The rush is on for Canadians to make contributions to their registered retirement savings plans (RRSPs) before the March 3 deadline.
Many squeak by in time to reap a sweet tax refund in the spring, but a tax-free savings account (TFSA) could be the better tax-saving alternative over the long-term this year.
Better yet, doing both could create a powerhouse tax strategy to trim tax bills by thousands of dollars in retirement. Potential tax savings depend on the individual taxpayer, so it’s probably best to discuss the right balance with a qualified professional.
Here are the RRSP/TFSA basics to get you started:
RRSP: Save now, pay later
Canadians love to get their RRSP tax refunds in the spring but the savings are smaller for those with lower incomes. RRSPs deliver the biggest tax advantage for wealthy Canadians because contributions can be deducted at the highest marginal tax rates.
That means someone with an annual income over $250,000, who is taxed at a combined Federal/provincial marginal rate of 50 per cent, will lower their tax bill by half of their contribution.
At the low end of the income scale someone who makes less than $55,000 and is taxed at a rate of 15 per cent, will only lower their tax bill by 15 per cent.
In dollar terms, tax savings on a $10,000 RRSP contribution from someone in the top income bracket will be $5,000 compared with $1,500 for someone in the lowest.
RRSP investments can grow tax-free until they are withdrawn, ideally at a lower marginal rate in retirement. That’s why it’s important to target contributions toward high-income years when tax savings are high and take a pass on contributing when income is low.
RRSPs can bite back for the rich, however. If the investments inside grow too much they will eventually be forced to make minimum withdrawals at a higher tax rate and even risk Old Age Security (OAS) clawbacks.
TFSA: Pay now, save later
You won’t have that problem with a TFSA because contributions are not tax exempt in the first place. You can’t deduct contributions from taxable income, but any gains made on the investments inside a TFSA (aside from dividends on foreign equities) are not taxed - ever. Withdrawals can be made at any time with no tax consequences.
In most cases, diverting RRSP contributions or refunds to a TFSA makes more sense for Canadians taxed at a lower marginal rate.
The RRSP contribution limit for 2025 is 18 per cent of reported earned income in 2024 to a maximum of $32,490 and unused contribution space can be carried forward to future years. But maxing them out early in life could be a huge mistake.
The TFSA was originally intended as a short-term savings tool when it was introduced in 2008, and contribution limits were low. In 2025, the TFSA contribution limit for those who were 18 years or older when the TFSA was launched in 2009 has grown to $102,000, but it can vary among individuals depending on withdrawals made over the years.
Total allowable space is expected to grow in future years, making the TFSA a potential retirement saving dynamo.
RRSP & TFSA: The best of both worlds
Investors can avoid the risk of their RRSP savings growing to higher withdrawal rates and OAS clawbacks by strategically shifting contributions to their TFSAs well before retirement.
Banking up a significant amount of cash in a TFSA allows retirees to top up needed cash without tax consequences, while keeping RRSP withdrawals in the lowest tax bracket.
Just about any investment is permitted in both the RRSP and TFSA - stocks, bonds, mutual funds, exchange traded funds - which presents an opportunity to use both as a single investment portfolio.
Consolidating retirement investments helps temper overall risk by diversifying across sector and geographic lines, and splitting assets between equities and fixed income.
