TFSA vs. RRSP – Which is better?

At a tax update seminar, a calculation was done to compare a Tax Free Savings Account (TFSA) to a Registered Retirement Savings Plan (RRSP). A fixed amount of money was contributed to a hypothetical TFSA. The same amount plus the tax savings from the tax deduction were contributed to a hypothetical RRSP. The funds within the two tax shelters were in the same investments earning the same rate of return. Upon withdrawal some years later, the TFSA amount was the same as the RRSP amount after the tax was paid on that withdrawal. The calculation makes it appear that a TFSA and an RRSP will result in the same return.

However, this RRSP calculation made an assumption that the taxpayer would be in the same tax bracket at the time of the contribution and at the time of the withdrawal. Typically one is in a higher tax bracket while working and contributing to a retirement fund and in a lower tax bracket after retiring. In such circumstances, withdrawals would then have less tax than in this RRSP calculation and the RRSP would have a larger return than the TFSA.

If you are saving for retirement, an RRSP would normally be the better choice as it allows you to play the tax bracket game and save tax.

If, however, you are saving for a large purchase in a year or two, a TFSA would make more sense. It would be reasonable to expect you would be in the same tax bracket now and when the funds are needed. This means that it wouldn’t make a difference whether RRSP or TFSA were used. However, using a TFSA does not waste RRSP contribution room. Withdrawals from a TFSA are added to the next year’s contribution room whereas withdrawals from an RRSP are not.

So, which one is better? It depends. As can be seen here, purpose is only one of a number of criteria that will affect the answer to that question.

For more information on the TFSA, see the Department of Finance Canada’s page on the TFSA at

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