“Should I invest in my RRSP or TFSA?”

It’s one of the most common questions when planning for retirement. There’s no one-size-fits-all answer, but understanding how each works is a great place to start. 

RRSP contributions reduce your taxable income now, but withdrawals are fully taxable. TFSA contributions are not tax-deductible, but withdrawals are completely tax-free. 

There are plenty of articles and calculators available online that deal with the RRSP vs TFSA question. To summarize, here’s a general rule of thumb: 

– If your tax rate will be lower in retirement, the RRSP is usually better. 

– If your tax rate will be the same, either account works about the same. 

– If your tax rate will be higher in retirement, a TFSA may be the better choice. 

The tricky part is estimating your future tax rate will be. Here are some less-talked-about factors to consider when deciding whether to invest in your RRSP (tax-deferred account) or TFSA (tax-free account).  

The Uncertainty of Future Tax Rates 

Tax rate uncertainty is always a factor. For decades, tax rates on retirees have generally trended downward. But no one knows what the tax system will look like 10, 15, or 30 years from now. A future government could raise or lower tax rates significantly. The best we can do when planning for retirement is work with what we know and assume the current regime will remain in place. 

Another layer of complexity involves government benefits. Your future tax rate isn’t just about income taxes—it also includes reductions in income-tested benefits like Old Age Security (OAS), the Guaranteed Income Supplement (GIS), and age-related tax credits. These clawbacks can function like hidden taxes. 

For example, in 2025: 

– OAS begins to be clawed back when individual annual income exceeds $93,454. 

– GIS is reduced at combined annual income levels above $29,136 for a couple receiving full OAS. 

The takeaway: both low- and high-income retirees need to consider how government benefits might affect their effective tax rate. Withdrawals from tax-deferred accounts such as an RRSP or RRIF will increase taxable income while withdrawals from TFSAs will not. 

Household Income Planning and Survivor Risk 

Under current tax rules, couples can split income from their tax-deferred accounts after the account holder turns 65, which often further reduces overall household taxes. But what happens when one spouse passes away? 

Assuming that the survivor inherits the tax-deferred assets and maintains a similar household income, their individual taxable income will be higher because there’s no longer an opportunity to split income, resulting in higher taxes and possibly pushing them over the OAS clawback threshold.  

If the couple has tax-deferred and tax-free assets, one planning strategy is to draw down tax-deferred assets earlier in retirement, reducing the future tax burden on the surviving spouse when income splitting will no longer be possible. 

Unexpected Inheritances and Their Tax Impacts 

Another consideration is a potential inheritance—expected or unexpected. For example, you may know your parents plan to leave you significant assets, but you don’t want to rely on them in your retirement planning. Still, if and when those assets are passed down, your income may jump, pushing you into a higher tax bracket than anticipated.  

Flexibility Matters 

Life throws curveballs, even in retirement. Whether it is for major home repairs, health related expenses, or dream trips, considerable lump sums could be needed. If this money is withdrawn from an RRSP or RRIF, it will be fully taxable at your marginal tax rate and will increase your income, which could have an impact on income-tested benefits and tax credits. But if that money is taken from a TFSA, there won’t be any tax consequences. 

So, RRSP or TFSA? 

Start with the basic rule: assuming the tax savings from the RRSP contributions are invested, RRSPs make sense if your current tax rate is higher than what you expect in retirement. But it’s smart to also have savings in a TFSA to give you more flexibility, for tax planning, benefit preservation, or handling big expenses without triggering a tax bill. 

When the numbers suggest both accounts would give a similar result, the TFSA is often the better choice – as long as you have the discipline not to dip into it before retirement. Its tax-free withdrawals and no impact on income-tested benefits make it a powerful and flexible retirement tool.