TFSA vs RRSP – Which one? Short answer: It depends. TFSA = tax-free growth & tax-free withdrawals. RRSP = tax deduction now, taxed on withdrawal later — so RRSP “saves” more when your current marginal tax rate is higher than the rate you expect to pay when you withdraw. Keep reading for the 2025 numbers, side-by-side comparison, real examples, and a simple decision flow to pick the winner for your situation.
Key 2025 numbers: The TFSA dollar limit for 2025 is $7,000. The 2025 RRSP dollar limit (annual cap) is $32,490, subject to the “18% of previous year’s earned income” rule and pension adjustments.
TFSA vs RRSP – Why this matters
- TFSA: You contribute with after-tax dollars. Money inside grows tax-free, and withdrawals are tax-free. Ideal if you expect to be in the same or a higher tax bracket later or you want flexibility. TD Bank
- RRSP: Contributions are tax-deductible now, lowering your taxable income today. The money grows tax-deferred, but withdrawals are taxed as income. RRSPs are powerful if you’re in a high tax bracket now and expect to be in a lower bracket in retirement. Canada.ca
TFSA vs RRSP At-a-glance comparison
| Feature | TFSA | RRSP |
|---|---|---|
| Contribution type | After-tax dollars | Pre-tax (deductible) |
| Withdrawals | Tax-free at any time | Taxed as income on withdrawal |
| 2025 annual limit | $7,000 (indexed). Unused room carries forward. | Lesser of 18% of previous year’s earned income and $32,490 (2025). Unused room carries forward. Canada.ca+1 |
| Re-contribution rules | Withdrawals added back to room the following year (not the same year). | N/A — RRSP contribution room behaves differently and is shown on your CRA Notice of Assessment. |
| Overcontribution penalty | 1% per month on the excess amount (applies from $1). | 1% per month on amounts over the $2,000 buffer for excess contributions. |
| Best for | Flexibility, tax-free compounding, short/medium goals, high expected future tax rate | Immediate tax relief, higher income earners, retirement savings, spousal RRSPs |
The math: simple examples of TFSA vs RRSP
Formula to decide: If your current marginal tax rate (MTR_now) > expected future marginal tax rate (MTR_future) → RRSP likely saves more tax overall. Otherwise TFSA likely wins.
Example A — You’re high-earning now
- Contribution amount: $10,000 to an RRSP today
- Current marginal tax rate: 40% → immediate tax refund ≈ $4,000.
- Years later: when you withdraw, assume marginal tax rate 25% → tax on withdrawal ≈ $2,500.
- Net tax saved across the lifetime: immediate saving ($4,000) − tax later ($2,500) = $1,500 net benefit. So RRSP beats TFSA in this scenario.
Example B — You’re early-career / lower tax bracket now
- Contribution amount: $10,000 to a TFSA (after tax) or to RRSP where your current marginal tax is 20% and future is 30%.
- RRSP immediate tax refund = $2,000. But if you ultimately withdraw at a 30% rate, you’ll pay $3,000 tax when withdrawn — net loss vs TFSA. TFSA becomes the better choice here.
Note: These examples assume the same investment returns inside both accounts. The core variable is the tax rate differential between contribution and withdrawal. Use the TFSA vs RRSP calculator (embed location below) to run your exact numbers with your province’s tax brackets.
Practical rules of thumb (short & actionable)
- If you’re young, early career, or expect your income to rise, prioritize TFSA to benefit from tax-free growth and flexibility.
- If you’re high earner now and expect a lower retirement income, prioritize RRSP for the immediate tax deduction.
- Use both if you can — max out whichever gives the best tax outcome now, then the other for diversification of tax treatment in retirement.
- For home down payment or short-term goals, TFSA beats RRSP (RRSP withdrawals are taxable unless under special programs like the Home Buyers’ Plan). (Link to FHSA/HBP guide on site.)
- Avoid over-contributions — CRA charges a 1% monthly tax on TFSA excesses and on RRSP excesses over the $2,000 buffer. Canada.ca+1
FAQs – TFSA vs RRSP
Q: Can I contribute to a TFSA and an RRSP in the same year?
A: Yes. Contribution room for each is separate. You can use both to diversify tax treatment and maximize savings.
Q: Are TFSA withdrawals added back to contribution room immediately?
A: No — withdrawals are added back to your TFSA contribution room the following calendar year (not the same year). Plan re-contributions accordingly.
Q: What happens if I over-contribute to a TFSA?
A: The CRA charges a tax of 1% per month on the highest excess TFSA amount for each month it remains. Fix it quickly to limit penalties.
Q: Is an RRSP always better if I want tax savings?
A: Not always. RRSP saves tax now, but withdrawals are taxable. If your retirement tax rate is higher than today’s, the TFSA may produce better after-tax outcome.
