Both accounts shelter investment growth from tax, so the choice is really about when you get the tax benefit.
How each one works
RRSP (Registered Retirement Savings Plan)
- Contributions are deductible, so they reduce your taxable income in the year you claim them.
- Growth is tax-sheltered, but withdrawals are taxed as income.
- Your yearly room is generally 18% of the previous year's earned income, up to an annual dollar maximum set by the government, plus unused room carried forward.
- The contribution deadline for a tax year is generally 60 days after year-end, which falls around the beginning of March.
TFSA (Tax-Free Savings Account)
- Contributions are not deductible.
- Growth and withdrawals are tax-free.
- You receive a fixed dollar amount of room each year from the year you turn 18 (and are a Canadian resident), and withdrawals are added back to your room the following year.
The simple rule of thumb
- If your tax rate is higher now than you expect it to be in retirement, the RRSP deduction is usually worth more.
- If your income is lower now, or you expect a higher rate later, the TFSA is often the better fit.
- If you may need the money before retirement, the TFSA is more flexible.
Where owners fit in
If you own a corporation, RRSP room is created only by earned income such as salary, not by dividends. That is one reason many owners take at least some salary. See our salary or dividend article for the full trade-off. Self-employed people build RRSP room from net self-employment income, which you can read about in our self-employed deductions guide.
Common mistakes
- Over-contributing to a TFSA, which triggers a monthly penalty tax on the excess.
- Not tracking RRSP room. Your room is shown on your Notice of Assessment.
- Contributing to an RRSP but not claiming the deduction in the best year.
- Using an RRSP when your income is very low and the deduction gives you little benefit.
Our tax planning team can look at your income, your corporation and your goals and tell you how to split contributions. You can also see how we prepare personal returns.
This article is general information, not tax advice. Check your contribution room with the CRA before contributing.
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