Both accounts let your investments grow without yearly tax. The difference is when you pay the tax. With an RRSP you get a deduction now and pay tax when you withdraw. With a TFSA you pay tax now and never again on that money.
The short comparison
| TFSA | RRSP | |
|---|---|---|
| 2026 limit | $7,000 | 18% of last year’s earned income, up to $33,810, plus unused room |
| Tax on contribution | No deduction | Deductible from income |
| Tax on growth | None | None while inside |
| Tax on withdrawal | None | Taxed as income |
| Room after withdrawal | Returns next January 1 | Not restored |
| Age limit | Open at 18, no end age | Must convert by December 31 of the year you turn 71 |
How the RRSP deduction works
If your marginal tax rate is 30% and you contribute $5,000, your tax bill drops by about $1,500. That is an illustration, since your real rate depends on your province and income. The money then grows tax-deferred, and you are taxed on withdrawals as if they were income that year.
RRSP withdrawals also have tax withheld at the source, which is 10%, 20% or 30% depending on the amount, and you settle the difference when you file.
A simple way to decide
- Expect a higher income later than you earn now? Early in your career, the TFSA often makes more sense. You pay tax at a low rate today and nothing later.
- Earning well now and expecting a lower income in retirement? The RRSP deduction is worth more at your current rate.
- Might need the money before retirement? The TFSA is more flexible because the room comes back.
- Saving for a first home? The RRSP Home Buyers’ Plan lets eligible buyers withdraw up to $60,000 from an RRSP for a first home without immediate tax, and the amount has to be repaid over time.
Where the TFSA has an edge
TFSA withdrawals are not income, so they do not push you into a higher bracket and do not affect benefits that depend on income, such as Old Age Security clawbacks or the Guaranteed Income Supplement. For retirees, that can be worth a lot.
Using both
You do not have to pick one forever. A common approach is to fill the TFSA first while income is modest, then add RRSP contributions as income and tax rates rise. Whatever you choose, the account only holds your investments. What you buy inside matters just as much, which we cover in index funds vs ETFs vs mutual funds. New to the TFSA? Start with what a TFSA is and how it works.
FAQ
Can I contribute to both in the same year?
Yes. They have separate limits and you can use both.
Which has the higher limit?
For higher earners the RRSP, which goes up to $33,810 in 2026. The TFSA is $7,000 for everyone.
Do I lose RRSP room if I withdraw?
Generally yes. Unlike the TFSA, RRSP room is not given back after a regular withdrawal.
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This article is for general education and is not financial, tax or legal advice. Rules and limits change, so confirm current figures with the Canada Revenue Agency or a licensed professional before you act.
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