TFSA or RRSP: an education member’s guide to making the right choice
So, you’re finally ready to invest and are weighing your options between a Tax-Free Savings Account and Registered Retirement Savings Plan.
But which one do you choose?
After all, both options will help you save money for various financial goals—and save on taxes, albeit in different ways. Yet similarities and differences aside, there are valid (and dare we say, educator-specific) reasons for choosing one over the other.
Before we get to those reasons, how much do you really know about these two account types?
Navigating the differences between a TFSA and an RRSP can be challenging, with over a quarter of Canadians reporting they are unsure of the distinction. Even for those who feel confident, there is often a learning curve; less than half realize that a TFSA can hold cash and other investment types
Proof that even when you think you know a little or a lot about something, there is always room to learn more.
With that sentiment in mind, here is a quick refresher on TFSAs and RRSPs:
TAX-FREE SAVINGS ACCOUNT
When you deposit into a TFSA, you’ve already paid tax on the money you put in and all withdrawals are tax-free. While this is a great incentive for choosing a TFSA as a savings vehicle, as we mentioned earlier; the ‘savings account’ part of the name sometimes misleads people into thinking that’s all a TFSA can be used as. In reality, you can also add a wide variety of financial assets including Guaranteed Investment Certificates (GICs), mutual funds, stocks, bonds, in addition to savings accounts.
Contribution limits:
The TFSA dollar limit is set by the government annually and is indexed to inflation. Currently the annual contribution limit is $7,000. However, if you haven’t yet contributed to a TFSA (and were 18 or older in 2009), the cumulative contribution room for 2026 would be $109,000*.
Rules about withdrawals:
You’re free to withdraw from a TFSA at any time without penalty. Keep in mind, however, that if you want to re-contribute that amount back into your TFSA in the same calendar year, it will count towards your annual contribution limit. So, if you’ve already maxed it out for the year, you would then have to wait until the following calendar year to avoid paying an over-contribution penalty.
REGISTERED RETIREMENT SAVINGS PLAN
Whereas a TFSA is all about being ‘tax-free’, an RRSP is a ‘tax-advantaged’ account. This means you won’t have to pay income tax on any money you contribute to an RRSP the year you make the deposit (and during any subsequent contribution years). If your contributions are made with after-tax dollars, you would receive a tax deduction for the contribution that you made. This can be carried forward and used in any tax year.
Contribution limits:
RRSPs also have contribution limits and as an education member, that limit tends to be significantly lower due to the fact your pension contributions are factored into the equation. This is why it’s important to check your RRSP limit annually on your personal Notice of Assessment and seek educator-specific advice to review your situation, since you can’t necessarily go by the maximum annual limit (which is $32,490 for the 2025 tax year and $33,810 for the 2026 tax year).
Rules about withdrawals:
Withdrawals you make from your RRSP have withholding tax applied and are taxed as income. Certain types of qualified withdrawals are not taxed but must be repaid to the RRSP. More on that below.
With the HBP: Qualified individuals can withdraw up to $60,000, tax-free, to make a down payment on a first home. This means a couple can withdraw a combined amount of up to $120,000. You will then have 15 years to repay that amount back to your RRSP, with the first payment due within two years after making the withdrawal (note that for those who withdrew from their RRSP to take advantage of the HBP between 2022 and 2025, repayment wouldn’t have to start until the fifth year after the withdrawal due to a temporary relief measure).
With the LLP: You can make a tax-free withdrawal of $10,000 per year from your RRSP to help pay for qualifying education costs, up to a total lifetime amount of $20,000. Withdrawals can happen over a maximum of 4 years and at least 10% of the amount borrowed from the RRSP must be paid back every year (meaning you have 10 years to repay the entire amount that was withdrawn). Note that the LLP can only be used if you or your spouse/partner are going back to school to pay for full-time training or education—not your children. The exception to the full-time rule being if either you or your spouse has a disability, in which case part-time is allowed.
Factoring in everything we’ve covered about TFSAs and RRSPs so far, identify which one is best suited for you based on any combination of the following two scenarios:
- Scenario 1: WHERE you are on the pay grid (i.e., your income and tax bracket)
- Scenario 2: WHEN you want to use the money (your time horizon)
Scenario 1: WHERE you are on the pay grid.
- Choose an RRSP if you’re making over $50,000
- Choose a TFSA if you’re making under $50,000
As a general rule, if you’re making more than $50,000 annually, RRSPs are a good way to go.
That’s because depositing money into an RRSP is a tax-savings strategy. You put money into it when you’re in a mid-to-high tax bracket (i.e., when you hit A3 on the pay grid) and you take money out when you’re in a lower tax bracket (retirement).
If you’re just starting out and lower on the pay grid, the deduction is less valuable since you probably won’t owe much income tax after claiming basic tax credits. That’s where putting your money into a TFSA likely makes the most sense.
Scenario 2: WHEN you want to use the money.
- Making over $50K/year: choose an RRSP for long-term savings goals
- Making under or over $50K/year: choose a TFSA for short- to medium-term savings goals
An RRSP was designed to be the ultimate long-term investment, since it’s meant to help Canadians put money away for retirement.
However, being an education member with a pension to look forward to, you may not think that you need to save for retirement. But here’s the thing, your pension income will probably only cover about 80-85% of your everyday financial needs. While that gap is much less than someone without a pension would need to fill, you still need to have some kind of savings strategy in place to make up the difference.
For financial goals in the shorter to medium end of your time horizon (such as building up an emergency fund, buying a new car, or paying for home renovations), a TFSA is the optimal choice.
You’ll have the flexibility to make withdrawals, tax-free and with no penalties. This makes the TFSA a good option when saving for a house—versus borrowing from your RRSP to take advantage of the Home Buyer’s Plan. With a TFSA, you won’t have to worry about paying the money back within a certain timeframe to avoid paying a penalty. Besides, if you’re still early in your career and haven’t yet reached the mid-to-high income level, it’ll give you time to work your way up the pay grid. Then, when you begin earning more (i.e., over $50K/year), you can opt to put any money you took out of your TFSA into an RRSP to get a better tax break.
TFSA or RRSP: if you still need help choosing, reach out to Educators Financial Group.
Since we’re very familiar with your pay and benefits structure, we can provide you with professional investment advice that includes an educator-specific perspective.
Let’s get your TFSA and/or RRSP investments started off on the right track
Source:
https://www.benefitscanada.com/pensions/retirement/canadians-still-not-knowledgeable-about-rrsps-tfsas-survey/
https://turbotax.intuit.ca/tips/rrsp-vs-tfsa-which-is-the-better-choice-3887
*TFSA contribution room starts when you are over the age of 18, have a valid social insurance number, and are a Canadian resident or citizen.
The information provided is for illustrative and general information purposes only, and is not intended to provide specific financial or other advice, and should not be relied upon in that regard. Please consult an Educators Financial Group Financial Advisor before making a final decision to ensure any strategy meets your overall financial needs and that your personal circumstances have been considered.
