RRSP or TFSA contributions – which should I choose?

February 2013


Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are two types of registered savings programs.  Canadians are encouraged to contribute to both types of savings vehicles, but how do they really compare?

Both strategies benefit from the ability to shelter otherwise taxable investment growth over a period of time.  In the case of a TFSA, contributions are made with after tax dollars, while a contribution to an RRSP will reduce taxable income in the year of the contribution. During your high income working years, the vote seems to favour the RRSP contribution to minimize annual tax payable. 

However, any withdrawal from an RRSP is fully taxed at the time of withdrawal.  A withdrawal from a TFSA can be made tax free, at any time, and the funds can even be recontributed to the TFSA at a later date. This provides a level of flexibility unmatched by the RRSP.

Timing and tax rates

When comparing the benefits of contributing to either an RRSP or TFSA, it is important to look at your current tax rate when the contribution is made, and projected tax rate at the time of withdrawal.  RRSPs were designed for those individuals who expect to be in a high tax bracket during their working years and a lower tax bracket in retirement.  The chart below illustrates this scenario and clearly shows the benefit of the early RRSP contribution (20 years prior to retirement). 


If you have had great success at growing your investments and retirement funds during your lifetime, in reality you may remain at the higher tax bracket throughout retirement, essentially nullifying the early benefits of the RRSP contributions. 

The scenario reverses in the case of a young adult contributing to an RRSP early in their career, when they are at a much lower tax bracket. In this case, there is a clear benefit to contributing to the TFSA early on. See the chart below for that comparison.

Consider when you will need the funds
So when determining where to make your contributions you should consider your needs. The flexibility of the TFSA is valuable if you need the funds for emergency or major purchases during your lifetime or if you are subject to income tested benefits, such as OAS clawback, the age credit and deductible medical expenses.  An annual contribution of $5,500 in 2013 along with continued annual contributions during your lifetime will provide a tax efficient savings plan. 

But don’t discount the RRSP contribution entirely!  You can contribute up to 18% of earned income to a maximum of $22,970 for the 2012 tax year. This contribution will reduce your tax payable this year and ensure your retirement nest egg continues to grow over time. High income earners should certainly take advantage of both savings programs.


    Don’t miss the RRSP contribution deadline!  The deadline for contributions for the 2012 tax year is Friday March 1, 2013.

    To make your annual TFSA and RRSP contributions, or to receive our complimentary RRSP 2013 Reference Guide, contact your Richardson GMP Advisor.


    Previous Tax & Estate Planning Strategies
    View items by year:






    • 2013 Tax Filing Changes: Foreign Income Verification Statement

      Dec 02, 2013

      In the 2013 Budget, the federal government announced it would take further measures to ensure that Canadian taxpayers with foreign holdings pay their fair share of federal taxes. To further this objective, the Canada Revenue Agency (CRA) revised the T1135 to require more detailed information about taxpayers and partnerships’ foreign holdings...
      read more
    • 2013 Year-end Tax Planning Checklist

      Nov 07, 2013

      Financial planning is time sensitive. While the following list is not exhaustive, here are some items that must be considered, incurred or paid prior to year end in order to be included in your 2013 tax return...
      read more
    • Beware of potential U.S. tax filing requirements

      Oct 04, 2013

      Canadian taxpayers may be at risk of a U.S. income tax liability. The legislation surrounding this issue has changed over the years, so it is important to evaluate your own situation to avoid any unpleasant surprises from the IRS...
      read more
    • Cottage Succession - Keeping it in the family

      Sep 05, 2013

      For most of us, there are wonderful memories attached to a family cottage. However, at some point, cottage owners will face the financial and emotional challenges of selling or transferring this cherished family asset...
      read more
    • Protecting yourself from possible lost income when the unexpected occurs - Understanding and maximizing Disability Insurance Coverage

      Aug 01, 2013

      While no one wants to contemplate the possibility of becoming disabled, the fact remains that if you fail to plan, the result to your lifestyle and the needs of your family can be seriously impacted...
      read more
    • Pension Income Splitting: Save taxes and enhance your family's wealth

      Jul 04, 2013

      Income splitting is a tax planning strategy that shifts income from a higher income earner to a lower income earner in order to reduce the overall tax paid by the family...
      read more
    • Renting your U.S. vacation property - Be sure you know the tax implications

      Jun 04, 2013

      Like many Canadians, you may own a vacation property in the United States (U.S.). And, you may be considering renting it out for the purpose of earning income or to defray the ongoing maintenance expenses. Before you begin renting your U.S. vacation property, however, you should take into account both the U.S. and Canadian income tax consequences...
      read more
    • What’s at the heart of your business?

      May 06, 2013

      You’ve worked hard to grow your business over the years and now it’s time to share the wealth with your favourite charity. Giving back through a personalized charitable giving strategy speaks volumes about who you are and the values you hold dear.
      read more
    • Family Wealth Transfer Plan: Permanent life insurance, an efficient way to accumulate and transfer wealth

      Apr 02, 2013

      Are you aware that permanent life insurance can be used as an efficient way of accumulating and transferring wealth? The Family Wealth Transfer Plan utilizes an effective insurance strategy that allows a parent or grand parent to transfer assets tax free to the next generation...
      read more
    • Trusts – An integral part of your estate plan

      Mar 01, 2013

      Integrating a trust (or multiple trusts) as part of your estate plan may provide significant benefits to you and your family. Typical benefits may include...
      read more
    • RRSP or TFSA contributions – which should I choose?

      Feb 01, 2013

      Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are two types of registered savings programs. Canadians are encouraged to contribute to both types of savings vehicles, but how do they really compare?
      read more
    • Take advantage of new limits to maximize contributions to your Tax-Free Savings Account

      Jan 04, 2013

      Effective January 1, 2013, the annual contribution limit for Tax-Free Savings Accounts has increased to $5,500. While this may be a small portion of your overall savings strategy annually, it can be one of the most powerful...
      read more