TFSA vs RRSP compared

Why a TFSA and an RRSP give the same result when tax rates match, how they diverge when rates differ, and the other differences that matter.

Part of the Investment Accounts and Tax track on Agenticks. About 11 minutes, written for a beginner reader.

Read first: TFSA explained, RRSP explained.

Last reviewed .

Risk notice. Tax rules depend on where you live and on your own circumstances, and they change. This lesson explains how the rules work in general; the official source linked below is the final word.

Key takeaways

This lesson applies to Canada. It compares the two most common Canadian accounts, and like every lesson in this track it describes how the arithmetic works rather than telling anyone which to use. Tax rates, benefits and personal plans differ from person to person, and the rules change. The TFSA and the RRSP are mirror images. TFSA contributions are not deductible, but income earned inside is generally tax-free even when withdrawn. RRSP contributions are deductible, and payments out of the plan are generally taxed. One takes the tax at the start, the other at the end. That raises an obvious question: does it matter which end?

The order of multiplication does not matter

Taking 30% off and then growing the rest is the same as growing it all and then taking 30% off. 0.70 x 2.65 is the same as 2.65 x 0.70. That one line of arithmetic is the whole reason the two accounts can come out equal.

Worked example: equal tax rates

Someone has $1,000 of pre-tax income to save. Their marginal tax rate is 30% now and 30% when they withdraw. Illustrative figures: a steady 5% a year for 20 years, so every dollar grows to about $2.65.

TFSA: tax paid first (1,000 x 30%, leaving $700 to contribute)$300
TFSA: value after 20 years (700 x 1.05^20)$1,857
TFSA: tax on withdrawal$0
RRSP: contribute the full $1,000 (The deduction means no tax is paid on it now)$1,000
RRSP: value after 20 years (1,000 x 1.05^20)$2,653
RRSP: tax on withdrawal at 30% (2,653 x 30%)$796
After tax, both accounts$1,857

Illustrative numbers, not a forecast. Real returns vary and can be negative.

There is a catch hidden in that example. Most people do not contribute a pre-tax $1,000 to an RRSP. They contribute $700 from their pay, then get roughly $300 back as a tax refund. The equal result only holds if that $300 refund is also invested. If it is spent, the RRSP side is working with $700 of savings that will be taxed on the way out, against a TFSA's $700 that will not, and the TFSA comes out ahead. So the honest version of the comparison is: same pre-tax money in, same tax rate in and out, same result. Change either the money or the rates and the answer changes.

Worked example: when the rates differ

Same $1,000 of pre-tax income, same 5% a year for 20 years, same 30% rate now. Only the rate at withdrawal changes.

TFSA, any withdrawal rate (Tax was paid at the start, so the later rate does not matter)$1,857
RRSP, withdrawn at 20% (2,653 x 0.80)$2,123
RRSP, withdrawn at 30% (2,653 x 0.70)$1,857
RRSP, withdrawn at 40% (2,653 x 0.60)$1,592
Which keeps moreRRSP if the later rate is lower, TFSA if it is higher

Illustrative numbers. Real marginal rates depend on income, province and the rules in force at the time.

That table is the core of the comparison, and it explains why there is no single answer. The deciding number, your tax rate when you withdraw, is decades away and unknown. Income in retirement, other pensions, where you live, and future tax law all feed into it. Benefits and credits are part of the picture. Because RRSP and RRIF withdrawals are taxable income, they count toward income-tested benefits and credits, and a high enough income can reduce what someone receives. The CRA says TFSA withdrawals can be made at any time, for any reason, without affecting eligibility for federal benefits and credits. For someone whose retirement income is near the point where a benefit starts to shrink, that difference can matter as much as the tax rate itself. The room is different too. TFSA room is added for every resident adult each year, whatever they earn. RRSP room is built from earned income and can be reduced by a workplace pension. Someone with little earned income may have far more TFSA room than RRSP room, and the reverse can be true for a high earner. Flexibility and deadlines differ. A TFSA withdrawal comes back as room the next year. An RRSP withdrawal is taxed and the room is generally gone. An RRSP must be converted by the end of the year you turn 71, while a TFSA has no such age limit.

TFSA
Withdrawals are generally tax-free, Withdrawals are added back to room next year
RRSP
Contributions are deductible, Withdrawals count as taxable income, Room is built from earned income
Both
Investments grow without yearly tax

Try your own growth factor

Use this to find the growth factor for any period, then apply a tax rate at the start (TFSA) or at the end (RRSP) and see that the order does not change the answer when the rates match. The default assumes 5% a year, an assumption for illustration only.

It is not always either or

Many Canadians hold both. The comparison above is a way to understand the trade-off, not a rule. Which mix suits someone depends on their income now and later, their benefits, when they need the money and how the rules change.

For saving toward a first home, the FHSA takes features from both accounts. The same pay-now-or-pay-later arithmetic appears in the US as Roth IRA vs traditional IRA. And the growth factor in these examples is just compounding, explained in compounding and time.

You can compare the TFSA and the RRSP

You can now show why the two accounts come out equal when tax rates match, how they diverge when rates differ, and what else besides tax rates matters.

Check your understanding

Your tax rate is 30% now and will be 30% when you withdraw. Starting from $1,000 of pre-tax income, which account leaves more after tax?
Neither, they leave the same amount. Deducting 30% now and paying 30% later is the same arithmetic as paying 30% now and nothing later.
In the worked example, the withdrawal rate drops to 20%. What happens?
The RRSP ends with more, because tax saved at 30% is repaid at only 20%. The gap between the two rates is what the RRSP gains.
Why does the RRSP's result in the example depend on what happens to the tax refund?
Because the equal result assumes the full pre-tax amount is invested, which means the refund has to be invested too. Putting $700 in an RRSP and spending the $300 refund leaves less than putting $700 in a TFSA.
Which statement about government benefits is accurate?
RRSP and RRIF withdrawals are taxable income, while the CRA says TFSA withdrawals do not affect federal benefits and credits. This is one reason the comparison is not only about tax rates.

Common questions

Is a TFSA or an RRSP better?
Neither is better in general. With the same tax rate when contributing and withdrawing, they give the same after-tax result. They diverge when the rates differ, and other factors such as benefits, flexibility and room also matter. The answer depends on personal circumstances.
Why do a TFSA and an RRSP come out the same?
Because a deduction at a given rate now, followed by tax at the same rate later, multiplies the result by the same factor as paying that tax at the start. The order of multiplication does not change the answer.

Terms defined in this lesson

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Sources

Written and reviewed by the Agenticks Learn editorial team. How we write and check lessons.

Agenticks Learn is general education. It is not financial, investment, tax or legal advice, it does not take your situation into account, and nothing on it is a recommendation to buy, sell or hold any security or to open any account. Examples use illustrative numbers. Investing involves risk, including losing money you put in, and past performance does not predict future results. Tax rules and limits change; the official sources linked in each lesson are the final word.