RRSP vs TFSA: We’re Looking At The Wrong Questions

Everywhere I looked this week there was the usual advertisements for buying your RRSPs.  The mad February scramble to try and shore up retirement financial plans has become a seasonal hallmark for Canadians.  Financial institutions of course have a vested interest in telling you had badly you need an RRSP, because their next recommendation is almost always a, “Well-balanced 5-star mutual fund.”  Excuse me while I go throw up in the corner at the thought of giving 2-3% of retirement assets up every year in MER fees from our mutual fund industry.   This is only the start of the RRSP vs TFSA debate.

The rash of RRSP ads were naturally answered by several articles written by people smarter than me on if families and/or individuals would be better off putting their money in Tax-Free Savings Account (TFSA) a Registered Retirement Savings Plan (RRSP), or a Registered Education Savings Plan (RESP).  I also seen several articles detailing how short-term investment loans could be used to maximize people’s contributions.

A Debate Only a PF Blogger Could Love

I couldn’t help but think that we are missing the main point here.  I’m not sure why the TFSA vs RRSP argument has been so in vogue this year, but to be honest, the far greater concern for most people should be just to save money in a tax-advantaged account, period! Reports in the Globe and Mail state that only about 5.3% of total RRSP contribution room got used last year, which was down from 6% the year before that.

Around 70% of Canadians haven’t  opened a TFSA, roughly half don’t even know what it is, while of the 30% that have opened a TFSA, most are using it for short-term saving, or basically as a bank account instead of a retirement savings option.  I honestly believe at this point, the confusion about which accounts to use are just reinforcing people’s general laziness and procrastination in trying to put off getting together a comprehensive plan and figuring out how to save for retirement.

Pick an Acronym – RRSP vs TFSA vs RESP

I guess for those of us personal finance nerds who love looking at spread sheets, the whole RRSP vs TFSA argument makes sense.  We enjoy throwing weird variables into the equation and watching the numbers filter through.  For the vast majority of individuals though, the only headline we should see in the newspaper is SAVE, SAVE, SAVE.  It doesn’t matter which account, just pick one!

Heck, even paying off your mortgage on a primary residence could be considered a tax-friendly investment if you plan on selling it one day (any money you make on the sale of your primary residence is non-taxable).  The real bottom line is that Canadians are more in debt than ever before (with the number hovering around 150% of yearly income) and that any saving is better than no saving.

Some people are so intimidated by trying to sort through the alphabet soup of Canadian personal finance, that they forgo the benefits of tax-advantage accounts altogether and just leave their money in bonds outside of any account, or high-interest savings accounts.  This can be catastrophic because of the tax treatment those respective methods of investing get.  It can also discourage people from aggressive saving because they are not seeing the substantial results that tax-sheltered investing can result in.

Let’s say, just for the sake of argument that you had two identical investors that began investing at 25, and saved $3,000 a year until they retired at 55.  We’ll make some crazy assumptions and say that somehow they both get 8% returns on their investments, but Investor A uses a tax-advantaged account (doesn’t matter that if it is a RRSP or TFSA for the purposes of this comparison) and Investor B does not.

If we further assume a marginal tax rate of 35%, then we assume Investor A should come out ahead by a small amount.  After all they invested the same amount of money, for the same amount of years, with the same return on it right?


The catastrophic effect that taxes has on your compounding means that Investor A ends our scenario with $367,038 at 55, while Investor B has only $217,027 to show for their efforts.  This gap wouldn’t show much after the first couple of year a (a hundred bucks here and there), but when compounded out, we can see a decisive difference.  This is why high net worth individuals love both the RRSP and TFSA.  Sheltered compounding combined with disciplined saving make all the difference

While it is nice for us nerdy types to kick back and forth about what specific account gives an advantage over another, it is easy to forget that for most people, the much bigger worry is simply putting in a couple hours a year to make sure that you are saving money in a tax-advantaged account at all.

I would love to hear your thoughts on the RRSP vs TFSA debate.  What works for you? Why?

15 thoughts on “RRSP vs TFSA: We’re Looking At The Wrong Questions

  1. I have both. My TFSA houses my emergency fund, so it’s more fluid than my RSP. My RSP doesn’t have much money in it because I opened it in January, and also because I can’t figure out how it works.

  2. 70% haven’t opened a TFSA account?!? That’s insane!

    We opened our TFSA’s the year they were introduced and have faithfully put in our 5k each year. Our RRSPs are also maxed out every year. It’s so much easier to take full advantage of both investment vehicles if you stay on top of them each year. They you don’t have to decide between one or the other.

    1. Isn’t that a crazy stat? I’m sure that when you realize your goal at 48 by maxing out these accounts people will think you must have inherited wealth or something, instead of merely being dedicated savers.

  3. My emergency fund is a cabin I paid cash for over the years. Will be retiring there in about a year. Wouldn’t have it any other way.

  4. I have both an RRSP and a TFSA, I keep my mini-efund in the TFSA and the RSP is for more long-term saving. I find it very hard to have a large amount sitting in an account so easily accessible as a TFSA… (not that I have a large amount to put in it!) takes a few more days to get money out with the RSP. I’m surprised so many don’t have a TFSA, I mean why would you not… if you have a savings account AT ALL, go for the TFSA!

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  6. At the moment, I’m focusing on maxing out my TFSAs first before contributing to my RRSPs. If you run the numbers, unless you reinvest your RRSP refund right back into your RRSP, you are almost always better off using the TFSA over the RRSP in the long run.

    1. Well E and M, if you are saving money period, then you are already ahead of most buddy. Like I said above, I’ve read lots of debates about TFSA versus RRSP. Basically, what it boils down to is the marginal tax rate you are paying in a given tax year, and what you think your marginal tax rate will be when you take the money out. All the other stuff is just noise.

  7. We max out the TFSA’s because hubby’s union uses up all the RRSP room for their pension plan.

    Just a reminder for those using the TFSA’s as an emergency fund. Once it’s funded for the year and then you take it out for an emergency you can’t put it back in until the following year. So try to have your emergencies late in the year. LOL

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  9. I agree. People need to get on using these accounts and not delay because they don’t fully understand everything.

    The biggest misconception I think is what you put inside the accounts. The names don’t necessarily help especially “Tax Free Savings Account”. The answer is, as we PF bloggers know, that you can put practically anything inside either of these accounts. Decide what you want to invest in, and chances are you can invest in it inside a TFSA or RRSP.

    Second pointer I would give to most people is that if you are young always go for the TFSA before RRSP unless you are set to be in the top tax bracket this year or something. You want to invest in RRSP in your highest earning years so you get the biggest tax refund.

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