How to choose between RRSPs and TFSAs

Few of us can afford to be complacent when it comes to preparing for retirement.

We’re living longer and many of us won’t have an employer pension that guarantees a set retirement income. According to Statistics Canada, 38.4% of employees had a registered pension plan in 2011.

That means it’s vital we plan carefully, which requires understanding the different savings tools available to us, says Hardeep Gill, certified financial planner and JR Shaw School of Business finance instructor.

“People need to sit down and think of their goals. I think everything is predicated on that,” says Gill, who adds that even those with a guaranteed workplace pension may need to save extra money.

Gill recommends allocating 10% to 15% of what you make towards your retirement goals. To help, there are two main investment vehicles: registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA).

Statistics show that not all who are eligible are using these tools. Only 24% of tax filers contributed to an RRSP in 2012, according to Statistics Canada. The federal Department of Finance reported that in 2011 more than 30% of adult tax filers had a TFSA.

“TFSAs have kind of made things complicated for people,” says Gill. Some people may not realize that, like RRSPs, they are a container for a diverse range of investment options, he explains.

To help people better understand their options, we’ve adapted a chart from Personal Finance, a textbook by Gill and Jeff Madura, that compares the two savings tools.

Qualified investments

RRSPs and TFSAs are containers to hold investments including cash, GICs, stocks, bonds, mutual and index funds, mortgages, investment-grade bullion, coins and more. Diversifying your investments is recommended. “Diversification means spreading out your money geographically and across asset categories,” says Gill.

 Who’s eligible  

Canadian citizens aged 71 or younger who earn money


Canadian residents aged 18 or older


Primary purpose


Retirement income


Short and long-term savings


Annual contribution limit


18% cent of earned income up to a maximum of $26,010 in 2017. If you participate in an employer-sponsored pension plan, your contribution amount will be adjusted.

 $5,500 in 2017

Unused contributions carry forward


Yes, if you didn’t maximize your contributions, you can carry the unused amount forward.


Yes, contribution room accumulates each year even if you do not file an income tax return or open an account.


Tax-deductible contributions

 Yes, the initial investment is tax deductible.  

No, you cannot deduct this investment on your tax return.


Tax-deferred savings






Taxable withdrawals

Yes, it’s considered regular income so you will be subject to income tax. No, it’s not considered earned income.  You do not have to pay taxes on the initial investment or earnings.

Withdrawn amounts can be re-contributed


No, unless part of Home Buyers Plan (HBP) or Lifelong Learning Plan (LLP.)  HBP is a tax-free withdrawal option for Canadians wanting to purchase their first home. Money must be repaid within 15 years. LLP is available to full-time students who use RRSP money towards their education. Funds must be paid back within 10 years.

 Yes but not until the following year, when the amount is added to the annual available investment room. Don’t risk over-contributing and being penalized. 
Plan lifespan  

Plan must be transferred to a registered retirement income fund (RRIF) or cashed in by the end of the year you turn 71. Cashing in may mean significant tax consequences. RRIF holds the same investments as an RRSP but a certain percentage must be withdrawn each year.

 Account does not terminate

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