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TFSA vs RRSP: How They Compare, and Which Comes First?

Updated

A Registered Retirement Savings Plan (RRSP) lets you deduct what you put in, which lowers your tax now, and you generally pay tax on what you take out later. A Tax-Free Savings Account (TFSA) works the other way round: no deduction going in, and the growth is generally tax-free, withdrawals included. Which one leaves you with more after tax turns on your tax rate when you contribute compared with your rate when you withdraw: the federal government’s 2008 budget, which proposed the TFSA, showed the two come out the same when the “effective tax rates” at contribution and at withdrawal are the same. The basics of each are in the TFSA guide and the RRSP guide, and the RRSP vs TFSA calculator runs the comparison with your own numbers.

How do a TFSA and an RRSP compare?

TFSARRSP
Putting money inNot deductibleDeductible within your limit, which lowers your tax
Growth and withdrawalsGenerally tax-free, even when withdrawnUsually not taxed while it stays in the plan; payments out are generally taxed
Where your room comes fromThe yearly TFSA dollar limit, from the year you turn 18 as a Canadian resident; unused room carries forward18% of last year’s earned income, up to a yearly dollar limit; unused room carries forward
What a withdrawal does to your roomThe amount comes back as room on January 1 of the next year (when room resets)The CRA’s formula for RRSP room has no item for withdrawals
Withdrawals that aren’t taxedWithdrawals generally aren’t taxedWithdrawals under the Home Buyers’ Plan or the Lifelong Learning Plan aren’t counted as income
Age limitNo upper age in the CRA’s conditions for opening oneGenerally, contributions until December 31 of the year you turn 71, when the plan must also mature (what to do at 71)
Federal income-tested benefitsIncome and withdrawals don’t affect themWithdrawals are reported as income on your return

Each account has its own room: the CRA works out TFSA room and RRSP room with separate formulas, and neither counts what you put in the other.

From the RRSP contribution limit page:

Your RRSP deduction limit is your unused room from past years plus the lesser of 18% of last year's earned income and the year's dollar limit, minus your pension adjustment, plus any pension adjustment reversal and minus any net past service pension adjustment.

If you’re a member of a registered pension plan (RPP) or a deferred profit sharing plan (DPSP), you have a pension adjustment, and each year’s adjustment lowers your RRSP deduction limit for the next year. More in how a pension adjustment affects RRSP room.

Why does your tax rate decide which comes out ahead?

An RRSP deduction saves tax in the year you claim it, and an RRSP withdrawal is taxed as income in the year you take it. A TFSA skips both steps: the money goes in after tax and generally comes out tax-free. The 2008 budget said the tax assistance a TFSA provides is “in many ways, a mirror image of that provided through RRSPs”. In the 2008 budget’s words, at equal tax rates “the value of the tax deduction available for RRSP contributions is equivalent to the value of withdrawing funds from a TFSA on a tax-free basis”. When your rate at withdrawal is lower than when you contributed, the RRSP comes out ahead; when it is higher, the TFSA does. The marginal tax rate calculator shows your combined federal and provincial rate.

You don’t have to claim an RRSP deduction in the year you contribute: the CRA’s guide says contributions you don’t claim can be carried forward to a later year “when you may be subject to a higher tax rate”. More on that in unused RRSP room explained.

A worked example: the same pay into each account

Both accounts in this example start from the same pay. A TFSA gets what is left after tax, since there is no deduction. The 2008 budget’s comparison set it up the same way: “the person contributes $1,000 but receives a $400 reduction in tax”, so both accounts cost $600 of spending given up. The RRSP lines below follow that method: the full pre-tax amount goes in, which is the after-tax amount plus the tax saving (your refund) invested too. If the refund is spent instead, the last line shows what happens.

Take $1,000 of pay, and assume whatever goes in grows to 2 times its value before it comes out. The RRSP starts with the full amount and grows to $2,000 before tax in every case.

  • Same rate both times (30%). The TFSA gets $700 after tax and grows to $1,400. The RRSP’s $2,000 is taxed at 30% on the way out, leaving $1,400. Difference: $0.
  • Higher rate now (40%), lower later (25%). The TFSA gets $600 and grows to $1,200. The RRSP leaves $1,500: $300 more in the RRSP.
  • Lower rate now (25%), higher later (40%). The TFSA gets $750 and grows to $1,500. The RRSP leaves $1,200: $300 more in the TFSA.
  • Higher rate now, lower later, but the refund is spent. Only the after-tax $600 goes into the RRSP. It grows to $1,200 and is taxed at 25%, leaving $900: $300 less than the TFSA’s $1,200.

The rates here are made up for the example. The RRSP vs TFSA calculator runs it with yours.

What changes the answer?

Points to the RRSP when…Points to the TFSA when…
You expect your tax rate when you withdraw to be lower than when you contributeYou expect your tax rate when you withdraw to be higher than when you contribute
The refund from the deduction is invested too (see the example)The refund would be spent (see the example)
You get the Canada child benefit: the RRSP deduction lowers your net income, the figure the benefit is worked out from, and the benefit shrinks as family net income rises (CCB amounts)You get the Canada child benefit and may need the money soon: TFSA withdrawals don’t affect it
Your tax rate now is higher than your spouse’s or common-law partner’s expected rate in retirement: you can deduct what you put in their RRSP, though their withdrawals soon after may be taxed to you (spousal RRSP)

If you may need the money before retirement

You can take money out of a TFSA tax-free when you want, and the amount comes back as room on January 1 of the next year. Taking money out of an RRSP works differently: the financial institution withholds tax, the withdrawal is income on that year’s return, and the CRA’s formula for RRSP room has no item for withdrawals. The RRSP withdrawal tax calculator shows the withholding, and the TFSA withdrawal rules cover the timing.

Retirement income and benefits

The CRA says TFSA income and withdrawals don’t affect federal income-tested benefits:

Income earned in a TFSA and TFSA withdrawals don't reduce federal benefits such as OAS, GIS and EI, or credits such as the Canada child benefit, the Canada workers benefit and the Canada Groceries and Essentials Benefit (formerly the GST/HST credit).

RRSP money is different, because what you take out is income. The Guaranteed Income Supplement depends on your income from the previous year, and above a net world income threshold you repay part or all of your Old Age Security pension. For someone whose retirement income is near either line, an RRSP withdrawal can also reduce these benefits, on top of the income tax on it. See the OAS clawback and how much you can earn on the GIS. Drawing from both accounts once you retire is covered in what to do with your money after retirement.

TFSA or RRSP first? What decides the order, and where an FHSA fits

The order turns on the same points: your tax rate now and later, whether the refund gets invested (shown in the example), and the conditions above. Moving money you already have in a TFSA into an RRSP is covered in the TFSA withdrawal rules.

If you’re a first-time home buyer, a First Home Savings Account (FHSA) has features of both: contributions are generally deductible, and a qualifying withdrawal to buy a first home is tax-free, within its limits and conditions. How it fits with a TFSA and an RRSP is compared in FHSA vs TFSA vs RRSP.

Sources

The figures and rules on this page come from these sources, last checked against them between August 29, 2026 and September 29, 2026. How we check facts.