/ Published 8:15 AM EST / Tamara George

RRSP, TFSA or both?

Contributing to a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) can be a great way of minimizing the taxes you pay and saving for the future. But they have different rules – and different benefits. What’s the right option for you?

I’m in a high tax bracket
If you contribute while your income is high and withdraw when you’re in a lower tax bracket (e.g. when you retire) RRSPs can work well. When your tax rate is lower, you can generate a higher net rate of return. But if the reverse is the case, and you anticipate that your tax bracket will be higher in the future, then a TFSA can provide a higher return.

Here’s an example. If you contribute $1000 to an RRSP when you’re in a 20% tax bracket, your net cost is $800 after the tax savings. If you’re in the same bracket when you want to take the money out, your net withdrawal will be equal to the net cost after paying the taxes. However, if you’re in a higher tax bracket (say 40%), your net withdrawal will only be $600 after taxes, so you will have lost money. But if the reverse is true, and you withdraw when you’re in a lower tax bracket (dropping from 40% to 20%), that’s where you’ll realize the greatest return.

However, if you income is high, you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or refund you get from your RRSP contribution could be used to fund your TFSA.

I have low income.
If you’re in a low tax bracket, an RRSP may not be the right savings vehicle. But a TFSA can be an ideal option. If your tax bracket won’t be dropping in the future, RRSP tax savings will be insignificant – and you may even end up being in a higher tax bracket when you make your withdrawals. TFSA withdrawals have another benefit for low-income Canadians; they don’t impact tested benefits and credits such as Old Age Security.



I’m temporarily in a low tax bracket.
If you’re on maternity leave, for example, and have made RRSP contributions in the past, you may want to consider withdrawing from your RRSP to make a TFSA contribution. However, remember than funds withdrawn from your RRSP can’t be re-contributed at a later date.

I’m in a middle-income bracket
Just starting your career? Anticipating a raise in the future? You may want to contribute to your TFSA now and accumulate RRSP room to be used later, when you’re in a higher tax bracket.

Whatever your income level, your choice depends on your savings needs, your eligibility for income-tested benefits and your current and future financial needs. Talk to your advisor about the advantages of RRSP and TFSAs to determine what’s right for you.


Please talk to your advisor before making any financial decisions. The commentary in this blog is for general information only and should not be considered tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.