TFSA vs. RRSP: The Question You're Getting Wrong

The Question Everyone Gets Wrong

Ask most financial advisors whether you should contribute to a TFSA or RRSP, and you will likely hear: "If you're in a high tax bracket, use the RRSP for the deduction." This advice is not wrong — but it is dangerously incomplete.

The correct answer depends not on your current income, but on the comparison between your current marginal tax rate and your expected marginal tax rate when you withdraw the funds. This distinction changes the optimal strategy for a significant portion of high-income Canadians.

The Fundamental Mechanics

Both accounts offer tax advantages, but through different mechanisms:

RRSP (Registered Retirement Savings Plan):

• Contributions are tax-deductible (reduces taxable income today)
• Growth is tax-deferred
• Withdrawals are fully taxable as ordinary income
• Contribution limit: 18% of prior year earned income, up to $32,490 in 2025
• Mandatory conversion to RRIF by December 31 of the year you turn 71

TFSA (Tax-Free Savings Account):

• Contributions are NOT tax-deductible (made with after-tax dollars)
• Growth is completely tax-free
• Withdrawals are completely tax-free and do not affect income-tested benefits
• Annual contribution limit: $7,000 in 2025
• Cumulative room since 2009: $95,000 (for those eligible since inception)
• No mandatory withdrawal requirements

The Marginal Tax Rate Framework

The RRSP and TFSA are mathematically equivalent when your marginal tax rate at contribution equals your marginal tax rate at withdrawal. The advantage shifts based on which rate is higher:

Scenario

Optimal Choice

Reason

|----------|---------------|--------|

Current rate > Retirement rate	RRSP	Deduction at high rate, withdrawal at low rate
Current rate < Retirement rate	TFSA	Pay tax now at low rate, withdraw tax-free later
Current rate = Retirement rate	Either	Mathematically identical outcomes
Current rate > Retirement rate, but OAS clawback risk	TFSA	RRSP withdrawals may trigger clawback

Why High Earners Often Choose Wrong

The conventional wisdom — "high income = RRSP" — assumes that high earners will be in a lower tax bracket in retirement. This assumption is increasingly incorrect for several reasons:

1. Large RRSP/RRIF balances create high retirement income A professional who accumulates $1,500,000 in their RRSP will face mandatory RRIF withdrawals of $79,200 at age 71 (at the 5.28% minimum rate). Combined with CPP ($15,000) and OAS ($8,500), total income is $102,700 — well above the OAS clawback threshold and in the same tax bracket as their working years. 2. CPP and OAS are higher than previous generations Enhanced CPP contributions since 2019 will result in higher CPP benefits for current workers. Combined with OAS, many retirees will have $25,000–$35,000 in guaranteed income before touching their RRSP/RRIF. 3. Defined benefit pension plans Professionals with government or corporate defined benefit pensions may have $40,000–$80,000 in guaranteed pension income, making additional RRIF withdrawals highly taxed. 4. The OAS clawback is effectively a 15% surtax For retirees with income between $90,997 and $148,000, the OAS clawback adds 15% to the effective marginal tax rate. A retiree in the 33% federal-provincial bracket who also faces clawback has an effective marginal rate of 48%.

2025 Contribution Limits and Cumulative TFSA Room

Year

TFSA Annual Limit

Cumulative Room (from 2009)

|------|------------------|----------------------------|

2009–2012	$5,000/year	$20,000
2013–2014	$5,500/year	$31,000
2015	$10,000	$41,000
2016–2018	$5,500/year	$57,500
2019–2022	$6,000/year	$81,500
2023	$6,500	$88,000
2024	$7,000	$95,000
2025	$7,000	$102,000

For a Canadian who was 18 or older in 2009 and has never contributed to a TFSA, the total available room in 2025 is $95,000 (if they were eligible from the start) or up to $102,000 for those who turned 18 in 2009.

The Coordinated Strategy: Using Both Accounts Optimally

For most high-income professionals, the optimal strategy is not RRSP or TFSA — it is a coordinated approach that uses both accounts strategically:

Phase 1: Peak Earning Years (Ages 40–60)

• Maximize RRSP contributions to reduce current-year taxes at the highest marginal rates (43%+ in most provinces)
• Contribute to TFSA with any remaining savings capacity
• Do not withdraw from RRSP — allow tax-deferred compounding

Phase 2: Early Retirement / Bridge Period (Ages 55–71)

• Execute RRSP meltdown — withdraw from RRSP at lower marginal rates (25–33%)
• Redirect after-tax RRSP proceeds to TFSA — convert taxable assets to tax-free assets
• Delay CPP and OAS to maximize guaranteed income and minimize clawback risk

Phase 3: Full Retirement (Ages 71+)

• Draw from TFSA first for large discretionary expenses (travel, home renovations) — no income impact
• Take minimum RRIF withdrawals to meet living expenses
• Use TFSA withdrawals to supplement income without affecting OAS, GIS, or income-tested benefits

Case Study: Two Doctors, Same Income, Different Outcomes

Two physicians, both earning $350,000 annually, both age 45, both with $500,000 in existing RRSP savings.

Dr. A follows conventional advice: Maximizes RRSP every year until retirement at 65. By 65, RRSP has grown to $2,100,000. At 71, minimum RRIF withdrawal is $110,880. Combined with CPP ($15,000) and OAS ($8,500), total income is $134,380 — triggering full OAS clawback and a marginal rate of 53%. TFSA balance: $95,000 (only annual contributions, no RRSP meltdown proceeds). Dr. B follows the coordinated strategy: Maximizes RRSP until age 55, then executes a 10-year RRSP meltdown, withdrawing $80,000 annually (taxed at ~33%) and contributing $53,600 after-tax to TFSA each year. By 65, RRSP is $900,000 and TFSA is $690,000. At 71, minimum RRIF withdrawal is $47,520. Combined with CPP and OAS: $71,020 — below the clawback threshold. TFSA provides tax-free supplemental income as needed. Lifetime tax difference: $280,000–$380,000 in favour of Dr. B's coordinated strategy.

Common Mistakes to Avoid

Mistake 1: Withdrawing from TFSA and not re-contributing TFSA withdrawals create new contribution room the following January 1. Many Canadians withdraw for a major purchase and forget to re-contribute, permanently losing the tax-free compounding space. Mistake 2: Holding cash or GICs in a TFSA The TFSA's greatest advantage is tax-free compounding on high-growth assets. Holding low-return assets in a TFSA while holding equities in a non-registered account is a significant missed opportunity. Mistake 3: Over-contributing to RRSP when retirement income will be high For professionals with defined benefit pensions, large non-registered portfolios, or rental income, retirement marginal rates may equal or exceed working-year rates. In these cases, TFSA contributions may be more valuable than RRSP contributions. Mistake 4: Ignoring spousal RRSP for income splitting A spousal RRSP allows higher-income spouses to contribute to an RRSP in the lower-income spouse's name, enabling income splitting in retirement. This can reduce the household tax burden by $10,000–$25,000 annually.

The Bottom Line

The TFSA vs. RRSP question has no universal answer. The correct choice depends on a careful analysis of your current marginal tax rate, your projected retirement income from all sources, your expected marginal rate in retirement, and your OAS clawback exposure.

For most high-income Canadians, the optimal strategy involves maximizing RRSP contributions during peak earning years, executing a systematic RRSP meltdown in early retirement, and building a substantial TFSA balance to provide tax-free income flexibility in later retirement.

The difference between an ad-hoc approach and a coordinated strategy can easily exceed $200,000 in lifetime taxes. Given the stakes, this is one area where professional guidance pays for itself many times over.