Like many Canadians most of us won’t be able to contribute the maximum to both a TFSA and an RRSP so what is the best strategy?

Let’s say you have $5,000 to invest and assume for illustration that this is invested for 20 years, grows at 5.5% each year after fees and that your tax rate remains constant at 40%


Your pre-tax contribution $5,000 $5,000
Tax payable upfront (at 40%) $2,000 0
Net contribution $3,000 $5,000
Investment growth (20 years at 5.5%) $5,755 $9,590
Total in each plan after 20 years $8,755 $14,590
Tax due on withdrawal (at 40%) 0 $5,835
Cash in hand after 20 years $8,755 $8,755

eggsInterestingly the plans end up the same, which suggests we should re-examine the assumptions:

  1. Is your tax rate likely to be higher or lower after 20 years?
    If lower, the RRSP will be worth more given that the taxes due on withdrawal will then be lower, but if higher, the TFSA would be a more efficient option.
  2. Flexibility is also a consideration. If you may require some or all of the invested cash, the TFSA enables withdrawals and subsequent replacement of the funds (not before the next calendar year).

Another consideration is where to invest. I am referring to the types of investments. To grow your money, you have to go beyond simply saving and invest it. Unfortunately, an estimated 90% of TFSA’s opened last year were GIC TFSA’s, which makes little sense if the objective is to grow the money. We are in an extremely low interest rate environment and investors ought to invest in bonds and or equities to grow ahead of inflation.

What you want is a ‘self-directed TFSA’, which is an investment account, not a bank savings account.

Differences between a TFSA & RRSP

A Registered Retirement Savings Plan (RRSP) and Tax Free Savings account are similar, but there are some key differences. An RRSP is primarily intended for your retirement, while you can invest in a TFSA for any short- or long-term financial goals.

Max Annual Contribution $5,500* The lesser of $24,930 or 18% of earned income, less pension adjustment for 2014
Maturity Limit None Must mature by the end of the year in which you turn 71
Tax deductible Contributions No Yes (reduces taxable income)
Tax on Withdrawals
  • Investment income and growth is tax free
  • Amount withdrawn is not added to your taxable income
  • Withdrawals are added to taxable income
  • Applicable marginal tax rate applies
Impact on Eligibility for Government Benefits, such as the Canada Child Tax Benefit, Old Age Security (OAS) or the Guaranteed Income Supplement (GIS) No Yes
Contribution Room Restored after Withdrawals Yes No
Ability to Carry Forward Unused Contribution Room Yes Yes
Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CSA, FCSI
Executive VP
(905) 330-7448