1.0 Introduction

When saving for retirement, making the decision on where to put your hard-earned money; deciding between the RRSP and TFSA, can be a difficult choice. Ideally you want to maximize both accounts by contributing up to your annual limit, and utilize any contribution room carried- forward from a previous year. Often, though, making this decision on your own isn’t as straightforward as most would like. At the end of the day, consulting a financial planner (such as Kinridge) is the best solution, but if you aren’t ready to commit to a financial planning engagement, knowing the basics can go a long way.

In this article, we look at the basics of RRSPs and TFSAs to help create better understanding and awareness around these account types.

2.0 At a glance

RRSP: a retirement savings account that allows you to defer some income taxation to a later date, ideally when in retirement with a lower annual income

TFSA: an investment account for long term goals where the investment growth is not taxed

Contribution rules:
- The RRSP contribution room depends on your annual income or the CRA’s annual dollar limit, which is an amount set by the Canada revenue agency.
- The TFSA contribution room is set by the CRA annually and is the same for everybody, regardless of their income.

Withdrawals:
- When withdrawing from a RRSP, the amount withdrawn counts as income for the year in which it is withdrawn and you will pay income tax on that amount.
- When withdrawing from a TFSA, there is no tax event, and you will receive the amount you withdraw. It will not be taxed as income, you will not pay any tax on the investment growth (such as capital gains tax).

3.0 What is an RRSP?

The RRSP is the Registered Retirement Savings Plan, an account type established by the Canada Revenue Agency (CRA) in 1957, and made available through most banks and investment dealers.

From the CRA:

“An RRSP is a retirement savings plan that you establish, that the CRA registers, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. You generally have to pay tax when you receive payments from the plan.

It is an extremely useful and beneficial tool for retirement planning” (Canada Revenue Agency, 2025).

4.0 What is a TFSA?

The TFSA is the Tax Free Savings Account, also an account type established by the CRA, but established in 2009. It is also made available through most banks and investment dealers. Don’t let the name of the account deceive you though, it is much more than a “savings” account and is better utilized as an investment account.

From the CRA:

“The tax-free savings account (TFSA) is a registered savings account that functions like an investment account. It can hold cash savings and investments that generate tax-free income.

TFSAs are overseen by the Government of Canada but administered by Canadian banks and financial institutions.

Any contribution you make to your TFSA and any income you earn through interest, dividends or capital gains are generally tax-free, even when you make a withdrawal. However, unlike a registered retirement savings plan (RRSP), contributions you make to a TFSA are not tax deductible” (Canada Revenue Agency, 2025).

5.0 Understanding the difference

Both the RRSP and TFSA are great tools for retirement planning. The TFSA can also serve as a tool for other long term financial goals. While both have taxation benefits, they have entirely different functions and rules.

5.1 Tax treatment

RRSP:
- Contributions are tax-deductible. You usually get a refund or pay less tax at filing time.
- Growth is tax-deferred. Interest, dividends, and capital gains are not taxed while inside the RRSP.
- Withdrawals are taxable income. You pay tax when money comes out.

TFSA:
- Contributions are not tax-deductible. No refund for contributing.
- Growth is tax-free. No tax on interest, dividends, or capital gains earned in the account.
- Withdrawals are tax-free. Money comes out without tax.

5.2 Contribution rules

RRSP:
- Up to 18% of your previous years gross annual income, or the CRA’s annual dollar limit, whichever is lesser. For example if you earned $150,000 before-tax in 2025, then 18% would be $27,000. The annual dollar limit for 2025 is $32,490 (Canada Revenue Agency 2025). Since $27,000 is the lesser amount, that is your contribution room for the year.
- You must subtract any pension contributions made on your behalf from your annual contribution room.
- Your unused contribution room carries-forward and you can catch up on your RRSP contributions later.

TFSA:
- Starting at age 18, or 2009 (the year of inception), Canadian residents receive an annual TFSA contribution limit.
- The CRA sets the annual contribution limit for the TFSA (Canada Revenue Agency 2026). For example, the annual contribution room for 2026 is $7,000.
- Contributions reduce your contribution room.
- Unused annual contribution room accumulates and forms your lifetime total contribution room. For example, if you turned 18 in 2025, contributed $5,000, then in 2026 your total contribution room would be $9,000 ($2,000 unused contribution room plus 2026’s annual contribution room).

5.3 Withdrawal rules

RRSP:
- Withdrawals are generally taxable as income when you cash in or withdraw from an RRSP.
- Your financial institution withholds tax when you withdraw.
- Withholding tax rates (Canadian residents): 10% up to $5,000, 20% from $5,001 to $15,000, 30% over $15,000 (Quebec withholding differs).
- A direct transfer from one RRSP to another is not considered a withdrawal by CRA

TFSA:
- Withdrawals are tax-free.
- Withdrawals are added back to your contribution room on January 1 of the next calendar year, not right away.
- Re-contributing a withdrawn amount in the same year can cause an over-contribution if you do not have available room.
- Excess TFSA amounts are taxable at 1% per month while the excess remains.

5.4 Best use cases

RRSP:
- When you want to lower your taxable income this year. RRSP contributions can be deductible, which can reduce the tax you pay.
- When you are saving mainly for retirement and plan to withdraw later. Money inside an RRSP can grow tax-sheltered while it stays in the plan, and you generally pay tax when you take it out.
- When you are buying your first home or going back to school and qualify for a CRA program. Under specific rules, the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP) can allow RRSP withdrawals without withholding tax and without including the withdrawal as income at the time

TFSA:
- When you want flexibility to use the money for any goal, anytime. TFSA contributions are not deductible, but investment income and withdrawals are generally tax-free
- When you might need to access the money (emergency fund or short-to-medium term goals). Withdrawals are tax-free, and the amount you withdraw is added back to your TFSA contribution room the next calendar year.
- When you want withdrawals that do not affect federal income-tested benefits and credits. CRA notes TFSA income does not impact federal income-tested benefits and credits, and you can withdraw without affecting eligibility for those federal benefits and credits

6.0 Which should you contribute to first?

There are a lot of variables at play here. A good starting point would be the Kinridge RRSP vs. TFSA calculator. This will illustrate which option maybe the best. However, in an ideal world, you should consult a financial planner to see how RRSP and TFSA contributions fit into your financial plan from a holistic perspective.

7.0 Common mistakes

RRSP:
- Assuming withholding tax is the final tax. CRA withholding is taken at withdrawal, but you still include the withdrawal in income and may owe more at filing.
- Over-contributing past the buffer. If unused contributions exceed your RRSP deduction limit by more than $2,000, CRA generally applies 1% per month tax on the excess.
- Spousal RRSP attribution surprise. If you contributed in the year of withdrawal or the prior two years, you may have to include some or all of your spouse’s withdrawal in your income.

TFSA:
- Re-contributing a TFSA withdrawal in the same calendar year when you do not have enough room. Withdrawals are added back to contribution room on January 1 of the next year, not immediately.
- “DIY” TFSA transfers (withdraw from one TFSA and deposit into another yourself). CRA treats the deposit as a new contribution, and it can create an excess amount. Use a direct transfer instead.
- Over-contributing and leaving the excess in the account. CRA taxes excess TFSA amounts at 1% per month while the excess remains.
- Contributing while a non-resident of Canada. CRA taxes non-resident TFSA contributions at 1% per month while the contribution remains in the account.

8.0 Summary

Both RRSPs and TFSAs are powerful tools, but they help you in different ways. An RRSP is mainly a retirement account that can lower your taxable income today, lets your investments grow tax-deferred, and then becomes taxable when you withdraw. A TFSA is a flexible account where contributions are not deductible, but growth and withdrawals are generally tax-free, which makes it useful for both long-term investing and shorter-term goals.

A simple way to think about it is this: if you want a tax break now and you are saving for retirement, the RRSP is often a strong fit. If you want flexibility and tax-free access later, the TFSA is often the better first step. In many cases, the best plan is to use both over time, in the right order for your income and goals.

9.0 Resources

The Kinridge RRSP vs. TFSA helper: https://kinridge.ca/resources/

10.0 Sources

Canada Revenue Agency. (2025). Registered Retirement Savings Plan (RRSP) – Canada.ca. Canada.ca. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

Canada Revenue Agency. (2025). What is a TFSA – Canada.ca. Canada.ca. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/what.html

Canada Revenue Agency. (2025). MP, DB, RRSP, DPSP, and TFSA limits and the YMPE. Aem. https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

Canada Revenue Agency. (2026). Before you contribute to a TFSA – Canada.ca. Canada.ca. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributing/before.html

Understanding the difference between RRSP and TFSA contributions