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


  1. 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?

  2. 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.

  3. 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.

  4. 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.


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

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

  6. 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.


  7. 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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