One of the perennial questions that comes up in the first two months of every year is whether individuals should first contribute to a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP), particularly if they cannot afford to max out contributions to both types of plans. And since 2009 when TFSAs first became available, every top personal finance writer has offered their opinion on the subject.

Chris Nicola on WealthBar created  WealthBar’s ultimate TFSA vs RRSP calculator. He says saving for your retirement income using your RRSP will beat saving in a TFSA for most people as long as your marginal tax rate when you are saving is higher than your average tax rate when you withdraw the funds, since the RRSP lets you defer paying tax until retirement.

The Holy Potato TFSA vs RRSP Decision Guide allows you to work through the steps to see which savings plan is best for you. This infographic illustrates that RRSPs can only beat TFSAs if you are making RRSP contributions pre-tax (i.e. contributing your refund so more goes in the RRSP). If you fritter away your refund, go straight to the TFSA.

Maple Money’s Tom Drake also presents an RRSP vs. TFSA Comparison Chart. Drake cites the recently released C.D. Howe Institute study entitled Saver’s Choice: Comparing the Marginal Effective Tax Burdens on RRSPs and TFSAs. The report notes:

“Especially for lower income Canadians, the Marginal Effective Tax Rate (METR) in retirement may actually exceed the METR during an individual’s working years because of the effects of clawbacks on income-tested programs like the Old Age Supplement (OAS) and the Guaranteed Income Supplement (GIS). At various income levels, these benefits are reduced. If most of your retirement income is from fully taxable sources like CPP, RRSPs, company pensions, and OAS, your METR will be higher than if you mix in some tax-prepaid investments like TFSAs.”

The Wealthy Barber David Chilton sees the fact that you can take money out of a TFSA in one year and replace it in a future year as both a positive and a negative. Thus Chilton says:

“I’m worried that many Canadians who are using TFSAs as retirement-savings vehicles are going to have trouble avoiding the temptation to raid their plans. Many will rationalize, “I’ll just dip in now to help pay for our trip, but I’ll replace it next year.” Will they? It’s tough enough to save the new contributions each year. Also setting aside the replacement money? Colour me skeptical. After decades of studying financial plans, I am always distrustful of people’s fiscal discipline. And even if I’m proven wrong and the money is recontributed, what about the sacrificed growth while the money was out of the TFSA? Gone forever.”

Young and Thrifty’ Kyle Prevost’s TFSA vs RRSP: Head to Head Comparison (updated to 2018) has lots of colourful pictures. He believes the RRSP and the TFSA are like siblings. Not twins mind you – but siblings with different personalities. In some ways he says they are almost mirror opposites and the inverse of each other.  Both options share the trait that let you shelter your investments from taxation – allowing your money to grow tax free using a wide variety of investment options.  Each have their time and place, and are fantastic tools in their own way, but depending on your age and stage of life, one probably deserves more of your attention than the other.

His take when it comes to the TFSA vs RRSP debate is: “Yes… DO IT.”  Prevost believes the real danger here is paralysis by analysis.  Picking the “wrong” one (the better term might be “slightly less efficient one”) is still much better than not saving at all!

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.