RRSP season is driven by two basic human emotions; fear and greed.
Fear that your registered retirement savings plan will not get you to your life-goal when you want, and greed for that yummy tax refund in the spring.
Whatever motivates you, keep that contribution in your pocket for now. Even if you don’t beat the March 2 contribution deadline, your total available amount can be carried forward to present and future tax years.
In some cases, contributing to a tax free savings account (TFSA) can bring bigger savings.
For investors with a longer-term view to retirement, the right combination of both might deliver a bigger bang.
A good overall tax strategy can keep thousands of investment dollars invested and compounding over time. A qualified adviser should be able to help, but here are a few basics for a clearer view.
Pack your RRSP in good years, pull back in lean years
An RRSP is just one cog in a retirement tax machine that could include employer pensions, family businesses, government benefits, home equity, and TFSAs.
Whether an RRSP is the best choice for your retirement investments from a tax perspective this year depends on individual circumstances.
Canadians love to get their RRSP tax refunds in the spring but not all refunds are equal, depending on how much income you claim in any specific year.
RRSPs deliver the biggest tax advantage for wealthy Canadians because contributions can be deducted at the highest marginal tax rates.
That means folks with an annual income over $250,000, taxed at a combined federal/provincial marginal rate of roughly 50 per cent, will lower their tax bills by half of their contribution.
At the other end of the income scale, someone who makes less than $50,000 and taxed at a rate of 15 per cent will only see a 15 per cent tax reduction.
In dollar terms, tax savings on a $10,000 RRSP contribution from someone at the top income bracket will be $5,000 compared with $1,500 for the same amount for someone in the lowest bracket.
RRSP investments can grow tax-free until they are withdrawn; ideally at a lower marginal rate in retirement.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 when income is low.
The risk of over contributing
Even with a contribution limit of 18 per cent of the previous year’s income (up to $32,490 this year), there are tax risks from over contributing.
If the investments in an RRSP grow to a certain threshold, the Canada Revenue Agency will eventually impose minimum withdrawal requirements.
That extra income you might not even need will be taxed at a higher marginal rate, which could result in Old Age Security (OAS) claw-backs.
When a TFSA make more tax sense
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.
Withdrawals can be made at any time with no tax consequences.
Diverting RRSP contributions or refunds to a TFSA makes more sense for Canadians taxed at a lower marginal rate. Unused RRSP contribution space can be carried forward to future years when income is higher.
The TFSA was originally intended as a short-term savings tool when it was introduced in 2008 and contribution limits were low. As of Jan. 1, 2026, the TFSA contribution limit for those who were 18 years or older when the TFSA was launched in 2009 has grown to $109,000, 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 potent tax-saving tool in retirement.
The dynamic duo: RRSP and TFSA together
Investors can avoid the risk of an RRSP expanding to higher withdrawal tax rates and OAS claw-backs 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, diversified, investment portfolio.
