TFSA vs RRSP: how to choose between Canada's two big accounts

Basics8 min read · updated 3 November 2026 · 12 sources

TFSA vs RRSP is the first question for most Canadians who invest. Both accounts let investments grow without tax. The Registered Retirement Savings Plan (RRSP) gives a deduction today and taxes withdrawals later; the Tax-Free Savings Account (TFSA) takes money you have already paid tax on and never taxes it again. Which one leaves more depends mostly on your tax rate now and in retirement, and on government benefits that shrink as your income rises. Amounts are in Canadian dollars and follow the rules as of November 3, 2026; the federal Budget 2026, due on November 5, 2026, may change some of them.

How the two accounts work

The TFSA limit for 2026 is $7,000 (CRA, TFSA 2026). Unused room carries forward, so someone who has been 18 or older and resident in Canada since 2009 and has never contributed has $109,000 of room. Withdrawals are tax-free and are added back as new room on January 1 of the next year (CRA, TFSA withdrawals 2026). Contributions above your room are taxed at 1% a month for as long as they stay in the account.

The RRSP limit is 18% of your earned income of the previous year, up to a dollar limit (Income Tax Act, s. 146 1985) of $33,810 for 2026 and $35,390 for 2027 (CRA, registered plan limits 2026), reduced by any pension adjustment from a workplace plan. Unused room also carries forward. Contributions are deducted from your income; withdrawals are taxed as income, and outside Quebec the bank withholds 10% on withdrawals up to $5,000, 20% up to $15,000 and 30% above as a prepayment of the final tax (CRA, withholding on RRSP withdrawals 2026).

The key: your tax rate now and later

If your tax rate is the same when you contribute and when you withdraw, the two accounts leave exactly the same amount. The RRSP deduction is like a loan of tax from the government that you repay on withdrawal, and the return on that money is yours in both cases. The difference comes only from a change in the tax rate.

The 2026 federal brackets start at 14% on the first $58,523 of taxable income, down from 14.5%, and rise to 33% above $258,482; Ontario adds 5.05% to 13.16% (CRA, tax rates 2026 2026). Including the Ontario surtax, the combined marginal rate in Ontario is 29.65% at a taxable income of $60,000 and 43.41% at $120,000.

When the TFSA wins

• Low income today: at the lowest federal rate of 14% plus the provincial rate, the deduction is worth little, and withdrawals later may be taxed at a similar or higher rate.
• Higher income expected later: early in a career, RRSP room is better kept for higher-income years, since it carries forward.
• Income-tested benefits in retirement: RRSP and RRIF withdrawals count as income for the Old Age Security recovery tax and for the Guaranteed Income Supplement (GIS); TFSA withdrawals do not.
• Money you may need: TFSA withdrawals are tax-free and the room comes back the next year, while an RRSP withdrawal is taxed and the room is gone.

The GIS effect can be large. The supplement falls by 50 or 75 cents for each dollar of other income, depending on family situation. Laurin and Poschmann of the C.D. Howe Institute calculated the effective tax on saving for different households and concluded that many low and modest earners would do better to save in a TFSA than in an RRSP, mainly because of this clawback (Laurin and Poschmann 2010).

When the RRSP wins

• High tax rate today and a lower one in retirement: the example above.
• A refund you will invest: the RRSP's advantage depends on it.
• US dividends: under the Canada–US tax treaty, US dividends paid to an RRSP are exempt from US withholding tax; a TFSA is not covered, because it is not used exclusively to provide retirement benefits (Golombek 2026).
• A spouse with a lower income: the higher earner can contribute to a spousal RRSP so that later withdrawals are taxed at the lower earner's rate; withdrawals are taxed back to the contributor if there were contributions in the year of the withdrawal or the two years before (CRA, spousal RRSP 2026).
• A first home: the Home Buyers' Plan lets you withdraw up to $60,000 from an RRSP for a first home and repay it over time (CRA, Home Buyers' Plan 2026).

Withdrawals and the RRIF

An RRSP has to be converted, usually into a Registered Retirement Income Fund (RRIF), or cashed out by the end of the year you turn 71 (Income Tax Act, s. 146 1985). A RRIF has to pay out a minimum every year: up to age 70, the factor is 1 divided by (90 minus age), so 4.00% at 65; from 71 it follows a table that starts at 5.28% (CRA, RRIF minimum withdrawals 2025). You can always withdraw more than the minimum.

Where the FHSA fits

For first-time home buyers, the First Home Savings Account combines both: contributions are deductible like an RRSP, and withdrawals for a qualifying first home are tax-free like a TFSA. Room is $8,000 a year, with up to $8,000 of unused room carried forward, and $40,000 over a lifetime (CRA, FHSA 2026). For someone saving for a first home, it beats both of the other accounts.

A practical order

1. Take any employer match in a group RRSP or pension plan first.
2. Saving for a first home: the FHSA.
3. High marginal rate, such as above $117,045 of taxable income in Ontario: the RRSP, with the refund invested.
4. Low income or an expected GIS in retirement: the TFSA.
5. In between: both, with US-listed holdings in the RRSP and money you may need in the TFSA.

Common mistakes

• Spending the RRSP refund: the RRSP's advantage assumes the refund is saved.
• Over-contributing to the TFSA by putting a withdrawal back in the same year: the room only returns on January 1 of the next year.
• Ignoring clawbacks: RRIF income can cost GIS or part of the OAS pension.
• Holding US-listed dividend stocks in a TFSA: 15% of the dividends is lost every year.
• Comparing balances before tax: part of an RRSP balance is future tax.

This article explains general federal rules and Ontario rates as of November 3, 2026, and is not financial or tax advice. Quebec has its own tax rates and withholding. The federal Budget 2026 is due on November 5, 2026; check for changes.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.