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3dstickfigures057r-450x600The TFSA vs RRSP Debate

At this time of year, some taxpayers are looking at their investments and are trying to decide how much they should contribute to their RRSP (registered retirement savings account) this year.  Others are considering whether they should save money into a TFSA (tax-free savings account).

If you’ve come to this post hoping to find the best answer, then you’ve come to the right place. I’ve been working all day on spreadsheets and projections trying to quantify the best path. However, what I have come to fully realize is that the only answer is:  It Depends.

There are too many variables and, without the use of a good-quality crystal ball or tardis (Dr. Who fans will get the reference), the best choice is a best guess given where you think you will be at retirement”.

So, I started compiling a list of considerations, then decided to ask Mr. Google. I came across this article by Gordon Pape that nicely articulates the things to consider (you can read the whole article at

The Age Test:
Everyone between 18 and 71 can ignore this one. For those who are still reading, the test is very simple. If you are over 71, a TFSA is your only choice. All RRSPs must be terminated, either by cashing out or converting to an income stream by Dec. 31 of the year of your 71st birthday.

For those under 18, the RRSP is the only option because you can’t open a TFSA until your 18th birthday. Most teens wouldn’t even think about an RRSP, but if you have any earned income, perhaps from a summer job, you’re eligible to contribute.

The Pension Test:
Anyone with a blue-chip pension plan should probably opt for a TFSA. That’s because they will have a secure income in retirement which will probably be above the national average. Withdrawals from an RRSP or RRIF, added to their pension, Old Age Security, and CPP, could push these people into a high enough bracket that some or all of their OAS benefits will be clawed back. This year the clawback kicks in when net income surpasses $70,954. At that point, the tax rate for an OAS recipient is higher than that assessed on someone with a million dollar income.

TFSA withdrawals are not considered to be income so they will have no impact on the clawback.

The Goals Test:
Ask yourself about why you are saving. Is it for retirement? If so, the RRSP is generally the best choice because it has a much higher contribution limit. You can only put $5,500 a year into a TFSA but the RRSP limit is 18 per cent of the previous year’s earned income to a maximum of $23,820.

If you are saving for a short-term goal, such as to buy a car, use a TFSA. If you put the money into an RRSP it will be taxed coming out, perhaps at a higher rate than your contribution deduction was worth.

A TFSA is also the best choice for an emergency fund. If something unexpected happens, such as a job loss or critical illness, you’ll want to be able to get at your money quickly, without having any held back for taxes.

For education savings, neither an RRSP nor a TFSA is the best choice. Instead, opt for a Registered Education Savings Plan (RESP) where the federal government will also make a contribution on your behalf of up to $500 a year.

The Support Test:
Do you expect to need government support in your later years, such as the Guaranteed Income Supplement (GIS)? Then choose the TFSA over the RRSP. GIS payments and provincial support programs are income tested. In the case of GIS, single people drawing OAS will lose $0.50 on every $1 for any other income except OAS and the first $3,500 of employment income. If income exceeds $16,560, the GIS disappears completely.

RRSP withdrawals and RRIF payments count as income for GIS calculations. This means that lower-income people who scrimped to put some money aside in an RRSP for retirement are penalized. You won’t have that problem with TFSAs because the withdrawals are not considered as income for the GIS calculation.

The Income Test: (authors note: this test assumes that you are earning more than $35,000 per year…generally at income levels of under $35,000 it is a better choice to pick the TFSA)
Do you have any idea what your income is likely to be after retirement? If you do, it makes the TFSA/RRSP choice a lot easier. If your income will be lower than when you were working, go for the RRSP. Here’s why. Let’s say you’re in a 35 per cent tax bracket. For every $1,000 you contribute to an RRSP, the government gives you back $350 as a tax refund. Your net cost is $650.

Let’s assume that in retirement, your marginal tax rate will fall to 25 per cent. You’ll pay $250 in tax for every $1,000 you withdraw from the plan. That’s a good deal from a tax perspective.

It’s the reverse if your income will be higher in retirement. For example, suppose your pension plan allows you to retire with full benefits after 30 years of service. You may decide to quit while you are still in your fifties and open a consulting business. With that income plus your pension you expect to make a lot more money than when you were an employee.

In this case, the TFSA is the better choice. The contributions will have been made with after-tax money when your marginal rate was 35 per cent. But if you later move to a 40 per cent rate, those tax-free withdrawals are going to look pretty attractive.


The best advice I can give is to talk to a trained investment and retirement specialist. See if they ask you the above questions (and come prepared with your answers).

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