Two of the best savings and investment tools available to you are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Both are excellent tools for securing your financial future in retirement, and before. And both offer a way for you to grow your investments faster. While RRSPs and TFSAs may seem similar, understanding the key differences between them will help you maximize your savings and make your dreams a reality.

Key differences between RRSPs and TFSAs

The main thing to keep in mind when you’re contributing to these two accounts is that your RRSP contributions reduce your taxes today, but you will be taxed when you withdraw from your RRSP once you retire. The TFSA offers no tax advantage today, but you don’t pay taxes when you withdraw, including on investment growth within the account.

Contribution limits and rules
RRSPs have a contribution limit of 18% of your previous year's earned income, up to a maximum of $31,560 for the 2024 tax year.

TFSA contribution limits are set annually, with $7,000 being the limit for 2024 and 2025. Unlike RRSPs, your TFSA contribution room accumulates regardless of how much you earn. If you don’t maximize your contributions, any amount left over will be added to your contribution room for the following year. And if you take money out of your TFSA, that amount gets added back to your contribution room.

How your taxes are affected
As mentioned, RRSP contributions are tax-deductible, while TFSA contributions are not. RRSP withdrawals are taxed as income, but TFSA withdrawals are tax-free. This is why you will often hear RRSPs described as “tax-deffered,” and it’s why RRSPs are a great tool for reducing the taxes you pay in your prime earning years.

Impact on government benefits
You can withdraw money from your TFSA any time without affecting your eligibility for income-linked government benefits like Old Age Security (OAS). On the other hand, RRSP withdrawals are considered taxable income and may impact these benefits.

Deciding which one is right for you
TFSAs offer more flexibility since they allow you to take money out, tax-free, at any time, while RRSP withdrawals before retirement are subject to withholding tax and result in the permanent loss of that contribution room. It’s a good idea to have both, and to be thoughtful around how much money you contribute to each plan as you go through life.

Who should save more money in their RRSP?

• High-income earners who would benefit from immediate tax deductions
• Those expecting lower income in retirement
• Anyone wanting to save for retirement who won’t need access to their funds before then

Who should save more money in their TFSA?

• Lower-income earners who may not benefit as much from RRSP tax deductions
• Young professionals early in their careers in lower tax brackets
• Those looking for a flexible savings option for short-term goals or larger purchases in the future, like a car or home renovation

3 ways you can maximize your RRSP and your TFSA

Remember, you can make real headway by saving money in both an RRSP and a TFSA during your working years. Here are three ways you can get ahead:

1. Set Goals: Use your TFSA for short-term savings goals and your RRSP for long-term retirement planning.
2. Contribute Based on Income: Contribute to your RRSP during your highest earning years to offset the taxes you pay and contribute to your TFSA in the years when you’re earning less. During times when you’re underemployed — or taking a break to raise kids — you’ll pay less in taxes, making the TFSA your better choice.
3. Invest to Save More, Faster: Use your TFSA to hold long-term investments like mutual funds, stocks, bonds and term deposits. Your savings grow faster, and you don’t pay taxes along the way or when you withdraw them. If you invest regularly for 5 or 10 years, you could have a sizeable amount saved up.
   
   You can also use your RRSP to hold investments like mutual funds, etc., but you may pay more to withdraw the funds if you need them before you retire.

Case Studies

When you’re deciding how much to save in your RRSP and TFSA, think about what tax bracket you’re in now and where you’ll be in the future, so you can minimize the taxes you pay over your lifetime. Here are some examples of what that might look like.

A young professional just starting out in their career
Sarah, 25, makes $45,000 a year. She should prioritize saving in her TFSA to maintain flexibility while building her career and saving for a down payment on a home.

A mid-career couple balancing priorities
John and Stephanie, both 40, earn a combined income of $150,000. They maximize their RRSP contributions to reduce current taxes and save for retirement while using their TFSA to save up for a home addition.

An older professional getting ready to retire
Robert, 58, earns $90,000 and expects his income will be lower in retirement. He maximizes RRSP contributions to benefit from tax deductions now and plans to convert his RRSP to a RRIF in retirement.

Tips to get started

1. Evaluate your financial situation, including your current income, expenses, and future goals.
2. Set clear financial goals for your short- and long-term needs.
3. Get professional advice to create a personalized strategy that optimizes both RRSP and TFSA benefits based on your unique goals. That’s what we’re here for!