RRSP vs TFSA: find the right balance


Most Canadians can benefit from having a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) — both are great tax-sheltered savings vehicles.

The key difference is whether you pay taxes now or later. RRSP contributions are tax deductible, so they generate a tax credit. But any withdrawals you make are taxed as income.

TFSA contributions do not generate a tax credit, but withdrawals are not subject to taxation. This makes TFSAs ideal for an emergency fund, as well as for saving for a vacation or other big-ticket item.

Your circumstances and goals will determine how you allocate your resources. As you formulate your strategy for your RRSP and TFSA, here are three scenarios to consider:


You believe your tax bracket in retirement will be lower than it is currently

RRSP contributions give you a tax break now, when your annual income is higher. Then, in retirement when your income will likely be lower, your withdrawals may be taxed at a lower rate.


You have a generous pension plan, or for other reasons expect to enjoy a comfortable retirement lifestyle

TFSA contributions will provide tax free income in retirement. By comparison, withdrawals from an RRSP (and from a Registered Retirement Income Fund) are taxable. When combined with other income sources, they could push your taxable income high enough to trigger a claw back of your Old Age Security pension.


You're in a low tax bracket but expect to earn more in the future

If you’re early in your career or at a point where you are earning less than you expect to in the future, you may not be able to efficiently use RRSP contributions. Depending on your situation, it may be more beneficial to save with a TFSA now and reserve your RRSP contribution room for when you're in a higher tax bracket, so your contributions can offset your higher income.

Qtrade Guided Portfolios offers a range of registered account types, including TFSAs and RRSPs, to help you save for your goals. We offer low fees, portfolio rebalancing and professional oversight, all in a convenient and easy-to-use platform. Ready to try?