TFSA vs. RRSP: Difference Between the Two

A TFSA and an RRSP both let your money grow tax-free while it's invested. The difference is when the tax applies.

With a TFSA, you contribute money you've already paid tax on. Everything inside the account grows tax-free, and withdrawals are tax-free too.

With an RRSP, you get a tax deduction the year you contribute. But you pay tax later, when you withdraw the money.

How a TFSA Works

TFSA contributions aren't tax-deductible. You're contributing money that's already been taxed.

In return, your money grows completely tax-free. Interest, dividends, and capital gains earned inside the account are never taxed. Withdrawals aren't taxed either, no matter how much the account has grown.

The annual TFSA contribution limit is $7,000 for 2024, 2025, and 2026. This limit is tied to inflation and increases in $500 steps.

Unused contribution room carries forward every year, so it adds up if you don't use it. If you withdraw money, that amount gets added back to your room, but not until the following calendar year.

TFSAs have existed since 2009. If you were 18 or older that whole time, lived in Canada, and never contributed, you'd have about $109,000 in available room by 2026.

How an RRSP Works

RRSP contributions are tax-deductible. They reduce your taxable income in the year you make them.

The tradeoff is that your money isn't tax-free, just tax-deferred. You pay tax on both your original contributions and any growth once you withdraw it.

Your contribution room is 18% of your previous year's earned income, up to a yearly maximum set by the CRA. That maximum was $32,490 for 2025, and it typically increases each year. If you belong to an employer pension plan, your room is reduced to account for that.

Like a TFSA, unused RRSP room carries forward indefinitely.

You can't keep an RRSP forever. By the end of the year you turn 71, you have to convert it into a Registered Retirement Income Fund (RRIF) or an annuity. After that, you start making taxable withdrawals.

Withdrawing Money: TFSA vs. RRSP

You can withdraw from a TFSA at any time, for any reason. You won't pay tax on it.

The one thing to know is timing. If you withdraw money, you don't get that contribution room back until the next calendar year.

An RRSP withdrawal gets added to your income for that year, and it's taxed at your regular rate. Your financial institution will also withhold a portion of it upfront.

There are two exceptions. The Home Buyers' Plan and the Lifelong Learning Plan both let you withdraw from an RRSP tax-free, as long as you repay it on schedule.

Using RRSP or TFSA Savings to Buy a Home

The Home Buyers' Plan lets eligible first-time buyers withdraw up to $60,000 from an RRSP tax-free, to buy or build a home.

If you withdraw the money between January 1, 2022, and December 31, 2028, you get extra time to repay it. Repayment starts in the fifth year after your withdrawal instead of the second, and it's spread over 15 years.

A TFSA doesn't have a program like this, but it doesn't need one. Any withdrawal from a TFSA is already tax-free, home purchase or not.

There's also the First Home Savings Account (FHSA), a separate account built specifically for saving toward a first home. It combines features of both the TFSA and the RRSP.

Can You Have Both?

Yes. A TFSA and an RRSP aren't an either-or choice. You can hold both at the same time, and each one tracks its own contribution room separately.

Many people use a TFSA for shorter-term or flexible savings, and an RRSP specifically for retirement. There's no rule that says you have to use either account a certain way.

The Core Tax Tradeoff

An RRSP deduction is worth more when your income, and your tax rate, is higher now than it's expected to be later when you withdraw the money. That's the whole idea behind the deduction.

A TFSA doesn't work that way. Your tax bracket doesn't matter at all, since you never get a deduction going in and you never owe tax coming out.

You can check your TFSA and RRSP contribution room anytime through CRA My Account, or on your latest notice of assessment. Contributing to one doesn't affect your limit on the other.