MONEY · REGISTERED PLANS · Canada
TFSA or RRSP: at equal rates, the gap is zero dollars
It is not a question of product, it is a question of one number: your marginal rate today against the one you will have on withdrawal. On $5,000 over twenty-five years, it decides $2,146.
By the Yoseri News desk · · 6 min read
This article describes the rules of Canada. Income tax, pension plans and tax-sheltered accounts do not transpose from one place to another.
These are not the rules of the region you picked (): this article describes those of Canada. The reasoning holds everywhere; the account names, the caps and the ages do not.
You have $5,000 to put away and two accounts in front of you. Articles will tell you "it depends". They are right, but it depends on one number only, and that number can be worked out.
The two mechanics, in two sentences
The TFSA is filled with money that has already been taxed. It grows sheltered, and you are taxed on nothing when you withdraw.
The RRSP is filled with money from before tax: your contribution is deductible, and the government hands your tax back the following spring. It grows sheltered too, but on withdrawal everything is taxable — capital as well as growth.
So the RRSP does not save you tax. It moves it in time.
The calculation, at three rate assumptions
Assumptions, written down so you can redo them: $5,000 contributed, 6% return a year, twenty-five years, a marginal rate of 37% at the time of contributing. The RRSP’s tax refund — $1,850 — is invested too, sheltered. Without that, the comparison is rigged from the start.
| Your marginal rate on withdrawal | TFSA | RRSP + refund invested | Gap |
|---|---|---|---|
| 37% — the same as today | $21,459 | $21,459 | $0 |
| 27% — lower | $21,459 | $23,605 | +$2,146 |
| 45% — higher | $21,459 | $19,743 | −$1,717 |
Look at the first row. Zero dollars of difference, to the cent. That is not a rounding, it is an arithmetic identity: at an equal marginal rate, deducting now and paying later comes to exactly the same as paying now and owing nothing later.
So the question is not "which is better"
It is: will your marginal rate be lower or higher when you take the money out?
Lower, and the RRSP wins: you deducted at 37% and you will pay at 27%. Higher, and it loses, by as much as it would have won the other way. The TFSA bets on nothing — which is what makes it the default when you do not know.
And you often do not know. At 25, early in a career, your marginal rate is more likely to rise than fall over the next ten years.
What the table does not say
It assumes you invest the tax refund. If you spend it — as most people do — the RRSP loses mechanically, whatever your rate. That is not a flaw in the product, it is a flaw in the plan.
It only talks about investing, not about income-tested programmes. An RRSP withdrawal inflates your taxable income for the year and can reduce benefits that depend on it; a TFSA withdrawal changes nothing about your income. On low incomes, that effect sometimes weighs more than the gap in the table.
It also ignores withholding on withdrawal. Taking money out of an RRSP before retirement triggers tax withheld at source, and our article on RRSP withdrawals shows why it is almost never enough.
Finally: the TFSA returns your room the following year, the RRSP never. Taking $5,000 out of an RRSP means losing $5,000 of room for good.
And for you, what does that mean?
Take your last assessment. Your marginal rate follows from two lines: your taxable income and the bracket it falls into. Compare it with what you expect for the year of withdrawal. The gap, in points, is the only figure that settles it.
And if both accounts are full, the question disappears — it becomes the order in which you empty them, which our breakdown on drawdown covers.
Yoseri’s Plan page works these paths out on your own figures and writes its assumptions beside them. It does not choose: Yoseri is registered as an adviser with no market authority, and the choice stays yours.
Where the figures come from
The maths in this article starts from the assumptions written above. Run them again with your own figures — you should land on the same numbers.
Yoseri News is an educational publication. Nothing in this article is investment advice, a recommendation to buy or sell, or tax advice. Yoseri is registered as neither an adviser nor a dealer with any market authority. The tax rules described here are those of Canada, and the limits change: check your own entitlements before acting.