RRSP vs. TFSA: Which is right for you?

Are you a middle income earner? It’s a coin toss

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From the February/March 2015 issue of the magazine.

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*Update: As of January 1, 2016, the TFSA limit has decreased from $10,000 to $5,500 

Not sure whether to use an RRSP or TFSA for your retirement savings? That’s a common question. In general, those earning a low income (under $35,000 or so) should favour the TFSA, while high-income earners are likely to be better off with an RRSP. For those earning a moderate income, however, it’s a coin flip.

The table below illustrates this idea for three 40-year-old investors at different income levels. Someone earning $30,000 and expecting to withdraw $10,000 annually after age 65 is in danger of losing the Guaranteed Income Supplement if he or she uses an RRSP. At the other end of the spectrum, a high-income earner may see significant Old Age Security clawbacks from RRIF withdrawals, but would still be better off with an RRSP because that would be more than offset by the greater tax savings when contributions are made.

Remember, this illustration only helps you decide which contribution to make with your first $5,500 of after-tax savings. If you can save more than that and you’re in a middle-income bracket—where the differences between the two accounts are modest—you could max out your TFSA and put the rest in your RRSP. And if you’re a high income earner maxing out your RRSP, use a TFSA for additional savings.


When TFSAs are better

There are a few circumstances when it makes sense to avoid RRSPs.

1. You expect to be in a higher tax bracket in retirement.

If you expect to earn a generous pension, the combined income from your pensions and your RRSP or RRIF withdrawals in retirement could drive you into a higher tax bracket than when you working.

2. You earn a low income.

If you earn less than $35,000 annually you should forgo RRSPs altogether, says pension expert Malcolm Hamilton. In retirement, withdrawals from RRSPs and RRIFs can lead to clawbacks of Old Age Security and other government programs like the Guaranteed Income Supplement. “The lower your income, the more likely you’ll be a recipient of these government income-tested benefits in retirement. You don’t want to mess with that,” says Hamilton.


11 comments on “RRSP vs. TFSA: Which is right for you?

  1. One thing I had come to understand: if you are saving enough to max out your TFSA and RRSP, you should do that before using unregistered accounts.

    To my mind, the whole TFSA vs. RRSP debate becomes somewhat moot in that case and you focus on tax efficiency – putting different asset classes (bond versus domestic equity versus foreign equity) into the appropriate account.


  2. I understand forgoing RRSP f you earn less than $35,000 annually, but does the same hold true with respect to spousal RRSP contributions? Does the spouse who earns less cash out the RRSP contributions before OASP kicks in?


  3. Could someone please help me understand how there’s a moderate OAS clawback in the $60,000 income scenario? I thought that for 2014 the threshold for a clawback to kick in is $71,592. I don’t see how this comes into play in the middle scenario. Thanks.


  4. I receive roughly $35,000 net from CPP Disability, Disability & a small work pension. I need to contribute max. $6,000+ to my RSP (CPP is eligible) in order to lower my taxes. I want to start withdrawing but, must wait until I reach 65 (I’m 57 now). Is this advisable or is there another method? I do not want to trigger any claw-backs.


  5. I am a newcomer to Canada on a Temporary Residence Permit and in the higher income bracket. Just 5 months old here and approaching my first tax filing. So still in the process of evaluating whether I would retire here or migrate to some other country. Which will be a better option for an individual like me TFSA or RRSP? Would like a complete blow out of the comparison considering “ease of en cashing” the savings in the event I decide to migrate to some other country.


  6. In 25 years what might the tax rates be? If I have put money away in RRSP’s then those deferred taxes will be taken out likely at a higher rate regardless of what tax bracket I’m in. So if you’re on the fence and in a middle income bracket would it make better sense to go the TFSA route? Now however if the company you’re working for is offering an RRSP matching program up to a certain percentage then it would make more sense to max the percentage matching for RRSP’s and put the rest if TFSA’s, wouldn’t it?


  7. Thanks for your article. One thing I cannot understand: what is the “expected income from portfolio at age 65” ?
    From where this money comes from exactly? From the government?
    My employer doesn’t offer pension plan. Does that means I Wil not receive this amount?
    Hopefully the answer will not be the annual interest of the earned money of my investments accounts !!
    Another question : are all these incomes taxable?


  8. If my personal income is considered low by my family income (me+spouse) is moderate-high. Which is right for me?


  9. Hi Dan,
    This is a great article. I just want to confirm, when is the basis of the tax bracket when withdrawing from RRSP? For example, I stopped working in 2018 with an annual income of $90,000. And I will have no income in 2019 since I already stopped working. Then I plan to withdraw from RRSP in 2020. What will be my tax bracket in 2020 as a basis of my RRSP withdrawal?


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