Finance 101

What’s the difference between a TFSA and RRSP? See the Journey of $1000

October 22, 2018


What’s the difference between a TFSA and RRSP? See the Journey of $1000

Finance 101

When it comes to saving for retirement, what’s the difference between a TFSA and RRSP? This infographic tracks the journey of $1,000 saved using each and demonstrates how they work and are taxed.

If you’re wondering how to decide between a TFSA and RRSP when it comes to your own savings, see our rundown of the TFSA and RRSP math here (but do check below our infographic for some bonus tips).

TFSA vs RRSP. The Journey of $1,000

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“I really need flexibility, so which is better between a TFSA vs RRSP?”

If you’re going to be withdrawing the money in the short-to-medium term, the TFSA is the better investment account for you. Saving for a vacation? Need to pay tuition for a professional development course this year (and don’t have money socked away in an RESP)? The TFSA is great for when you need some funds for bigger purchases like that.

“I want to have an emergency fund. In that case, what is the difference between a TFSA and RRSP?”

It’s really no contest, here. The TFSA is just the best vehicle for this, assuming you actually need this rainy day fund, which is a separate question. There are a few drawbacks for an RRSP for an emergency fund: when you take out those funds, that contribution room for your RRSP is gone for good. You’ll pay income tax and a withholding tax on the funds you withdraw. Your RRSP is really a long-term investment account.

“What if I want to buy a home? Which is better for helping with that, a TFSA or RRSP?”

In this case, RRSP holders can use up to $35,000 from their account towards the first-time Home Buyers’ Plan (HBP), without paying tax on the funds. You will still have to pay it back into your RRSP over a long time of up to 15 years.

Keep in mind that in today’s Canadian real estate market, $35,000 doesn’t go quite as far as it did when this program first started. So, if you have other savings to top up your downpayment in other accounts, that’s certainly an option. However, it is generally worth it to use the HBP. You can always talk to a financial adviser with respect to your personal situation before you proceed with what might be the biggest purchase of your life.

“I’m saving for retirement and want to make sure I’ll have enough to maintain my lifestyle after I stop working. So, which is better, a TFSA or RRSP?

It’s all in the name: RRSP stands for Registered Retirement Savings Plan, which is the bedrock of many Canadians’ financial plans for retirement. As you can see in the infographic above, an RRSP is projected to outperform a TFSA over the long-term.

“I see here that an RRSP converts to a RRIF at age 71. What’s that?”

When you’re in retirement, you’re obviously making the shift from saving to spending. The Registered Retirement Income Fund is the vehicle for making that happen. Your RRSP automatically converts to it (if you haven’t converted it already). From that point on, you have to make mandatory withdrawals on those funds you invested within the RRSP. The TFSA has no such counterpart and you can keep contributing money into it.

Did we answer your questions about the difference between a TFSA and RRSP? When you sign up for a WealthBar account, you now have access to unlimited financial planning advice. We’re here to help!

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  1. Jim Kinnear

    Very good graphic explanation. With a TFSA, there is a limit to how much, per year, can be deposited without incurring a penalty.

    • Richard Hordern

      It is EXTREMELY important to note that RRSPs only work on the assumption that when you retire, you will be in a lower tax bracket, than when you were in the workplace. My career has been in teaching where it is common for salaries to start low and then have incremental increases, and many other occupations are similar. I now find that, cashing out RRSPs on top of my pension income, I will be paying a higher tax rate than I would have paid, in my earlier years, if I had invested post tax dollars. I was also saddened when my father died and all of his RIFs (former RRSPs) had to be cashed at once, meaning at the highest tax rate -- lost almost 50% of what had appeared to be the face value of the investments. He should have been cashing them in at a much higher rate, then mandated, while he could cash them at a lower tax rate.

      • Dave777

        Me, RRSP has turned into a tax trap, guaranteed to pay more taxes out than defered in. Worse, you do not get gains and dividend deductions. Best to keep RRSPs small as in 50k per person ot less.

  2. Red Harrison

    I have never seen a TFSA that has a 6% rate of return. Let's see these numbers with a reasonable rate of return like 1-2 %.

    • Denny Hollick

      Hi Red, This is a pretty common misconception about TFSAs. Many people think that they can only be used with 'high interest savings accounts' or GICs. This is not the case. TFSAs can be invested in stocks, bonds, ETFs and many other investments. Generally speaking in the long-term, returns of the US equities market as a whole is actually above 6%. Check out this article here in MoneySense:

    • Morridin19

      If in your TFSA you just bought an ETF that tracked the Canadian stock market you would see an average return (over all historically available data) of around 9.1%. This doesn't include the MER which is about 0.06% (for VCN and XIC). Not unreasonable at all. Now if you are basing your rate on the most banks give for just holding cash in a savings account in your TFSA you need to educate yourself on some better uses for your TFSA.

    • Tom Gilman

      Well Red, you definitely don't understand what a TFSA is intended to be. Not that I blame you. Banks have convinced Canadians that a 1-2% investment is appropriate. You have been mislead. I reccomend you seek sound advice.

      • Denny Hollick

        It's true. Banks lobbied quite hard to have the TFSA called a 'savings' account. We did a blog post on how it should be renamed!

      • Danielle

        You probably haven't seen a 6% rate of return because your money was not invested in a solid portfolio. If you opened your TFSA at the bank they never tell you can actually invest your money in the market. It is rather accumulating interest at a regular savings account. I am a financial advisor and I show that to my clients all the time. Look for an investment company rather than investing your money at the bank. Advisors at the bank are paid to open an TFSA account for you but are paid very little to open an investment account inside a TFSA for low amounts of money. They are usually looking at clients that can invest 300 K or more.

    • Rick

      I don't think you're using your TFSA properly.

    • Doug

      You must be dealing with a bank. I average about 8-9% with my fiance all planner

      • Robyn

        Who is your financial planner? Looking for a referral.

    • jeff

      When you choose to invest in professional managed portfolios you definitely can earn 6% plus ROR. The TFSA is intended for long term wealth creation, not short term emergencies. You and your advisor would choose the best appropriate investment vehicle.

    • Gabino

      Just like RRSP you can always invest TFSA in mutual funds as well and they it is not guaranteed to get 6% it will have a rate of return greater than savings tfsa or GICs and bonds.

    • Kevin

      It's because you aren't supposed to keep cash in a TFSA. It's assuming you're keeping ETF's in there. You get your 1% interest plus whatever dividends and growth you get from the investments. I'd say 6% is a conservative estimate and you should be able to do better. If you're keeping cash in your TFSA please do some research because you're losing so much growth it's upsetting me.

    • CarolLynn

      Stocks! Tax free accounts can hold many different types of investments very possible.

    • Ryan

      I've been getting well over 6% a year I n my tfsa. It all depends on what you invest in once your money is in there.

    • Max

      Thats because you have not invested in stocks with divedends with 6+% return per annum

    • Rob

      Your TFSA assets can be invested in anything type of investment it does not have to be a savings account paying 1 or 2%.

    • Investor

      I have invested in marijuana stocks and some other high growth stocks. I have tripled my investments. TFSA is the best way to make investments. Imagine if I had to include these gains in my income tax?

  3. nnulk

    What is the final estate if the employer is matching RRSP contributions? Is it a better choice in that case?

  4. Lucas

    I noticed under RRSP additional Tax rebates from utilizing the RRSP are not considered. What additional $ are we saving... based on upfront-year end tax savings visa RRSP receipts here? It only displays RRSP holdings.

    • Denny Hollick

      Hi Lucas, This is taken into consideration with the starting balances. The TFSA starts at $750 (because tax is deducted from your paycheque), and the RRSP starts at $1000 since you get those taxes back for any RRSP contributions you make.

  5. Tim

    Why compare one vs the other? Why not position as a real wealth builder and demonstrate doing both! For example contribute to an RRSP and with the refund invest in the TFSA!

    • Denny Hollick

      We agree! We find many people don't understand the difference between the two, so this is of particular interest to many. It's not so much picking one, over another, and both have their advantages in certain circumstances.

  6. Varun

    Would love for this to be an interactive page where you could drag the tax rate. For e.g., what if you started out with a marginal tax rate of 43%? How does the end result look in that case? Everyone's personal situation will be different, which may tilt the final result one way or the other.

    • Denny Hollick

      That's something we're actually working on :D

    • ryan

      I agree this would be useful. Could include pension income as that will affect the marginal tax rate of RRSP withdrawal? Overall this is an amazing way to show the differences. Nice work!

  7. Pat

    Maybe you should include some shading to indicate the RIF payments (and taxes on the RIF payments) from age 71 to 90. Currently it just looks like they just disappear when actually 19 years of $1100-$275 = $15675 goes to the person with the RRSP before their estate collects the $6840.

  8. Jordan

    If u made your max contribution in tfsa and invested in stocks and say turned it into $100,000. Could at the end of the year you withdraw it all and then in the new year put all the $100,000 back in?

    • Martin

      Yes. Your contribution room is calculated as new contribution room (currently $5,500) + unused contribution room + withdrawals you made in the last year. AKA what goes out can go back in the following year PLUS the new contribution amount.

  9. Vincent

    You tax the RRSP upun withdrawal but do not include any tax return on the deposit nor any compound interest on that tax return. You also do not take into account the change in the marginal tax rate of a person overtime. I guess the graphic explains that a TFSA grows tax free and a RRSP do not, it is pretty much useless past that.

  10. Dean

    While I am a TFSA fan - shouldn't the RRSP take the tax refund and then invest in in a non registered account? Seems like a fairer comparison

  11. Brad Scheck

    One thing I didn't see mentioned that is quite important is that TFSA withdrawals aren't going to cause claw back on income tested benefits such as OAS and GIS. It really stings when you take money out of your RRIF and pay 30% tax and then are subject to 50% claw back on GIS.

  12. marcia

    so if you had money in an rrsp and none in tfsa would you recommend cashing out rrsp and paying taxes now to reinvest balance in tfsa?

    • Stephen

      Great question. I.m thinking the same as I have a large amount in response and a defined pension.

  13. James F

    Very good graphic. I would say that for many people all savings are "after tax". They have 500 or 1000 dollars left at the end of the month and this is their savings to a TFSA or RRSP. They don't typically think about the tax refund at the end of the year and simply contribute what they can afford. Likely they will deposit the same amount to either account and in that case the TFSA is the true winner . Debate?

  14. Des

    You forgot one big advantage of TFSAs. If you don't have pensions to draw at age 65, you can collect guaranteed income supplements (GIS) from the government for five years. Significant tax free income you wouldn't have if withdrawing RSPs.

  15. Kim

    One thing not considered is how RRSP income affects Canada pension, i.e., it reduces it, whereas TFSAs have no effect as it's not considered income.

    • Alan

      Kim, you're incorrect on RRSP affecting your CPP withdrawals - they do not. It may affect your OIS though.

  16. Manny

    Very educational presentation.

  17. Jerry

    Are RRSPs a good idea if you have a government pension plan?

  18. Jason

    This seems very one sided .it does not mention about the benefits of differing taxes with RRSPs this is especially helpful if you are in higher taxes brackets

  19. Norm Lalonde

    This comparison is misleading. The slight of hand occurs at the RIF point because it is reducing the RRSP amount by $1100 per year, when actually they would still have $1100 minus the taxes to reinvest. This amount would not even be taxable but that is another issue. If the RRSP was cashed out in a lumpsum at 25% tax it would work out to be exactly the same result as a TFSA. The TFSA and the RRSP end up exactly the same over time when a person's tax brackets remain the same. The RRSP is superior in cases where the RRSP is deducted in a higher bracket than when it is redeemed. If the concept works where a person saves in a lower bracket than when it is redeemed, then the TFSA is superior. Both options are good but they need to be deployed in the proper places.

    • Florin

      Absolutely correct. Notwithstanding government clawbacks or government help (GIS) in retirement, it's all a decision of tax rate while working vs in retirement. At the same rate, TFSAs and RRSPs are equal.

    • SUSIE


  20. 1Milltfsaorbust

    Max rrsp and use the income tax return to max tfsa. Hit em both while sacrificing to max 1. As for tsfa returns that is my area to swing for a home run. Was over 200000 at 1 point and held firm at the current 150000 range. Avoid using the tfsa for any purchase and it can become a powerfull income stream as well. Tax free and not income tested. Do your research people. And not at a bank or just marginally losing to inflation yearly will be the new goal. Somebody is getting rich. Just not you!

  21. Richard

    Something that many people fail to consider is that realized capital gains are tax-free in a TFSA, 50% taxable in a non-registered account, and 100% taxable in an RRSP (because they are withdrawn as "income").

  22. Alex M

    What an odd title - "the difference btw RRSP and TFSA", and posted with a question mark, as if the author herself is confused. These deductions hardly have anything in common. RRSP is a tax reduction while working and it comes with a big tax hit when you cash in at 69. TFSA is a tax-free investment (can be GIC, stocks, ETF, anything), and it remains tax-free when you retire. RRSP might not be a good idea for people working for very low wages and/or expecting substantial GIS supplement. RRSP will save them little to nothing on taxes, and they will lose one-year GIS when they cash RRSP out. OTH, they won't go wrong with TFSA.

  23. Lee John Jackson

    it does not mention about the benefits of differing taxes

  24. Gurdip Ahluwalia

    Me and my wife own a house which we use as a rental property. We both have TFSA. Can we use the funds from our TFSA to fund the mortgage on our rental property? Thank you

  25. Clumseyfingers

    I would like to see an illustration showing the same gross withdrawals from the TFSA as the RRSP after age 71.

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