Good to know: RRSP vs. TFSA

The RRSP deadline is approaching (March 1, 2023) and 2022 brings an additional $6,000 of contribution room for Tax-Free Savings Accounts, bringing the cumulative maximum to $81,500. It’s never too early to start saving, so here is a guide to help you understand when it is better to invest in your RRSP and when you should invest in your TFSA.

Both RRSPs and TFSAs shelter you from tax as long as the investments are held within the account and stay in the account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund at your highest marginal rate, but the money becomes fully taxable at your highest marginal rate when you take it out. The TFSA is the reverse: you don’t get a tax break on contributions, but you don’t pay tax on withdrawals either. So if you’re deciding between the two options, it’s really a question of whether to pay the taxman now or later.

In general, those earning a low income should favour the TFSA, while high-income earners are likely better off with an RRSP. If you expect your income to be higher in future years than it is in this current year, you’re usually better off saving your RRSP contribution room for your higher-earning years.

Here’s a breakdown of the contribution numbers for a RRSP:

When TFSAs are better

1. You are using the account for short-term savings (ie. a home renovation fund, or trip fund) and you are earning less now that you expect to earn later

2. You earned a low income this year and plan to earn a higher income in future years.

When RRSPs are better

1. You are planning for long-term savings (ie. retirement)

2. You earned a high income this year and can maximize ROI (The RRSP tax shelter at the highest marginal rate could be up to 47.7% ROI on investments!)