RRSP vs TFSA comparison

A common challenge for many Canadians is trying to determining if they are better off putting their money into an RRSP or a TFSA. A comparison between the characteristics of the different accounts is summarized below.

RRSP TFSA Non-Registered
Contributions
Reduces Taxable Income Yes No No
Contribution Limit
(for 2020 tax year)
18%
(up to $27,230)
$6,000 -
While in Account
Can invest in stocks, bonds and mutual funds Yes Yes Yes
Interest and Capital Gains are Taxed while within Account No No Yes
Withdrawals
Increases Taxable Income Yes No No
Contribution Room Restored after Withdrawals No Yes -

At a high level, if you are early in your career or at a lower income bracket, you are often better off using a TFSA. If you are in a higher income tax bracket, an RRSP may be better. Let's now look at two examples to do a comparison between money invested in an RRSP, a TFSA, and a non-registered account to see which is the best to use. In both examples, we will follow an initial $1,000 investment in each of the accounts, and then compare the outcomes at retirement.

Example 1: Early in Career / Lower Income Tax Bracket

RRSP TFSA Non-Registered
Investment Account
Comments
Taxable Income
(pre-contribution)
$35,000 $35,000 $35,000 -
Contribution Amount $1,000 $1,000 $1,000 -
Taxable Income
(post-contribution)
$34,000 $35,000 $35,000 Only the RRSP Contribution
affects taxable income
Income Tax Reduction +
Increase in Government Benefits
$200* $0 $0 Marginal tax rate is ~20%
Value of Investment after
20 years at 4%/year growth
$2,600* $2,200 $2,200 -
Tax paid after selling investment $0 $0 $120 No capital gains tax needs to be paid
within either the RRSP or TFSA
Income at Retirement
(In today's dollars)
$35,000 $35,000 $35,000 -
Withdrawal Full Amount Full Amount Full Amount -
Income owed and Decrease
in Government Benefits
$520 $0 $0 The RRSP withdrawal counts as income,
so the tax is paid at the ~20% marginal tax rate
Final Value $2,080 $2,200 $2,080 -

In this example, the final value of the RRSP is lower than the TFSA account, and actually the same as the non-registered account. Because the income when the RRSP contribution is made is the same as at retirement, there is no benefit to using the RRSP account. You would be better off saving the RRSP room until a year when your income moves to a higher tax bracket. THe best choice is to use the TFSA.


Example 2: Higher Income Tax Bracket

RRSP TFSA Non-Registered
Investment Account
Comments
Taxable Income
(pre-contribution)
$120,000 $120,000 $120,000 -
Contribution Amount $1,000 $1,000 $1,000 -
Taxable Income
(post-contribution)
$119,000 $120,000 $120,000 Only the RRSP Contribution
affects taxable income
Income Tax Reduction +
Increase in Government Benefits
$430* $0 $0 There is a larger reduction for the
RRSP option this time because the
marginal tax rate is ~43%
Value of Investment after
20 years at 4%/year growth
$3,150* $2,200 $2,200 -
Tax paid after selling investment $0 $0 $120 No capital gains tax needs to be paid
within either the RRSP or TFSA
Income at Retirement
(In today's dollars)
$35,000 $35,000 $35,000 -
Withdrawal Full Amount Full Amount Full Amount -
Income owed and Decrease
in Government Benefits
$630 $0 $0 The RRSP withdrawal counts as income,
so the tax is paid at the ~20% marginal tax rate
Final Value $2,520 $2,200 $2,080 -

The only difference in the set up for this example is that the income when the contribution is made is now much higher than in Example. Because of that difference, the marginal tax rate at contribution is much higher than when the money is withdrawn at retirement. As a result, the final value of the RRSP is now the highest of all the accounts, and may be the best choice to use. If the RRSP is the best choice, the next step is determine how much is the optimal amount to contribute. To that, try out the RRSP contribution calculator.

*Both examples assume the money from the income tax deduction is then contributed to the RRSP at a later date.



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