Ed Rempel, a CFP and CMA, has written another guest post on the topic of TFSA vs. RRSP's.  This time, instead of writing about clawbacks, he does a direct comparison.  It's a fairly lengthy (and technical) post, so you may want to get more comfortable.


“You give 100 percent in the first half of the game, and if that isn't enough, in the second half you give what's left.” – Yogi Berra  

Tax Free Savings Accounts (TFSA’s) will be available in 2009. Should we be using them instead of RRSP’s to save for retirement? 

The short answer is that there is not a definite answer. It will depend on your circumstances. 

Since the real difference between them is the tax consequences, the answer depends on 2 key factors

  1. Marginal tax rates when contributing vs. marginal tax rates when withdrawing.
  2. Use of the tax refund. 

Key Factor 1

Most people assume that they will be in a lower tax bracket when they retire, since they will be making less income than while they are working. If this is true, that would be better for RRSP’s. In the introductory article about clawbacks on seniors, however, we saw that this is often not true. 

The 3 main clawbacks on seniors are on the GIS, age credit and OAS. All of them apply to all seniors within that income bracket, so they will cost seniors real money. 

The top tax bracket for non-seniors in Ontario is 46% which starts with a taxable income of $120,000. For seniors, however, when you included the clawbacks, we found that they are at a marginal tax bracket of 46% or higher if their income is either under $15,000 or over $37,000. 

This $15,000 threshold below which the GIS 50% clawback applies will vary between $15-20,000. Use $20,000 if your income will include the maximum OAS (40 years in Canada at age 65) and you are single, and $15,000 if not. 

This means that the only people that would be at a lower tax bracket will be those with a retirement taxable income between $15,000 (or $20,000) and $31,000. That range has only a 21% marginal tax bracket. For non-seniors, you are in a marginal tax bracket with an income over $37,000. 

This means that RRSP’s have an advantage for those with working taxable incomes over $37,000 that expect to retire with an income between $15-31,000. This would apply to those with modest retirement savings, but not those with essentially no savings or to those with lots of savings. 

These terms are very general, but “modest retirement savings” means something like $50,000-$150,000 when you are in your 40’s and say $250,000 to $750,000 when you will retire. These figures assume retirement is 15 to 25 years from now

There will be all kinds of variations for different people, but there are some rules of thumb: 

Key Factor 1 Winner

The winner, generally, for each is people in these categories: 


  • Reasonable working income and modest retirement savings or pension.
  • High working income (over $120,000).


  • Low working income (under $37,000/year).
  • Reasonable or high working income with very little retirement savings or pension.
  • Reasonable or high working income with generous retirement savings or pension.   

Key Factor 2

If you use an RRSP, what do you do with the tax refund? Getting a tax refund is the main reason many Canadians contribute to an RRSP. How you use it is critical for the TFSA vs. RRSP battle

Based on the work of Talbot Stevens, there are 3 options for your tax refund

  1. Spend the refund.
  2. Reinvest the refund to your RRSP.
  3. “Gross-up” the tax refund. 

To understand “gross-up”, let’s look at an example. If you have $10,000 to invest in your RRSP and are in a 50% tax bracket, you would need to contribute $20,000. Your tax refund would be $10,000, so you are net out-of-pocket $10,000, which was the cash you have available. 

How could you do this? You could contribute $10,000 plus take a short RRSP loan for $10,000 (or use a line of credit). Use the tax refund to pay off the loan. 

If you are contributing monthly and have reduced your tax at source (or are contributing to a group RRSP), then you are essentially doing the gross-up. 

Let’s look at how these 3 options affect the TFSA vs. RRSP battle. Here, the point is most clearly shown when we ignore investment return (assume 0%) and look at only one contribution. For simplicity, we assumed a 50% tax bracket before and after retirement. 

If you have $1,000 of available cash, here are your options:


With 0% Return         With 10% Return
  RRSP only. RRSP w. RRSP w.       RRSP w. RRSP w.  
Year Spend Refund Refund Gross-up TFSA   RRSP Refund Gross-up TFSA
0 $1,000 $1,000 $2,000 $1,000   $1,000 $1,000 $2,000 $1,000
1   $500       $1,100 $1,600 $2,200 $1,100
2   $250       $1,210 $2,010 $2,420 $1,210
3   $125       $1,331 $2,336 $2,662 $1,331
4   $63       $1,464 $2,632 $2,928 $1,464
5   $31       $1,611 $2,927 $3,221 $1,611
6   $16       $1,772 $3,235 $3,543 $1,772
7   $8       $1,949 $3,566 $3,897 $1,949
8   $4       $2,144 $3,927 $4,287 $2,144
9   $2       $2,358 $4,321 $4,716 $2,358
10   $1       $2,594 $4,754 $5,187 $2,594
Before Tax $1,000 $1,999 $2,000 $1,000          
After Tax $500 $1,000 $1,000 $1,000 $1,297 $2,377 $2,594 $2,594

Key Factor 2 Winner

TFSA. Only if you consistently gross-up all of your RRSP contributions, does the RRSP match the TFSA. Few Canadians do this. If you spend the tax refund, you would be far ahead with a TFSA. Even if you regularly contribute your tax refund, the TFSA wins, but not by a wide margin. 

Note that if you always contribute the refunds, you end up contributing the same amount over time, but you are always behind the TFSA because you invested later. However, with a 10% return, you are only about 10% behind the TFSA at retirement. 

Overall Winner: TFSA vs. RRSP

Overall, the TFSA will win for about 80% of Canadians. 

  • If you will spend your tax refund, then the TFSA clearly wins in almost any scenario. Note this is what most people do. 
  • If you regularly reinvest the tax refund or gross it up, then you should go back to the stage 1 rules of thumb. The TFSA also wins in most categories in stage 1. However, RRSP’s do win in one large category that would include 1/3 to 1/2 of Canadians – those with a reasonable working income and modest retirement savings or pension. 
  • If you would be tempted to withdraw from a TFSA, since it will be so much easier than withdrawing from an RRSP, then the RRSP may be better for you. 
  • TFSA limits are only $5,000/year, which is too little for most Canadians to maintain their existing lifestyles after they retire. RRSP’s allow much more contribution room, unless your income is under $30,000.   

Final Thoughts

After declaring TFSA the winner for about 80% of Canadians, the best advice, however, will be to use a combination of TFSA and RRSP

The purpose is to end up with a taxable income in retirement between $15,000 (or $20,000) and $31,000. If you can, then you will be in a low bracket in retirement. Note these brackets will likely be increased for inflation every year, so the brackets may be about double in 25 years. 

You can achieve this by having a “modest” RRSP and the rest of your savings in a TFSA. Therefore, you should aim for your RRSP to be no more than about $350,000 now, which would be about $750,000 in 20-25 years. 

We find that when our retired clients have a significant RRSP or pension plus a significant nest egg that is non-RRSP, then we can plan their retirement income very effectively. We can decide how much to withdraw from each source each year. Large non-RRSP portfolios are not that common for Canadians, however. 

Now that we will have TFSA’s, the goal will be to build up a good nest egg in both a TFSA and an RRSP. This will provide all kinds of planning opportunities to minimize tax after you retire. 

All these planning opportunities provided by TFSA’s are the dream for financial advisors. This is why we consider the TFSA to be the best improvement in retirement income planning for at least 50 years.

Photo credit: Anlex Basilio

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  1. Al on April 10, 2008 at 11:11 am

    My choice is to put money in the RRSP and put the tax return in the TFSA. Save Save Save!

  2. JR on April 10, 2008 at 12:50 pm

    contrary to my general line of thinking, but only for this thread, I would

    In year 1, Contribute 50% of the available RRSP you have for this tax year, say $5k (the earlier the better)

    When the tax return comes in (say $2k, plonk that along with a personal top up (in the amount you contributed the previous year $5k) this then gives you in year 2a $7k contribution, that now returns $2.8k.

    Take the $2.8k return in year 2, add to that the $5k, now you have $7.8k, and a tax return of $3.12k in year 3. For year 4 you now have a contribution of $5k + $3.12k = $8.12k, for a tax refund in yr 4 of $3.248. At year 5, from your own money again $5k + $3.248k = $8.248k, would give you a tax return of $3.296

    compounding is wonderful, in a few short years CRA will have matched your original $5k RRSP contribution, well fairly close to it.

    Numbers and amounts contributed can vary, as with the ROR in the RRSP account as well as your personal tax rate. I used a simple example.

    Once the pot is full to a level that you can do things with the RRSP account, that is the time to melt down and do the smart exchange RRSP for other tax savings methods

  3. George on April 10, 2008 at 3:25 pm

    “RRSP’s allow much more contribution room, unless your income is under $30,000.”

    This is only true for employees that don’t have pension plans, since a “pension adjustment” occurs on your RRSP contribution limit each year, which can reduce the available room substantially.

    My income is above $30,000, but I’ve got a very good pension plan. My RRSP limit for 2008 is only $1900. As a result, I’ll have far more room available in the TFSA.

    Starting in 2009, I don’t anticipate putting a penny into my RRSP unless my TFSA has been fully “maxed out” for the year.

  4. Daniel on April 10, 2008 at 3:46 pm

    With retirement a few decades away for me, it seems hard to find the right trajectory to end up with the optimal amount in RRSPs. If I max out TFSA first, I can always move funds from TFSA into RRSP later when the path will (hopefully) be clearer. I will probably be in a higher tax bracket later too, so I will get more benefit from RRSP contribs later as compared to now.

    Is this approach sound?

  5. JR on April 10, 2008 at 4:08 pm

    Daniel, only you can decide whether to go the TFSA first and RRSP second.

    RRSP’s give you tax free money to put into an RRSP.

    Both the RRSP & TFSA can get you bonuses when invested properly.

    If you dont use the RRSP contribution today, the amount available will just keep increasing, and at some point you may wish to take the TFSA funds and make that contribution

    At some point should you have built a nice tidy RRSP nest egg, you would have enough RRSP (half way down the road to retirement)to start the meltdown.

    My rule is, to always pay yourself first, and if you can do that with OPM, all the better

  6. JCR on April 10, 2008 at 8:06 pm

    “The purpose is to end up with a taxable income in retirement between $15,000 (or $20,000) and $31,000.”

    Ed, is this taxable family income or personal income (e.g., a couple could have up to $62,000 if split equally)? And does this include dividend income and capital gains, or only income taxed at the full marginal rate?

  7. JR on April 10, 2008 at 8:39 pm


    Using the calculator/tables provided by service Canada its easy to see how much GIS or allowance a person or couples will qualify for.


    This is not for everyone, but if you really want to milk this, then planning is required to make sure that income at 65 is minimal.

    One thought for those planning to go all the way to 65 was to start collecting CPP at 60 at the reduced rate, along with the not deducted CPP premiums, banking it or putting it into an RRSP or tax deferred vehicle, then hopefully topping up OAS & CPP with supplements at 65.

  8. George on April 10, 2008 at 9:20 pm

    JCR: It’s extremely difficult to factor dividends and capital gains into the equation, since the tax rates on these forms of income are likely to change between now and a future retirement date. My guess is that Ed’s numbers are based on regular taxable income for individuals.

    No matter what I do, I’m going to have a retirement income that’s greater than $31k (because I’ll have a pension that pays me more than that) so I’ll be doing what I can to minimize taxable income in retirement – I’ll use TFSAs instead of RRSPs as soon as they become an option.

  9. Daniel on April 11, 2008 at 11:00 am

    Would the interest incurred on a loan for investing in a TFSA be tax deductible?

  10. Sarlock on April 11, 2008 at 1:25 pm

    It seems to me the placement of investments in to a combination of RRSP, TFSA and non-registered portfolios allows you the opportunity to carefully place different parts of your diversified portfolio in to different locations with regard to tax implications.

    The riskiest part of your portfolio, which usually garners capital gains/losses, is probably best placed outside of your RRSP/TFSA. This way you can carry forward losses and enjoy a fairly nice tax rate on the gains. If you make capital gains in your RRSP, you are charged at your marginal tax rate at retirement, which may prove to be higher than the tax rate you would pay today on a capital gain.

    The safest part of your diversified portfolio, the interest income earners, your bonds, money market funds, etc, are located in your TFSA. This is because the tax rate for interest is highest of the three types of returns. This gives your overall portfolio more stability during market turmoil (like right now) and provides you with tax free interest income.

    The rest of your portfolio, a mix of medium risk growth stocks, dividend earners, resources, etc, goes in to your RRSP. Again, this will depend on your expectations of tax rates upon retirement. It may indeed prove to be more tax effective to invest in dividends outside of your RRSP if you expect a fairly high tax rate upon retirement.

    In this way, you may be able to pay more tax now, at a favorable rate (via dividend tax credits, capital gains tax rates) and reduce your income at retirement, thus potentially qualifying for part of the GIS.

    I will likely plan my retirement strategy to exhaust the majority of my RRSPs first (between 50 and 60) and leave the TFSA to compound as long as possible before withdrawing from it. This way, I can live nearly tax free in my later retirement years.

    Daniel: You won’t be earning any taxable income from your TFSA, so I doubt you’ll be able to claim your interest to invest in it.

  11. johnnycanuk on April 12, 2008 at 12:35 am

    TFSA’s are new. The government has not outlined all the rules to apply to them yet. Do not expect any tax relief when investing in them. Only the interest earned will be free of taxation. No one knows if mutual funds and shares can be held within a TFSA. The maximum to date is $5000 per year. Expect these TFSA’s to be secured investments paying a low interest rate. Always remember that the rules can be changed on a whim of the elected politicians. If they become highly used, expect some form of taxation to be applied.

    For now consider the creation of the TFSA, to be a political move aimed at seniors upset about the income trust situation. It is also a way for the govt to encourage saving without interfering with the monetary policy (raising interest rates), which could impact the business community.

  12. George on April 12, 2008 at 1:36 am

    Johnnycanuk: According to the CRA, a TFSA should be able to hold pretty much any investment that can be held in an RRSP (see http://www.cra-arc.gc.ca/agency/budget/2008/taxfree-e.html#q9 ) for details.

    It’s true that the rules can be changed, but I don’t think it’s likely that TFSAs will become highly used. RRSPs are an excellent way to defer taxes, yet very few people have used all their contribution room. TFSAs will help to encourage people to save more, and true savers will be the ones who benefit the most.

    TFSAs could have a positive impact on the business community, as it might increase the amount of capital available for investment, especially if mutual funds and publicly-traded securities can be held in the accounts.

  13. Ed Rempel on April 15, 2008 at 12:47 am

    Hi JCR,

    Good question. The $31,000 income above which you will probably be at a higher tax bracket when retiring than when working is individual. So, yes, that would be up to $62,000 for a couple is split evenly.

    This is taxable income, which would include investment income. This means it only includes 50% of any capital gain, but 145% of any dividend. For this reason (and how it affects clawbacks), after 65, capital gains beat dividends.


  14. Ed Rempel on April 15, 2008 at 12:48 am

    Hi Daniel, Johnny and George,

    I agree with your George. It looks like TFSA rules will be basically identical to RRSP’s, other than the tax on contributing and withdrawing. Both will not allow tax deductible loans, investment options will probably be identical, etc.

    This also makes sense for all those companies administering them, since it will take almost no programming to allow an RRSP administrator to administer TFSA’s.


  15. Gates VP on April 17, 2008 at 1:38 am

    OK, so I’ve recently moved to the US and I’m behind the curve here on Canadian content.

    It sounds to me like TFSA / RRSP now gives Canadians the “IRA” / “Roth IRA” option. (Except with a 5k TFSA limit instead of an income %).

    Am I on track here or is it just late?

  16. FrugalTrader on April 17, 2008 at 5:09 am

    Gates, I don’t know a lot about ROTH IRA’s/IRA’s, but from my understanding, yes they are similar. The biggest difference being that IRA’s have a penalty upon withdrawal where TFSA’S do not.

  17. Chuck on April 17, 2008 at 6:07 pm

    Gates: the TSFAs are like Roths. The difference is a Roth is still a retirement savings account. The TSFA is a savings account you can pull money out to do anything: buy a house, car, vacation, or fund your retirement.

    The government said that the TSFA was based on a UK program.

  18. Ed Rempel on January 11, 2009 at 6:05 pm

    Hi Chuck,

    The best use for most people for the TFSA would be as a retirement vehicle. It is called a savings account (as are RRSPs) and you can use it as a savings account, but the long term tax savings with that use would be very small compared to using it as a retirement vehicle.

    The long term growth of your retirement nest egg should be many times higher than just a savings account.

    This is especially true if you will be affected by clawbacks after you retire. For most Canadians, having a nest egg in RRSP and one in TFSA will allow very effective tax planning during retirement.


  19. Steve on January 12, 2009 at 6:14 pm

    playing with the #s

    If your really want to nickel and dime it you could borrow the $400, putting $1400 in to you RRSP right from the start, getting a $560 refund (%40 tax), with a net gain of $160.

    If you put the $160 in to your RRSP for the next year, and the $64 (%40 x $160) refund from that etc. etc. you gain an addition $264 from refunds after 5 years (at that point the refund is less than $1 so I stopped)

    Put this in the equation and when you take the money out at the end of 20 years you have:

    RRSP + invested refunds = $2875 ($4792 -$1917 in tax)

    A $1875 increase from your initial $1000 vs. a $751 increase from the TFSA.

    So the RRSP + invested refunds beats the TFSA by $1124, or a ratio of 2.5:1

  20. cannon_fodder on January 13, 2009 at 5:25 pm

    In the example above, they borrowed the full amount to gross up. However, the example cited a 50% tax bracket so that the $1,000 would have included borrowing another $1,000 for a net cash outlay of $1,000 (cash in hand) + $1,000 (borrowed) – tax refund of [50% x ($1,000 (cash in hand) + $1,000 (borrowed))] = $1,000.

    I’m not sure what you did to calculate the outcome you did, but it obviously was in error. If the $1,000 TFSA only increases by $751 after 20 years, you’ve realised compound growth of only about 2.8% per year.

    Let’s assume you are in the 40% tax bracket and your growth is 8%. You can either put in $1,000 into the TFSA and watch it grow for 20 years = $4,660.96 OR you can borrow $666.66 and add it with your $1,000 to put it in your RRSP. You will get your $666.66 back at tax refund time (which hopefully is soon after you borrow it so that interest costs are small). The way you arrive at $666.66 is simply by taking the amount of cash on hand divided by (1 – Marginal Tax Rate) and then subtracting the amount of cash on hand. In this example: [ $1,000 / (1-40%) ] – $1,000

    Now, your $1,666.66 can grow at 8% over 20 years to become $7,768.23. If you take it out at 40% MTR, then the value of that $7,768.23 is, of course, $4,660.96. No advantage either way.

    The question is, if you take all of that money out at once 20 years from now, will it necessarily be at a 40% MTR? Not at all! Factor inflation into it and you will see that the amount of income required to be at a 40% MTR, with all else being the same, will be much higher – probably 50% higher. Also factor in that you are retired and for many people this will mean that they actually withdraw less income than they did during their working years (especially as they close in on retirement) and they need less income. I would bet that as the aging baby boomers start retiring en masse, studies will show that retirees are withdrawing RRSP/RRIF money at a lower MTR than their contributions if they typically were able to contribute at a 40% or greater MTR.

    Because GIS entitlement is an annual process, perhaps some people will determine that they are better off to take a little more money out of their RRSP’s than they need one year and contribute it to the TFSA so that the following year they can receive their CPP, OAS, and still qualify for GIS – making up any income required via TFSA withdrawals.

  21. Steve on January 14, 2009 at 4:21 pm

    Here’s the full breakdown.

    Say you have $1000 in pre-tax income, and your tax bracket is at %40.

    In the first year
    TFSA = $600 ($1000 – $400 in tax)
    RRSP = $1000 (no tax, spent refund)
    RRSP + return = $1400 ($1000 + $400 tax refund invested immediately)

    After 20 years at %5.5 compounded annually, you pull the money out at a tax rate of %40

    Used PV*(1+R)^N
    where PV is present value, R is the interest rate, and N is the number of investment periods.

    TFSA = $1751 (no tax)
    RRSP = $1751 ($2918 – $1167 tax)
    RRSP + refund = $2451 ($4085 – $2451 tax)

    So the results look like a tie if you spend your refund, but if you don’t the RRSP is the clear winner.

    If your really want to nickel and dime it you could borrow the $400, putting $1400 in to you RRSP right from the start, getting a $560 refund (%40 tax), with a net gain of $160.

    If you put the $160 in to your RRSP for the next year, and the $64 (%40 x $160) refund from that etc. etc. you gain an addition $264 from refunds after 5 years (at that point the refund is less than $1 so I stopped)

    Put this in the equation and when you take the money out at the end of 20 years you have:

    RRSP + invested refunds = $2875 ($4792 -$1917 in tax)

    A $1875 increase from your initial $1000 vs. a $751 increase from the TFSA.

    So the RRSP + invested refunds beats the TFSA by $1124, or a ratio of 2.5:1

  22. Elman on January 14, 2009 at 8:58 pm

    the 1000 you use to buy RRSP, isnt that an after tax money (you havent received the refund). So you should probably use 1000 as well to buy TFSA and not 600.

  23. George on January 14, 2009 at 9:04 pm

    @Elman: Money that goes into an RRSP is always before tax – that’s the whole point of the refund (you can contribute $1000 but it only costs you ~$600 out of pocket because of the tax savings).

  24. DAvid on January 14, 2009 at 9:52 pm

    Steve wants his taxes returned twice; he describes a tax return on pre tax income!

    $1000 is available for both the TFSA and the RRSP. If he invests the refund, as cannon_fodder states, it balances out. However, since most folk will place funds into an RRSP and get their marginal tax rate on contribution, and only pay at their average tax rate on withdrawl. This can be about a 10 – 15% difference.


  25. George on January 14, 2009 at 10:34 pm

    The other thing to keep in mind is that calculations involving reinvested refunds are always hypothetical. In my circumstance, I’ve maxed out my RRSP contributions (they’re lowered because of a generous work pension) so I am not usually able to reinvest much of the tax refund into the RRSP.

    For people like me (savers with maxed out RRSPs and good pensions), the TFSA is awesome as an early-retirement savings tool.

  26. Steve on January 14, 2009 at 10:57 pm

    David, you’re right, I goofed, there is no refund back for the $1000, I’d simply pay no tax on that amount.

    It should be

    Say you have $1000 in pre-tax income, and your tax bracket is at %40.

    In the first year you invest
    TFSA = $600 ($1000 – $400 in tax)
    RRSP = $1000 (no tax, no refund)

    After 20 years at %5.5 compounded annually, you pull the money out at a tax rate of %40

    Used PV*(1+R)^N
    where PV is present value, R is the interest rate, and N is the number of investment periods.

    TFSA = $1751 (no tax)
    RRSP = $1751 ($2918 – $1167 tax for the withdraw at 40% tax)

    Looks the same to me.
    The only benefit would be if you take the money out at less than 40% tax.

  27. George on January 14, 2009 at 11:11 pm

    @Steve: You’re quite right – equal contributions to an RRSP and a TFSA (RRSP pre-tax, TFSA after-tax) will result in the same after-tax gains when you withdraw, but only if you’re paying the same marginal tax rate when you withdraw from the RRSP.

    RRSP withdrawals are done at your average tax rate (assuming no other retirement income), which is lower than your marginal tax rate, as David notes above.

    TFSAs as a retirement vehicle are most beneficial to the following groups:

    1) Low-income earners who don’t get much benefit from the deductability of RRSP contributions (and who stand to lose out from retirement benefits due to claw-backs).

    2) High-income earners who want to shelter some of their non-registered portfolio.

    3) Middle- and upper-income earners who also have a good pension plan and therefore have reduced RRSP contribution limits due to the pension adjustment (PA).

  28. Ed Rempel on January 15, 2009 at 11:12 pm

    Hi Steve,

    Your figures are correct. Note that the RRSP only keeps up with the TFSA when you “gross-up” your contribution. You only put $600 into the TFSA, but $1,000 into the RRSP.

    If you had $600 cash, you could not put that into your RRSP to get an extra $400 tax refund. Your refund would only give you a refund of $240 ($600 x 40%).

    You would need to gross-up your contribution. This means you would contribute your $600 and borrow $400 more to contribute, which would give you a full $1,000 to contribute. Then your refund would be $400, so you could pay back the $400 you borrowed.

    For RRSP to keep up with RRSP, you need to gross-up your contribution every year.

    As George pointed out, contributing your refunds is often hypothetical for those that always max out. This is even more true for those that gross-up their contribution every year.


  29. Ed Rempel on January 15, 2009 at 11:27 pm

    Hi George,

    RRSP withdrawals are done at your marginal rate, not your average rate. If you are comparing TFSA to RRSP, your income when you withdraw would be the same except for the RRSP withdrawal. So, it is on top of any other income.

    TFSAs as a retirement vehilce are also most beneficial to:

    1. Anyone that has saved very little for retirement and has no pension plan.

    2. Those that have quite a bit of retirement savings or modest savings and a
    pension plan.

    3. Anyone who will be in a similar tax bracket when they retire than when they are working and will not contribute 100% of their tax refunds back to RRSPs (and gross them up).

    The first 2 groups would be affected by clawbacks in retirement, so they will almost definitely be in the same or a higher tax bracket when they retire than they work.


  30. Steve Salter on July 9, 2009 at 2:33 pm

    Unless the projections of savings/retirement income include the ACTUAL tax calculation (i.e. the T1) with all the intricacies (progressive -indexed- tax brackets, clawbacks, surtaxes, age credits, etc, then any discussion of ‘which is better, TFSA or RRSP’ will be badly approximated. Unless you calculate with a true ‘goal-based’/tax accurate program, then you won’t get any valid information.

    Generally, maxing the RRSP is the best strategy for most levels of income. The TFSA is best suited for saving for a lump sum cash call… if you anticipate a constant (inflation adjusted) after tax income in retirement, max your RRSP, then max your TFSA and if there is anything left over dump the rest into nonreg.

    Using simplistic (spreadsheet) marginal or average tax rate models is not suited for this type of calculation… the complex way that investment capital (and other non-investment entities) interact with income tax over time is of primary importance for this type of analysis.

  31. Fraser on January 9, 2010 at 10:08 pm

    In my opinion, the premise of a low-tax bracket in retirement (RRSP) is absolutely not something a person should actively plan for – why on earth would I want to retire poor? I plan to build my income continually throughout my life and my business/investment income should remain the same after I “retire”.

    I love that TFSA has no future taxation. Limits are low but $5k/yr in a decent investment (12%+) would build enough over 20 years to make it worthwhile.

  32. Gerald on March 3, 2010 at 7:24 pm

    If your employer does any kind of RRSP matching then surely RRSPs would win even for small amounts.

    Have you heard of any companies starting a TFSA match? I suppose that because of the limit that would be hard to do. But maybe they could get away with less because of the ability to withdraw it now.

  33. Gerald on March 3, 2010 at 7:30 pm

    Since those who cannot contribute $5,000 to a TFSA in a given year are able to carry forward their unused contribution room to future years it seems to make sense to open an TFSA on your 18th birthday just in case.

    Then you can catch up later if you want.

    Is this a loophole or sorts? If it isn’t then shouldn’t I be able to get consideration for all the years since I turned 18 and carry all those years of unused contribution forward?

  34. DG on March 3, 2010 at 11:39 pm

    Gerald – You accumulate contribution room whether you have an account or not, so there’s no point in opening one if you plan to let it sit idle. Same deal as for RRSPs.

    TFSA contribution accumulation starts at your 18th birthday or 2009, whichever is later.

    Employer TFSA, interesting idea..


  35. Highlander on March 4, 2010 at 11:47 am

    Being in a lower tax bracket when you are retired doesn’t necessarily mean you are poor. Good after tax planning can really minimize the taxes you pay.

    My original plan was to not touch the RRSP until the non-registered funds were gone, but when I saw what the eventual taxation was on my RRSP income, I figured there had to be a better way. Setting up a dividend stream with the non-registered funds and slowly nipping at the RRSP balance while in lower tax brackets makes the money go MUCH further. You can easily collect $60,000 in income that way an pay <10% tax. That is a far cry from my current tax bracket, and is plenty of funds. If you can manage on $40,000 then you can pay virtually no tax.

    I am SO planning to be in a lower tax bracket when I retire….

  36. Laksh on March 23, 2010 at 2:07 pm

    I am very new to this. I am only 24 years old and just out of university and started a new job! I do not make much but time is on my side and want to make the best use of it.

    Can someone very briefly explain how RRSP’s work in terms of building wealth for retirement.

    I understand its tax deferred till I access the funds after I retire but have some questions:

    1. If i open up a RRSP- is it as simple as depositing some money in to it every month or as much as i can up to my limit for that year and letting it grow.

    2. I do not understand what some of your talking about Registered Funds and Non-Registered Funds and how they are different.

    3. Is the money i put into a RRSP guaranteed to grow or can i loose all my money if the market goes down? Or does this have something to do with if I choose registered funds versus non- registered funds? I am getting the feeling that registered funds are guaranteed investments at a particular interest rate compounded over the years and Non- registered is investing your RRSP in stocks, equities etc..where you take a risk with your money but better returns but you also risk losing your money – including your principal?

    4. I plan on using a RRSP as well as TFSA. RRSP as my main source of retirement income and TFSA as both a short term long term investment.

    – Correct me if I am wrong but can you transfer money from your RRSP into a TFSA after retirement and withdraw money tax free? I am estimating that about $45 000 income is all i need to live comfortably including CPP/OAS and all other income i get from government. This is assuming that i have my house paid off etc… So assuming I have a sizable RRSP built up, I assume that would only take out about $20 000 year or so from that and the rest will be made of the governmetn incentives? I always assumed that if i can live on $45 000 that i took that directly out of my savings.

    Sorry for all the questions! Any help and advice on how i should approach this would be appreciated!

  37. DG on March 23, 2010 at 2:26 pm


    A registered account refers to a TFSA, RRSP, RESP, etc. It is called “registered”, because it is registered with the government to get special tax treatment.

    A non-registered account is not registered with the government and gets taxed normally. Your chequing and savings accounts are “non-registered”.

    Registered or non-registered refers to the tax treatment, not the actual investments contained within. For example, you could hold Microsoft stock in a TFSA, RRSP, RESP, and a non-registered investment account. You could hold cold hard cash in all of the above too.

    You cannot directly transfer money from an RRSP to a TFSA. You pay tax on the money when you remove it from the RRSP. CRA rule of thumb: if you discover some wonderful loophole, you are mistaken about something or it is illegal. :)

  38. Gerald on March 23, 2010 at 2:39 pm

    Most graduates should forget RRSPs for a while and put as much money against their debt (any kind) as possible because of their low marginal tax rate.
    During this time, only contribute to an RRSP if there is an employer match.

    Schedule the payments or get your employer to put X% of your paycheque into a 2nd account from which you do nothing but pay off debt.

    When you’re debt is paid off and you’re in a higher tax bracket then start contributing to your RRSP.

    If you plan on living for a while after you retire then forget TFSAs. (http://www.taxtips.ca/calculator/tfsavsrrsp.htm)

    You can have stocks, mutual funds and even gold bricks in an RRSP. They move up and down with the market but you’re making money on dollars that would otherwise be going to the taxman. Capital and returns are taxed as income when you withdraw.

  39. Laksh on March 23, 2010 at 2:42 pm

    Great thats DG!

    That clears it up a bit. Is it possible to lose money from an RRSP contribution? Or does this depend on the type of portfolio i have created. Without knowing too much about RRSP’s i would say that I would want 80% in safe guaranteeed investments and 20% in equties? How do conservative people normally do it? Or since i am young should i increase my risk?

    Once I get married I am wondering if we should do our own RRSP contributions or combine them. What the benefits and negatives? I am really torn on this one!

    Also going back to my estimate of needing retirement income of $45 000.00/per year. How do people decide how much to withdraw from RRSP if $45 000 is the amount they are looking for. Do they look at how much governmetn incentives they are getting and look for the rest of the amount from their RRSP’s?

  40. DG on March 23, 2010 at 3:22 pm


    Gain and loss depends entirely upon the portfolio. You can go broke just as easily in an RRSP as an unregistered account.

    RRSPs do not merge when you get married.

    As for the portfolio, if you ask 10 different people you will get 10 different opinions. I will share mine:

    – If you are saving for retirement, I would go very heavy on equities. Maybe even 100%. That might be aggressive, but in any case, most people would agree that going heavy on GICs at your stage in life would be a mistake. However, if you want to use some of these saving in the near term, say to make a nice down-payment on a house, then I would hold that portion as bonds, moneyfund, or GICs.

    – I would max out TFSA before RRSP for multiple reasons:

    1. It is easy to move TFSA funds to an RRSP but the reverse is not true. Going TFSA now lets you defer the TFSA vs RRSP decision.

    2. Going with TFSA will let you easily use the money for a house. (On the other hand, you could easily waste it on something stupid. If you are vulnerable to this then maybe RRSP is better).

    3. As your career progresses, you will make more money, move into higher tax brackets and will get better deductions for RRSP contributions. Use the TFSA now, and then switch to RRSP in 30 years when it gets you more bang for the buck.

  41. Laksh on March 23, 2010 at 3:59 pm

    What about my wife and I contributing to RRSP’s? Should we have our own…or combine our money and contribute it to one Portfolio?

    Any benefits/disadvantages?

    Thanks….my last question!!!

  42. DG on March 23, 2010 at 4:18 pm

    Okay, I think I know what you are asking now.

    The goal at retirement is for you and your wife to have equal income… this means you are minimizing taxes. One person earning 90k pays way more than twice the tax of two people earning 45k.

    So, in general, your RRSP balance should be equal at retirement.

    Now say your wife has a nice juicy government pension, and you don’t. In that case you should have a larger RRSP to compensate your lack of pension and help keep income equal.

    Again, you are young and have a lot of career ahead of you.. who knows what kind of pension either of you will wind up with in 30+ years from now. Prioritizing the TFSA lets you defer this kind of planning until things become clearer many years down the road.

  43. Laksh on March 23, 2010 at 4:41 pm

    Thank DG!

    Couldnt stashing away $5000/year till I figure out the RRSP thing backfire? The whole idea of RRSP i thought was about compounding interest and time working toghether.

    If i wait too long to invest into and RRSP and then i lose out on compounding interest and time dont I?

  44. DG on March 23, 2010 at 4:55 pm

    You would invest your TFSA money the same as you would in an RRSP. If you were going to buy mutual fund XYZ in your RRSP, you can buy XYZ in your TFSA too.

  45. Laksh on March 23, 2010 at 5:02 pm

    Wow great you have really clarified a lot for me!! It makes sense to me now! Thank you so much.

  46. Showtime on February 13, 2011 at 8:18 pm

    A very interestng topic that I’ve thought about myself. I appreciate Ed’s insight and analysis. I do find the following statement quite odd: “Overall, the TFSA will win for about 80% of Canadians”. It is an arbitrary number that is not even supported by Ed’s own comments. He goes on to say that RRSPs win in one large category that would include 1/3 to 1/2 of Canadians – those with a reasonable working income and modest retirement savings or pension. Also because of TFSAs relatively recent introduction and the $5k limit, older people will have less opportunity to take advantage of TFSAs. Statistically, Canada has an older population (largely due to baby boomers). I agree that if someone has the cash, it’s best use both rrsp and tfsa. I just think “tfsa better for 80% of canadians” is inaccurate. Based on info available, including Ed’s, the number would be more like 50%, maybe less.

  47. Stu Lach on February 20, 2011 at 5:12 pm

    This older people here(62) in retirement has found TFSA’s very useful. I keep transfering (in kind) dividend stocks from our taxable account to our TFSA’s every January and then withdraw the divs all year tax free of course. Just last month I transferred roughly $11650 worth for our 2011 contribution. I know I’m losing the div tax credit but paying no tax at all is better. Works for me!

  48. Alex on April 27, 2011 at 12:43 pm

    Laksh’s comments make me believe even more that basic retirement planning and money management should be a mandatory part of education in Canada. I work for a major bank in Canada and see all kinds of kids just out of school investing in GIC’s and parking funds inside an RRSP, while making less then 15-20k/year because they really don’t know what is out there.

    Being only 22 myself, and being in a low tax bracket now, I’ll be taking the TFSA approach first, and waiting a few years until my income hits 80k+ a year before I start maxing out contribs to an RRSP.

    So here’s my question being fairly new to the field:
    (Note: I am VERY aggressive in investing/risk tolerance.)

    In which savings vehicle should I hold My various elements of my (now) small portfolio?

    I have/will have Stocks, an open RRSP and TFSA, and am looking into precious metal/ gobal equity/small cap funds. I also enjoy playing with the commodity markets, but that’s more of a hobby.

    Also, My company has a pretty good defined contribution pension plan.

    Thoughts on a strategy for maximising growth in the long term?

    p.s. I saw someone touch on this in an earlier post, but it seemed to be based on someone in a moderate risk class.

  49. vrcnv on February 1, 2012 at 2:24 pm

    the key thing here is that if you don’t reinvest the tax refund, you’re going to break even. it’s simple math: the commutative property of multiplication. you’re just doing things in a different order

    where x = your pre-tax amount to invest, 1/y = your tax rate, and z = your investment growth rate / year, s = your total amount at retirment after t years.

    rrsp: (x * z * t ) * y = s
    tfsa: (x * y) * z * t = s

    in the rrsp case, the funds grow first, then you subtract tax, in the tfsa case the tax is deducted first then you grow it. as others have posted, it’s hard to predict what your tax rate is going to be at retirment so it’s merely speculation as to whether it’ll be the same, lower or greater (everyone who invests in the rrsp would be hoping for lower, and everyone who invests in the tfsa would be hoping for higher).

    reinvesting the ‘refund’ (the tax that you’re not paying now but will pay later) is the key thing here. it’s like an interest free loan from the government that you get to invest however you choose. however, it’s important to know that the refund you get now you still have to pay back later when you retire so it’s simply not enough to just take the refund and hide it under your bed. in that case you’ll still break even with the tfsa.

    therefore you have to take this money and invest it and earn interest on it. that interest is yours to keep. this is why you have to start early: to maximize this amount of interest. using simple savings account calculations, if you get a ‘refund’ of 100/month, and you invest that immediately each month over 40 years at 2%, you end up with 25 500 in earned interest (and 50 000 in unpaid tax money that you have to give back). if you waited until you were 45 to invest 100/month with a 24000 initial deposit (the refund you get for all of your unused rrsp contributions at this point now that you decided to start contributing), you’d end up with 17 000 in earned interest and if you waited till you were 55, you’d have a only 10 000 in earned interest.

    these calculations are pretty conservative (2% interest rate, 1200 refund/year) and even in this case you end up with 25 500 extra vs the tfsa. that’s like retiring and getting a brand new car or an all expenses paid cruise every year for 5 years.

  50. vrcnv on February 1, 2012 at 5:33 pm

    in my last calculation i left out a key piece of information. the starting age i used is 25. so 100/month at 25, 24000 initial + 100/month at 45, and 36000 initial + 100/month at 55. the calculations are approximate +- 1000.

  51. ALEX on February 1, 2012 at 5:58 pm


    Thanks for your reply! I certainly see where you were going there with rrsp’s being better if reinvesting the refund, and I do mostly agree. The variable being tax at retirement, and how much of a difference it is from when it was invested. A basic strategy I was planning on using was to reinvest the RRSP refund into the TFSA. What are your thoughts on that?

    But one question I still have, what should I hold in each of these accounts to make them more efficient? In broad diversification terms of course, is it better to hold interest income inside the RRSP, over capital gains? In my mind, being very aggressive inside the TFSA is better approach in the long term, capital gains being the target. I guess I think this way because I always thought that the Gov didn’t consider the way the funds are invested in these accounts, and only based the taxation on amount withdrawn and tax bracket. Did I miss a big piece of the pie thinking that way?

  52. Jeff on September 18, 2012 at 1:56 pm

    I’m not sure where you came up with that formula but your results are wrong.

    Even with simply reinvesting the refund, the RRSP is still way behind. Assuming an equal tax rate at contribution and retirement, you need to double up your investment (i.e. gross up) in the RRSP in order for them to equal out in the end.

    @10%, $5000 invested in a TFSA will be ~$54k in 25 years.

    Assuming a tax rate of 50%, we would have $7.5k to invest in an RRSP, which would come out to ~$81k in 25 years. Taxed at 50% on withdrawal, we only have ~40.5k…well below the TFSA.

    You would need to invest $10k to get ~$108k in 25 years (or $54k after tax).

    The example in the article is very clear, if you expect to your tax rate at contribution will equal your tax rate at retirement, you need to gross up for the RRSP to even match the TFSA, which really puts you behind due to lack of flexibility and potentially cancelling out other old age benefits.

  53. dave on October 27, 2012 at 5:18 am

    I have no information here but i do think its easier and less stressful in the tfsa course.
    #1 -> don’t really need to deal with the government unless some political decision is made.

    #2 easier to manage.

    #3 read above theres some other reasons.

    rrsp does sound good, but measuring the pros/cons. i think id take a little less money over more headache.

    btw my opinion doesnt matter.

  54. Ed Rempel on October 27, 2012 at 9:55 pm

    Hi Alex,

    As a general rule, you should have your more aggressive holdings in your TFSA.

    The TFSA is tax-free growth, while RRSPs are tax-deferred growth. If your RRSP grows a lot, you will have to pay tax on it eventually at withdrawal.

    Just one caution. I find some people get so focused on the tax aspects of their investments that they forget the investment aspects. Over time, the investment aspects are far more important. Make sure your investments are good quality, suitable for you and your risk tolerance, with at least enough growth to achieve your goals.

    After that, you can decide which investments to put in which account, but I would caution you against trying to choose investments just based on the type of account.


  55. Jason on November 28, 2012 at 12:29 pm

    How does the TFSA stack up against the RDSP for people between 50 and 60?

  56. Ed Rempel on November 28, 2012 at 6:58 pm

    Hi Jason,

    The RDSP is an extraordinarily generous vehicle for disabled people where they can get a grant of up to $3,500/year for a contribution of $1,500. They are obviously far more beneficial that TFSAs or RRSPs.

    However, once you turn 50, you no longer get any grants. You can still contribute, but do not receive grants. Your contributions grow tax-deferred, but you will have to pay tax on the growth when you withdraw.

    Therefore, a TFSA would probably be better after age 50, since you do not have to pay tax on the withdrawal.


  57. j... on January 30, 2013 at 5:52 pm

    Agree, good analysis. I would say the RRSP edges out the TFSA if no other reason than the immediate tax break. Pretty tempting to get that 30% or 40% tax reduction when you’re in your high earning years.

    Also, I find it helpful to use a good retirement planning app to help with the number crunching. A real good one that I use is called the 5 Minute Retirement Plan. It’s an iPhone app and one of the best ones I’ve found so far.


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