43% of Canadians Are Still Making This Classic Retirement Mistake

Royal Bank of Canada (TSX:RY)(NYSE:RY) found that roughly half of Canadians aren’t using a tax-advantaged retirement account. That’s a huge mistake.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Saving for retirement is a lengthy and grueling process, yet nearly half of Canadians are leaving big money on the table. According to research by Royal Bank of Canada, 43% of Canadians don’t have a Tax-Free Savings Account, often referred to as a TFSA. Even fewer have a Registered Retirement Savings Plan, or an RRSP.

If you don’t have one of these tax-free investment accounts, you’re making a huge mistake. Over several decades, your potential tax savings could total $100,000 or more. All you have to do is register for a TFSA or RRSP and begin contributing. If you’re still not convinced, perhaps some math will do the trick.

Tax-free heaven

Let’s say you invest $500 per month for the next 30 years, earning the long-term stock market average of 8%. In total, you’ll have invested $180,000 in capital, but over time, that money will have ballooned to $708,806. But don’t get too comfortable. If you earn between $40,000 and $80,000 per year, taxes will reduce your next egg by nearly $300,000! If you earn more than $80,000 per year, the pain will be even worse.

Let’s say you’re relying on these savings to get you through retirement. If you earn 8% per year in profits, your $708,806 nest egg will generate $57,000 in annual income. Not bad, especially considering that income will be tax-free. If you didn’t use a TFSA, your resulting nest egg would only generate annual income of roughly $35,000. And don’t forget that additional taxes will reduce that value even further.

RRSPs work in a similar way to reduce your tax burden, but instead of saving you taxes later in life, you’ll avoid the taxes today. While many investors opt for an RRSP, I’ve always been a bigger fan of TFSAs. That’s because taking the tax hit now completely removes future uncertainty. With a TFSA, you’ll know that however much you have in your investment account is truly what you have.

RRSP accounts, because they’ve yet to factor in taxes, can cause you to believe your portfolio is worth more than it actually is. Also, taking the tax hit now shields you from any tax increases down the road. With a TFSA, taxes can double and you’ll still be paying 0%.

Regardless, you shouldn’t sweat the TFSA or RRSP decision too much. The way that tax incentives are structured, it’s likely that the ultimate difference in value won’t be that stark. The most important thing is to establish one of these savings vehicles and make regular contributions.

Automate your retirement

Once you have a TFSA or RRSP established, the next thing you should do is immediately set up automatic deposits. Most brokerage accounts allow for this. For example, you can make it so $500 gets withdrawn from your bank account each month and deposited into you investment account. This is one of the best retirement hacks you can use. With automatic deposits, you’re significantly more likely to contribute funds each month than if you relied on yourself to manually process the payments.

Your next step is choosing the right stocks that can build long-term retirement wealth, but using automatic contributions with a TFSA or RRSP is your first order of business.

Should you invest $1,000 in TD Bank right now?

Before you buy stock in TD Bank, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and TD Bank wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

open vault at bank
Bank Stocks

3 Canadian Bank Stocks to Shield Against Market Downturns

Canadian bank stocks are some of the best options on the market, and these three are probably the top ones.

Read more »

calculate and analyze stock
Bank Stocks

1 Canadian Stock Down 7% to Buy and Hold for a Long Haul

Now is the time to take advantage of this top-notch Canadian stock, buying it while it's still down.

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank of Canada: Buy, Sell, or Hold in 2025?

Royal Bank is down 6% in 2025. Is it time to buy the dip?

Read more »

chart reflected in eyeglass lenses
Stocks for Beginners

Seize the Dip: Investment Opportunities Await This April

If you're looking for one and only one opportunity during a market dip, buy this top stock.

Read more »

hand stacks coins
Bank Stocks

Here’s How Many Shares of IGM Financial You Should Own to Get $1,000 in Yearly Dividends

Besides its attractive dividend income, IGM Financial’s strong long-term growth fundamentals could help its stock outperform the broader market in…

Read more »

A person looks at data on a screen
Bank Stocks

Where Will Bank of Montreal Stock Be in 5 Years?

These factors give Bank of Montreal (TSX:BMO) stock the potential to outperform the broader market in the next five years.

Read more »

calculate and analyze stock
Bank Stocks

Where Will TD Stock Be in 3 Years?

Here are some key reasons why I expect TD stock to reward patient investors handsomely over the next three years.

Read more »

Pile of Canadian dollar bills in various denominations
Bank Stocks

1 Dividend Stock Down 10.2% to Buy Now for Lifetime Income

A high-yield stock with a nearly 200-year dividend track record is a screaming buy right now.

Read more »