RRSP versus TFSA: The basics

The Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are both designed to encourage you to save more money, regardless whether it is for retirement or a significant purchase. The two share some aspects, but they have key differences which must be considered before choosing one.

Registered Retirement Savings Plan (RRSP) 

RRSP contributions are taken from income before taxes. That means contributions are not taxed. The idea behind this is to lower your tax liability when you retire, and on the lower tax bracket since you will not be earning income.

To contribute to your RRSP, you need earned income. These includes salary or wages, alimony received, and rental income. Investment income is not considered “earned income” in the case of RRSP contribution.

The annual contribution limit is set  to the lower of; 18%  of your earned income from the previous year or, the Annual maximum contribution limit for the taxation year. Early withdrawals lead to withholding taxes.

Lastly, RRSP is age restricted. When you turn 71, you can’t make a new contribution to your RRSP and you’ll need to close the account. You have the choice to use your savings,  purchase RRIF or purchase an Annuity.

Tax-Free Savings Account (TFSA)

TFSA contributions  on the other hand, are made  with already taxed money. This means that withdrawals are not taxed. Due to this fact, TFSA often is used as a saving fund for reasons other than retirement.

TFSA original annual contribution limit was set to $5000 back in 2009. However, since then, there have been several changes to the contribution limit.

The current annual contribution limit amount is $5,500. Unused contribution room is carried forward indefinitely and, withdrawals are added back to the following year’s contribution room. If you have not opened a TFSA or made any contribution to a TFSA since 2009, you have a contribution room of $57, 500.

Unlike RRSP, TFSA is not age restricted and you can make contributions to when you decide it’s enough.

Finally, TFSA has a penalty for over contributed amount, which is taxed monthly for the duration of the time that the excess contribution stays in the account.


Both RRSP and TFSA are great products which will encourage you to grow your savings, but it is of crucial importance to understand the differences between the two to make the right choice when choosing a savings account.

Ultimately, your goal is the main objective when choosing between RRSP and TFSA. If your goal is a retirement plan, RRSP might prove more suitable for you. TFSAs, on the other hand, is not considered a retirement plan, but you can still save a lot of money for other goals and earn interest tax-free.

Changes to the TFSA annual limit from 2009 to 2018


Year                 Contribution Limit
2009                            5,000
2010                            5,000
2011                            5,000
2012                            5,000
2013                            5,500
2014                            5,500
2015                          10,000
2016                            5,500
2017                            5,500
2018                            5,500
Total contribution room                         $ 57,500


PS: It’s never too late to start saving.