This article has 22 comments

  1. I thought this report was interesting but you are right – it’s difficult to come to a definitive conclusion.

    I personally think that for most middle class Canadian who don’t have a pension, the rrsp will likely be better.

  2. Can’t understand why every Canadian financial blog talks about this TFSA vs RRSP crap all the time. People who read these blogs generally save 20%+ of their income anyways, and for the average income over $50k, you clearly have the $5k to punt into the TFSA and then put as much as you have remaining to save in the RRSP. Why does everyone neglect that we can only put in $5k/year anyways? Shesh. If everyone in Canada doesn’t have $11,000 in their TFSA already then they have made some pretty big mistakes ($5k + $5k + 20% of 2009 cap gains for *anything* you may have invested in).

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  4. Hey CC,

    Great and helpful analysis of the study. Your bottom line conclusion is, in my opinion, the correct one. We dont know what changes to the tax regime are coming in the years ahead. Both vehicles are good and ought to be used by most Canadians earning any decent income. Thanks,

  5. Just like the adage that you should diversify your investments, you should diversify how you hold your investments, so I think you should do BOTH. The big problem with trying to predict future tax rates is that it’s completely unpredictable. But for me personally, with governments around the world including Canada racking up huge structural deficits in their irresponsible spending plans, it seems to me that tax rates only have one direction to go in the future – UP! The only real question is by how much?

    My only real criticism of the TFSA is that the $5K / year contribution limit is too small to be an investment vehicle that can be taken seriously for another decade. The much higher maximum contribution rate available in the RRSP structure makes it a more serious investment vehicle.

  6. Great post — very helpful!

    I agree with the last paragraph especially. I won’t retire for another 30+ years, so it’s difficult to plan for a system that doesn’t even exist. Who knows what will be left of CPP and OAS by the time the boomers are through? (Although with increasing lifespans, who knows how long people will live in the future too?)

    I guess we can just do the best we can right now.

  7. Interesting post. I never look at TFSA/RRSP as an either or debate. They tend to accomplish different things under the current rules. If TFSA upper limits start being indexed for inflation and become credit proofed, you have a much closer apples to apples comparison.

  8. The thing I like about the TFSA is it lets you defer the which-is-better decision. You can always flow your TFSA funds to an RRSP as you approach retirement if it looks like an RRSP will be better. The reverse is not true.


  9. @ Dan: This seems like a strong argument to me. The closer you get to your retirement date, the more certain you can be with your calculations.

    Additional benefit of deferring RRSP contributions is that marginal tax rates tend to increase the deeper we get into our careers. Using the TFSA as a means to accumulate funds until an RRSP deduction can be made in a higher tax bracket seems like a good idea to me. This gives more certainty that your contribution AETR will be higher than your withdrawal AETR.

  10. Canadian Capitalist

    @Ray: We need something to write about and TFSA / RRSP is plenty of grist for the mill. Seriously though, I thought the C. D. Howe report to be interesting, simply because it shows how complicated our tax system is.

    Regarding your point that TFSA is only $5,000. If your tax bracket is 35%, a $5,000 contribution to a TFSA is equivalent to a $7,700 contribution to a RRSP, which would be max. out the RRSP room for someone earning $42,000 per year.

    @Phil S, @Thicken: Both are good and if at all possible, maxing out both is ideal. If there isn’t enough money to contribute to both, contributing to one this year and the other the next would work. Good point about diversifying your retirement accounts.

  11. RRSP’s are nothing more then government fraud, just look south on whats going on with 401k’s..that policy will soon hit Canadian shores. TFSA’ are far superior, NO TAX..rrsp’s are nothing more then a tax deferant, a 30 y/o investing in RRSP’s will pay a lot more in taxes on his RRSP at retirement then he pays on his income today. Dont buy the hype.

  12. Like Ray, I don’t really worry about it as an either/or because I will always max out my TSFA and put a bunch more in RRSP. My thinking is more about whether to treat the TSFA as part of my retirement savings or non-retirement savings. Currently I’m using it as a spot to put the fixed income part of my non-retirement savings, and leaving my regular investments more equity heavy because dividends and capital gains are taxed less. However, in 8 years when I’ve put $50,000 into TFSA I may want to switch that up, because I won’t want to have $50,000 in bonds.

  13. Canadian Capitalist

    @Dan: Yes, a TFSA would be an ideal place to channel contributions in low income years and using it as a source of funds to contribute to a RRSP in high income years.

    @boko: I don’t know what’s going on with 401(k)s but I don’t think RRSPs are a government fraud. They are a legitimate savings vehicle and the only one we had before TFSAs came along. TFSAs are currently a great deal but who knows how the rules will be tinkered with in the future.

    @Aleks: Personally, we use the TFSA to hold emergency savings but starting next year, we’ll be looking to it as a retirement savings vehicle as well. The nice thing about TFSA is that it can be so flexible — RRSPs not so much.

  14. I think we will always be recalculating TFSA vs RRSP for years to come. Because of the changes in future tax laws, because there is no clear winner (it always depends on your personal situations) and because they are our only two options (sort of like financing vs. leasing on cars).

    Regardless, I will probably take the info and weight my contributions based on where i sit on the income scale, but still contribute some into both.

    @Boko I don’t think of Tax differing so much a fraud, but rather before the TFSA it was our only option. But what i really wanted to ask you was what policies you are referring to south of the border on 401k’s?

  15. >>a 30 y/o investing in RRSP’s will pay a lot more in taxes on his RRSP at retirement then he pays on his income today. Dont buy the hype.

    Not true at all.

    I know many 30 year olds in the 40% tax bracket. Combine that with an early retirement – somewhere between 45-55 and I can guarantee that RRSPs are advantageous.

    I think this discussion is very important. CC will have the numbers, but most Canadians don’t even contribute RRSPs let alone decide which registered account to put money into. Even though its only $5k/year, look at the average savings of Canadian retirees, isn’t it somewhere between $100-$200k. That’s maybe 10-15 years of TFSA contributions (non-inflation adjusted), so it’s a ‘small’ amount, but still very significant.

  16. The one tricky thing about RRSPs is the whole silly tax game that you have to play. The last time I read the rules, you have to be either completely out of your RSP by age 72, or else have it rolled into a RRIF. If tax rates are the same in retirement as they are today while you’re working (which I find hard to believe), then you will pay less tax if you take less money out of your RRSP each year in retirement than you made while contributing to your RRSP.

    Obviously if you make the assumption that you take all of your RRSP savings out in one gigantic lump sum cash out payment, then of course you skew the tax figures to one that shows that it doesn’t make any sense to use RRSPs. Similarly, if you assume that you only take out enough $ to match the basic exemption, then you skew the calculation the other way as you get all of that money tax-free.

    As I said, I absolutely love the TFSA structure from a tax standpoint. It’s just that the $5K annual limit isn’t enough for me to consider it a serious retirement savings tool for at least another decade. Even then, it will never be able to catch up to the total balance sitting in my RRSP account – it will just be less of a rounding error. If they bumped up the annual limit to about $15K or $20K, then I would take it much more seriously.

  17. My two cents on the topic is the RRSP makes sense if the MTR at the time of contribution is greater than the MTR at the time of withdrawal. Generally, I think most peoples MTR in retirement is lower than the MTR while working so RRSPs edge out in the long run.

    I think the TFSA is not great for long term not because of the math but rather because the likelihood that people will take out the money long before retirement.

    Anyhow, here’s my recent article on the topic before the release of the C. D. Howe Institute report. –

  18. Good point CC, on the AETR. Total tax paid matters. I think one can eyeball the answer using the cumulative over vs under the curve working from left to right in the chart you have copied. The TFSA builds up a huge early lead at low incomes that probably isn’t overcome by the RRSP until the working income gets to $100k+. If this approach is right, then only in Ontario at 60% replacement income does the RRSP beat the TFSA based on average tax rate. In Alberta and Quebec, and in Ontario at higher retirement income replacement rates, the TFSA always is a better choice, when a choice must be made.

    For those who may have a wish to leave a legacy with any remaining TFSA/RRSP money after they die, as I have blogged about before (, since RRSP/RRIF money is all deeemed to be disposed of at death and the totality of funds taken into income, chances are that the death year tax rate will be high if not in the highest tax bracket. With TFSA, the money is all tax free and can flow 100% to beneficiaries. Another plus for the TFSA over the RRSP.

  19. @ Phil S: I don’t think the TFSA amount is insignificant, especially for new investors.

    A pair of 30-year olds who put in the max every year for 25 years and retire early at age 55, would have contributed $250,000 between them. At 4% real-return, this would be $430,000 dollars sitting there, tax-free on withdrawal. That amount of money would be a fairly nice “icing on the cake”!

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  22. Any idea why the chart shows spikes in the results at $50k, $75k, $85k and $120k?