authorized contribution amount.

After your account is established, the robo-advisor should manage everything for you, including any deposits and portfolio rebalancing. Perfect for beginner investors, you can save up and earn passive income from the comfort of your home, sometimes at a better price than a professional advisor. Be careful, as all robo-advisors have different rates and conditions. 

Online Brokerages

There are also many online investment platforms in Canada. Unlike robo-advisors, which offer pre-arranged options, you can use this type of brokerage to create, modify and monitor your own TFSA or RRSP account. More experienced investors use these platforms because they have fewer limitations than other alternatives.  

While you may have to pay service fees and other costs following certain transactions, some online brokers are cheaper than robo-advisors in the long term. Depending on which platform you choose, you may even find accounts and investment options that aren’t offered by any robo-advisor or financial institution. 

Banks & Credit Unions

If you’re not sure whether a robo-advisor or online brokerage is your best option, you can open a TSFA or RRSP with most banks and credit unions. Here, you’ll receive all the security of a top-tier financial institution and have the opportunity to speak face-to-face with a professional advisor to determine which account is the better choice.

Although banks tend to charge higher fees, at least you’ll know who is handling your money and where it’s going. Moreover, depending on your risk tolerance, your advisor can direct you to investment accounts with low, medium or high risk.

Additional Reading

What Is An Exchange-Traded Funds (ETFs)?

Investing For Beginners In Canada: A Guide

How To Avoid The Capital Gains Tax In Canada

TFSA VS. RRSP FAQs