Both the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) help your savings grow without being taxed every year. The difference is when you pay tax, and that difference is what decides which one is better for you.
How the RRSP works
RRSP contributions are tax-deductible, so they reduce your taxable income today. Your money grows tax-deferred, and you pay income tax when you withdraw it, usually in retirement.
- Contribution room: 18% of your previous year’s earned income, up to the annual maximum ($33,810 for 2026), plus any unused room from earlier years
- Withdrawals are added to your taxable income
- By the end of the year you turn 71, your RRSP must be converted, usually to a RRIF
How the TFSA works
TFSA contributions are not tax-deductible, but your growth and withdrawals are completely tax-free.
- Annual limit for 2026: $7,000. Someone who has been eligible since 2009 and never contributed has $109,000 of room
- Unused room carries forward
- Withdrawals are added back to your room the following calendar year
- Withdrawals do not affect income-tested government benefits
The key question: your tax rate now vs. later
If your tax rate today is higher than you expect it to be in retirement, the RRSP usually wins: you get a deduction at a high rate and pay tax later at a lower one. If your tax rate today is lower, for example early in your career or as a newcomer still building income, the TFSA often makes more sense, and you can save your RRSP room for higher-income years.
A few common situations
- Early career or lower income: TFSA first.
- Higher income: RRSP first, and consider putting the tax refund into your TFSA.
- Saving for something before retirement: TFSA, because withdrawals are flexible and tax-free.
- Expecting large government benefits in retirement: TFSA income will not reduce benefits like OAS or GIS.
You do not have to choose just one
Most families benefit from using both. The right mix depends on your income, your goals, and when you will need the money.
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This article is for general educational purposes only and is not personalized financial, tax, or legal advice. Figures are current as of 2026 and may change.
