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Should You Contribute to Your RRSP or TFSA?

14 February 2012

February 29th, 2012, is the final day to make a contribution to your Registered Retirement Savings Plan (RRSP) for the 2011 taxation year. Like most Canadians you probably scramble at the last minute to find some extra cash, or even consider taking out an RRSP loan. You probably don’t even give much consideration to your overall investment plan – other than the nice tax refund! But do you really need to contribute to Your RRSP? Would the TFSA be a better option? Let’s look at the pros and cons of each plan before you rush to your bank for a RRSP Loan.

Not only can you contribute to your RRSP, but you can also take advantage of the Tax Free Savings Account (TFSA) introduced by the government in 2009. Many Canadians are still unfamiliar with the TFSA and how it works, continuing to contribute to their RRSP. Both plans shelter your income tax-free, both plans have benefits, and both the TFSA and RRSP work in different ways. The biggest difference is the treatment of taxes in each plan. Let’s look at the basics!


The RRSP (Registered Retirement Savings Plan) is what most Canadians are familiar with. This is a powerful investment and savings tool, which provides tax-free compounding growth, in addition to lowering your taxes. When you contribute to your RRSP, the contribution is deducted from your income. For most people this usually results in a tax refund.  The higher your income the higher your refund! Sounds like a winning plan, doesn’t it?

However, a RRSP contribution is nothing more than a tax-deferral plan and this is the way you really need to view it. The string attached most people forget, is that you get taxed when you make withdrawals from your RRSP. That’s because RRSP withdrawals become taxable income. So the tax man cometh back for the refund he gave you! There’s no way around this – it’s about as absolute as gravity.

RRSP withdrawals become taxable income.

Think of the tax refund from your RRSP contribution, as a loan from the government that you have to pay back. So when you make contributions to your RRSP think for the long term. Where will you be when you retire – will your income be higher or lower? Does an RRSP contribution really help you lower your taxes? Can you use the refund for investing or to help pay down your mortgage or consumer debts?

Here are the RRSP basics:

    • A  RRSP is not an investment. It is a registered plan for sheltering taxable income.
    • A RRSP is not just for savings, you can hold mutual funds, stocks, or bonds in a RRSP.
    • You can contribute a higher amount to an RRSP than a TFSA (see your tax assessment).
    • You can carry forward any unused contributions.
    • You get a tax deduction for contributing. For most Canadians this results in a tax refund.
    • You pay taxes when you withdraw money from an RRSP.
    • You cannot use your RRSP investments as collateral for a loan.
    • You cannot write off the interest for an RRSP loan.
    • You cannot hold your RRSP after age 71. It must be converted into a RRIF, an Annuity, or even worse withdrawn and declared as taxable income. That’s a bad thing!



Many people haven’t utilized the full benefit of the TFSA (Tax Free Savings Account), which in many ways is a much better deal than the RRSP. The bottom line is, when you contribute to a TFSA you do not get a tax-deduction or a refund. But you can withdraw money from the TFSA tax free! This makes the TFSA an ideal investment plan to save for retirement. You can save tax-free, withdraw tax-free, and reduce the amount of taxes you pay at retirement. It won’t affect your government benefits in retirement, which income from your RRSP can. The only catch is that you are limited to $5K per year, and any withdrawals reduce your current annual contribution room. However you can contribute that amount back in the following year.

Here are the basics:

    • The TFSA is not an investment. It is a registered plan for sheltering taxable income.
    • A TFSA is not just for savings, you can hold mutual funds, stocks, or bonds in a TFSA.
    • For 2012 your maximum contribution room is $20,000 (4 years x $5000 per year)
    • You can carry forward any unused contributions.
    • You do NOT get a tax deduction for contributing.
    • You do NOT pay taxes when you withdraw money from a TFSA.
    • You can use your TFSA investments as collateral for a loan or line of credit.
    • You cannot write off the interest for a TFSA loan.
    • There are NO age restrictions on the plan – you can hold it until your 99 (or 103 if you want)


Which One is Right for you?

iStock 000019070471XSmall Should You Contribute to Your RRSP or TFSA?

For some Canadians the $5K per year limit on the TFSA is a drop in the bucket, and for most Canadians finding an extra 5K per year is virtually impossible [Editors Note: I just found $20 in my jeans, I believe in the impossible].  If you find yourself under the 50K to 60K salary mark, and have to choose one or the other, consider the TFSA over the RRSP. You won’t get that nice refund every year. But when you withdraw money from your TFSA, you won’t be paying any taxes either.You won’t owe the government anything! How sweet is that? I covered the merits of the TFSA over the RRSP in a post last February, Maximize The TFSA, and Forget The RRSP.

If you’re a higher income earner, you will benefit from RRSP contributions because the refund amount will be higher, as you are in a higher tax bracket. That leaves you two options. First, you can maximize your RRSP contributions and get the largest refund possible. That refund then can be reinvested again into the RRSP, a TFSA, or even used to pay down the mortgage. The Passive Income Earner wrote a stellar post last week on exactly these three scenarios in, Maximize Your RRSP. If you’re not sure what the best use of your refund is, then this post will give you some great ideas!

The second option is to optimize your RRSP. This means you only contribute to your RRSP what is necessary to reduce any taxes payable. You then maximize your TFSA contributions. Anything left over then goes into your RRSP. My Own Advisor (not really my advisor), covers this strategy in detail from a post last May, in I’ll Maximize My TFSA First, Thanks. I’m a fan of this strategy, because building up your TFSA means you will pay less tax in retirement.

Please keep in mind the Dividend Ninja is not an accountant or professional advisor. Everyone likely has an individual circumstance that is very different from mine or someone else’s. Regardless of your TFSA or RRSP strategy, I hope you will work out the details with a tax expert, financial planner, or your accountant, and see what is the best strategy is for you!

About the Author

Dividend Ninja

The Dividend Ninja is a DIY (Do It Yourself) investor, who started blogging in 2010 about his journey into dividend stocks. After investing in mutual funds for years, and working with a second advisor in 2009, he realized it all came down to fees and commissions. Like most people, the market crash of 2008 and 2009 changed his views about investing and the financial industry. Dividend stock investing was the strategy that made sense for him! You can learn more about his rants on dividend stocks and index investing at the Dividend Ninja.

Comments (32 )

Great article!!

I think this article should be mandatory reading for everyone considering contributing to their RRSP “this season”.

Contributing to an RRSP is not a bad thing, rather, it can be a very good thing – but you need to understand why this vehicle is most appropriate for you. In many cases, when you do the math, especially for lower- and middle-income earners, the TFSA wins hands down.

Thanks for including my post, in this great read Ninja.

Will tweet a few times over the next couple of days. People need to read this!

Poor Student Wrote:

I am not yet even in the first tax bracket, every year I get all the taxes I paid back. That is the first reason that the TFSA is for me, and should be for those taxable low incomes too. And because I am young, the $5K a year is going to benefit me more so than other older investors because I have more years to add to the total. Some people may not be able to add as much as they want to the TFSA, but I can add all my extra money and then some and not reach the limit now. And after I am working after I graduate I will have built up a lot of contribution room that I will actually be able to use.

I did start and contribute to an RRSP but I will be deferring the tax credit until I have a much higher income to make the tax benefit make the most sense.

Great article.

Modest Money Wrote:

Thanks for this post Dividend Ninja. It is a real eye opener. I made the mistake of listening to my bankers and the people doing my taxes when choosing to put money into an RRSP. I was under the assumption that the TFSA was just a savings account with a low interest rate. Nobody ever told me that it is much more than that. The bankers obviously wanted commission on my RRSP purchase and the tax guy wanted to make it look like I was saving money on taxes. Now I just have to figure out how to properly take advantage of the TFSA going forward.

your thriftiness Wrote:

Thanks for writing this article, I’m a newbie at personal finance and it’s a great intro to the different ways of saving for the future. :)

Poor Student, BINGO! You get the gold star in today’s class :) Seriously though, to understand that the power of the TFSA is more beneficial for moderate to low income earners, and to realize this concept at a young age is worth gold! Your’e going to do well…

Modest Money, yes exactly just like a RRSP the TFSA can hold anything – its just a plan. Unfortunately the word “savings” really throws people for a loop here. Most RRSPs also have admin fees and other costs, but with TD Waterhouse and with TD Bank, I don’t pay any admin fees for my TFSA.
Yes the refund looks like a gift – but its not – you pay it back later.

MOA your posts on the TFSA are stellar. Readers go check his site out! He was one of the first bloggers to bring this issue to the forefront…

Stu Wrote:

As a retiree TFSAs are a great place to stash Div stocks away from the taxman while withdrawing the income monthly. Also transferring Div stocks from ones taxable acct’ every Jan is like a small pay raise. Your previous years Div withdrawals added to your annual $5000 makes for a nice (and growing) contribution.
For retirement building I think they’re better than an RRSP. If you’re a young couple with kids who can afford to sock away much more than $10,000 a year? That amount wouldn’t get you much of a tax refund in an RRSP. Get an investment acct’TFSA and fill them with Div stocks and withdraw the Divs regularly for income (just like a refund check huh?). Go one step further and reinvest those Div$ in more Div stocks and as soon as posssible transfer them “in kind” to your TFSA. If your on track to have a large$ retirement portfolio the RRSPs come complete with gov’t handcuffs in that all of it is taxable ,has to converted to a RIF or annuity at 71, and may cost you much more in tax than you ever saved while building it. Today many retirees are reporting their pay higher taxes because of this. But with the TFSA your free and clear.

Hi Stu,
It’s great to know that a retired person is also using the TFSA for their reitrement strategy. I never thought of it that way, but its an excellent point. I also agree with you that the RRSP contributions “may cost you much more in tax than you ever saved while building it.” Many people still don’t see that by having income compound tax-free in their RRSP it just increases the amount that gets taxed later.

And movign the assets from your RRSP to TFSA with transferrign your assets in kind is brilliant. Very cool!

One question though, is with TD Waterhouse I get dinged $25 per withdrawal from my TFSA (I would with an RRSP as well). How do you get around the withdrawal fees or do you?


Well said Stu. Your plan is exactly my plan :)

Once stocks are able to DRIP, transfer shares to my TFSA. I have a post related to this, planned for next week. I hope you check it out!

Stu Wrote:

No I’m not transferring RRSP toTFSA. I’m transferring from a taxable acct to TFSAs. I don’t think the gov’t allows RRSP in-kind or any kind of transfer out of an RRSP. I’m really not sure. My plan all along has been to hide from tax all my div stocks by tucking them into out TFSAs. Next years contributions will finish the job. Now that I’m retired I’m basically past the building stage and into the consumption stage.

Stu Wrote:

One small downside to the transfer is you may trigger a capital gain “if” the stock has appreciated at all. Still this a minor problem. Other people complain that once a stock is in your TFSA you can’t claim a capital loss. I look at it that unless something happens to the dividend I really don’t care if the stock falls below my cost. I couldn’t care less because eventually I’ll collect enough divs to offset the loss. This is the one place Buy and Hold is king. Aside from the odd stock blowing up on you, building a TFSA portfolio is like building a near perpetual cash machine.

Stu Wrote:

MOA Are you Dripping the stocks inside the TFSA or outside?
I had thought a good plan might be to hold stocks in a taxable acct, set them up as DRIPs “with” SPPs, send them cash every month and transfer some shares to the TFSA annually,collect the TFSA div cash back to the taxable acct to add to the SPP money. This would still add contribution room for the next year. Another small bonus is that TFSA div cash in a way gets a bigger return when you compare it to investing cash which has already been taxed.

Hey Stu!

I now DRIP stocks both inside the TFSA, RRSP and outside unregistered.

Inside TFSA, for all the great reasons you’ve indicated. I mean, it’s TAX-FREE dividends :)

I can’t believe more people don’t do this?

Anyhow, I own about 5 dividend-paying stocks inside my TFSA, that can all synthetically DRIP. That’s why when I do my dividend income updates on my blog every month, the income keeps going up.

I own about 12 dividend-paying stocks, different ones, outside the TFSA and over half of those, are DRIPping as well. Again, more dividend income. When I can, when contribution room will allow, I will move those shares into the TFSA. I’ll do that again, in 2013. Not sure which stock(s) yet though, but usually something that can DRIP, maybe TransCanada (TRP) for 2013.

Any cash leftover outside the TFSA, is used to buy more, new stocks. I can build up those shares over time, them once enough to DRIP, I do so. Then, repeat the cycle above for the TFSA as I slowly obtain a nice tax-free dividend war-chest.

In my RRSP, I have mostly ETFs but this month, I bought another dividend-payer: Procter & Gamble. I will be writing about that transaction, soon. I keep only U.S. dividend-paying stocks in my RRSP, and ETFs like I mentioned. Most of those U.S. dividend-paying stocks, are also DRIPping as well. Examples include JNJ, Abbtt and Sysco.

Overall, things seem to be coming together nicely for retirement. Now I just need to payoff my mortgage :)

stu Wrote:

Hey MOA,Sounds like a good plan you got going there. Congrats

Mommyinvestor Wrote:

Totally new to all this, but trying to get smarten up with our retirement plan. I’m keen on purchasing some DRIP stocks with SPP, but can I do this from within a TFSA then? What happens to the stocks purchased under the SPP – are they automatically within the TFSA and presumably you have to make sure that you don’t invest more than the $5k limit per year or am I missing something here?

dj Wrote:

I Maximize the TFSA first thing in the year and then add to my RRSP throughout the year cutting into my carried over contibution room each year now. Eventough I am fairly sure I’ll be in a lower tax bracket when I retire I think the TFSA is better deal. I’d rather pay the tax now and take out the uncertainty of future tax brackets. Eventually I’ll be maxed out in both and then be adding to my non registered account.

red_falcon Wrote:

While RRSPs and TFSA’s have their own advantages and disadvantages, why not combine both?
One of the reasons for doing this is to maximize the use of limited funds. It’s also doubly important when saving up for a mortgage (ie. 1st time buyers).

So… what did I do?
1st year. Contribute to RRSP first… about 5k. If you are between two tax brackets, then put a little extra so you drop to the lower tax bracket. I then got a tax refund, which I then put into the TFSA.
2nd year. Contribute to RRSP 5K. Refunds to TFSA
3rd 5k to RRSP Refunds to TFSA
4th 5k to RRSP. Refunds to TFSA
5th. 5k to RRSP. Refunds to TFSA

End result? I got to contribute to both, reduced taxes to the govt, and got a tidy RRSP about 25k as a downpayment for the house. Talk about a Win/Win/Win situation!!! yay!!!

It’s not a debate whether you contribute to RRSPs or TFSAs. Rather, compromise, focus on what you need, and the rest will follow.

“No I’m not transferring RRSP toTFSA. I’m transferring from a taxable acct to TFSAs.”
Yes of course, my mistake…

Mommyinvestor: If you have stocks with a transfer agent, you can not hold them in your RRSP or TFSA, you will only be able to “synthetically DRIP” full shares with the discount broker.

What you can do however, is transfer the assets in kind from your transfer agent to a TFSA with your discount broker, then shelter the dividend income. But it only makes sense to do that if you have enough to “Synthetically DRIP” one full share.

Your maximum TFSA contribution room for 2012 is 20K, less any previous annual contributions less 2012 withdrawals if any.


Excellent! that’s the way to do it IMO…

Red_falcon, yes of course if you can do both you are one of the lucky ones! The majority of Canadians are not in a position to even consider maxing out the TFSA or anywhere close to it, and most earn below 50K. In this case the TFSA is a better option for them in the long term…
If however you are able to get a large refund, and you are able to max out the TFSA (each and every year) then do it by all means!! Whatever works for you.
Just remember RRSP contributions are fully taxable when you withdraw them later, can affect your government benefits (clawbacks), and the plan has to be converted into a RRIF or annuity later. I just prefer to max out the TFSA first, becuase it is really headache free in the long term!



As Ninja said nicely, stocks with a transfer agent are just that, and that’s where you can only use a full DRIP with SPP – a share purchase plan to purchase optional shares or fractional shares.

You can most certainly hold stocks in your RRSP or TFSA, but the fractional shares won’t be reinvested like they would with transfer agents. You must have enough shares in your brokerage RRSP or brokerage TFSA invested, whereby when dividends are paid, the dividends buy one whole share.

Here is some reading on DRIPs:

I have a post planned about transferring or rather, closing your DRIP with SPPs and moving shares to your brokerage RRSP or brokerage TFSA. Stay tuned for that!

Happy Investing :)

Well said Ninja :)

Mommyinvestor Wrote:

Mmmm, sounds like I can’t do what I was hoping to then, but thanks for all the info. I may be best starting outside of a TFSA (I can only start small!) and then looking at moving it as I grow. @myownadvisor – I shall keep any eye out for your post and thanks for the additional reading on DRIPs in the meantime – looks like I’m on a bit of a learning curve here! :-)

Brenda Wrote:

Great article. I like the summary . As a former banker I used to advise people of the pros and cons and make suggestions but the final decision is the customers. I have a question. My nephew pays someone to do his income tax and she did not include his RRSP contributions for Jan and Feb. Now says she can include them this year. I think an amendment to tax year 2010 has to be made. Is she correct? I thought you could only do a 12 month period ( he does have room for this ).

Brenda, thanks! :)

I’m not an accountant or a tax expert, so my advice is to go see one (other than the one that did this return). Your RRSP contributions within the first 60 days of 2012, can either be used for your 2011 or 2012 tax return – you can deduct them in either year, or even carry them forward to future years. I do not think you can carry it back to the 2010 return.

I do believe you can have these contributions applied to the 2011 return after the 2011 return has been filed – sounds like your nephew had better get a new accountant. It looks like the tax preparer simply forgot to enter the 2012 contributions for the first 60 days, and did this in previous years as well, not sure why though? You’ll need a proffesional accountant to sort this one out if mistakes have been made over several years.


Stephen Wrote:

…great post. Interested to know if you have thoughts on TFSA or RRSP for bonds? Is there a difference? I’m inclined to put my bonds under my TFSA…


Stephen, I’m not a tax expert. However the bottom line is the TFSA shelters your investments from only Canadian income taxes, but not foreign taxes. The RRSP shelters your investments from both Canadian and Foreign taxes.

If these bonds are Canadian Govt. or Canadian corporate bonds, the income will be sheltered in both the TFSA and RRSP. If the bonds are U.S. or foregin bonds, you would want to hold them in your RRSP.

Cheers! :)

Sam Wrote:

Correction: TFSAs and RRSPs cannot hold everything. You cannot short sell or buy OTC securities. I don’t use options yet but I’m pretty sure your investments on those are limited as well. Also important to note: dividends paid into a TFSA are subject to US withholding tax, while those in an RRSP are not.

Sam Wrote:

I believe I’m right in saying that this line is incorrect re: TFSAs

“any withdrawals reduce your current annual contribution room”

Unless I’m very much mistaken any withdrawals simply increase your contribution room for the FOLLOWING year, and do nothing to your current year.

So you could withdraw $7000 at the beginning of the year, deposit 5k at the end of the year and then have 12k room for next year (the 7k you took out and the 5k annual contribution room).

Please correct me if I am mistaken.

Katy Wrote:

I know this is an older article, but can you explain why exactly it is better to use the TFSA first if I make less than 50K? If my marginal tax rate is still currently higher than it will be when I retire, won’t I still save on the taxes?

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