RRSP

When the RRSP beats the TFSA

Your RRSP — the Registered Retirement Savings Plan where contributions are tax-deductible and growth is tax-sheltered — works like a deal with the CRA. You give up access to money today, they give you back some of what you paid in taxes. The refund isn't free money. It's your money, returned.

Here's how the math works: every dollar you put into an RRSP reduces your taxable income by exactly one dollar. If you're in the 30% marginal tax bracket and contribute $5,000, your taxable income drops by $5,000 and you get roughly $1,500 back at tax time.

The key word is marginal. Canada taxes income in layers. The first $57,375 you earn federally gets taxed at 15%. Everything above that hits higher rates. So when someone says their tax rate is 30%, they mean their next dollar gets taxed at 30% — not their whole paycheque.

The refund calculation

At $75,000 income in Ontario, your marginal rate sits around 31% combined federal and provincial. A $6,000 RRSP contribution creates roughly a $1,860 refund. At $50,000 income, the same contribution only gets you back about $1,200 because you're in a lower bracket.

This is why RRSP contributions make more sense as your income climbs. The refund gets bigger. But there's a catch most people discover too late: you'll pay tax on every dollar when you withdraw in retirement. The RRSP bet is that your tax rate then will be lower than your tax rate now.

TaxSplit.ca calculates your exact refund based on your province and income — the numbers shift significantly depending on where you live and what you earned last year.

Annual limits that actually matter

Your RRSP contribution room for 2025 is the lower of $32,490 or 18% of your 2024 earned income. Earned income means employment income, self-employment income, rental income, and a few other sources. Investment income doesn't count.

You can carry forward unused room indefinitely. If you couldn't contribute $6,000 this year, that room stays available until you use it. Your Notice of Assessment from the CRA shows exactly how much room you have.

What goes inside

An RRSP isn't an investment — it's an account that holds investments. You can put cash, GICs, stocks, bonds, ETFs, and mutual funds inside. The account wrapper makes everything tax-sheltered until you withdraw.

Most banks will try to sell you mutual funds for your RRSP. The management fees on these run 1.5–2.5% annually, which over 20–30 years becomes a significant drag on growth. Low-cost ETFs are usually better, but you'll need a self-directed account to access them.

The withdrawal reality

Money comes out of your RRSP as taxable income. If you withdraw $40,000 in retirement, that's $40,000 added to your income for tax purposes that year. The withholding tax gets deducted immediately — 10% on withdrawals up to $5,000, 20% on $5,001 to $15,000, and 30% on amounts over $15,000.

Two exceptions exist: the Home Buyers' Plan lets first-time buyers withdraw up to $60,000 tax-free, but you must repay it over 15 years. The Lifelong Learning Plan allows up to $20,000 for education expenses, also requiring repayment.

When RRSPs don't make sense

If you expect your retirement income to be higher than your current income, the RRSP creates a problem. You get a tax deduction today at a lower rate but pay tax later at a higher rate. Below about $50,000 income, a TFSA often makes more sense.

The forced conversion to a RRIF at age 71 creates mandatory withdrawals whether you need the money or not. Those withdrawals count as income and can trigger Old Age Security clawbacks for higher-income retirees.

If you're deciding between RRSP and TFSA this year: RRSP usually wins above $60,000 income. Below that, TFSA first. The exact crossover point depends on your province and expected retirement income.