RRSP vs. TFSA: Which Is Better for Gen Z?

Gen Z members can hold stocks like Toronto-Dominion Bank (TSX:TD) in their RRSP or their TFSA. Which is better?

| More on:
Silver coins fall into a piggy bank.

Source: Getty Images

Generation Z is reaching adulthood. The oldest members of the generation are 26; the youngest are 11. It took a while, but the millennials’ younger cousins are coming of age.

If you’re a member of generation Z, it would be a good idea for you to start planning for retirement. Yes, you heard right. Although you may feel like you’re too young to start thinking about retirement, the truth is, you should start thinking about it as soon as you start working. As we age, the passage of time seems to accelerate — many people report feeling like they reached retirement age “in the blink of an eye.”

If you’re in your early/mid-twenties, you most likely already have a job. That means you have the ability to save money. While many young Canadians bemoan the cost of housing, the fact is that everybody can manage a meagre amount of savings — let’s say, $100 per week. If you save that much weekly and invest all of it, you could end up with a several hundred thousand dollar account balance when you retire.

The question is, where do you put your savings? As you may know, the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) are the two main accounts that Canadians use to save for retirement. The former gives you a tax deduction, while the latter keeps your investments tax-exempt, even when you withdraw them. Each has its own benefits and drawbacks. In this article, I will explore the pros and cons of RRSPs and TFSAs, so you can decide which account is best for you.

The benefits of an RRSP

The RRSP has two main benefits that TFSAs don’t have:

  1. A tax deduction
  2. A larger contribution limit

You get a tax deduction when you contribute to an RRSP, lowering your tax bill for the year in which you make the contribution. The TFSA does not have this benefit. Additionally, RRSP contribution limits can be quite large. Your contribution limit is either $30,780, or 18% of your income, whichever is lower. So, you can fit a lot of investments into an RRSP for tax-free compounding.

The benefit of a TFSA

The main benefit of a TFSA over an RRSP is the fact that the money is not taxable upon withdrawal. In an RRSP, investments grow tax-free, but you ultimately pay taxes on them when you convert them into cash and withdraw. This does not happen with TFSAs: they are 100% tax-free even on withdrawal. This makes TFSAs particularly useful accounts for dividend stocks.

Consider Toronto-Dominion Bank (TSX:TD), for example. It’s a Canadian bank stock with a 5% dividend yield at today’s prices. Next year, Canadians who were 18 or older in 2009 will have $95,000 worth of TFSA contribution room. If you invest that much money at a 5% yield, you’ll get $4,750 per year in annual dividend income, assuming the stock’s yield doesn’t change.

Now, of course, TD’s dividend could change. Historically, it has tended to go up. In the future, if a Great Depression-style event occurs, it could conceivably go down. You should never put 100% of your money in just one stock, unless you have some kind of special “edge” in understanding the company’s prospects. Nevertheless, TD’s 5% yield goes to show that a lot of passive income can accumulate inside a TFSA. Just make sure you aim for a diversified portfolio yielding 5%, not a single stock portfolio made up of nothing but TD Bank!

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 Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Man data analyze
Dividend Stocks

This 5.3% Dividend Stock Is a No-Brainer as Trump’s Tariffs Hit

This dividend stock offers investors strong income should Canada be hit by Trump's tariffs.

Read more »

Map of Canada showing connectivity
Dividend Stocks

Trump’s Tariffs: 1 Canadian Stock to Dump and 1 to Buy Immediately

As Trump threatens tariffs on Canada, these are two top stocks to watch.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA: 4 Canadian Stocks to Buy Now and Hold Forever

These top Canadian stocks could give a big boost to your hard-earned TFSA savings in the long run.

Read more »

stock research, analyze data
Dividend Stocks

Prediction: These Could Be the Best-Performing Value Stocks Through 2030

Despite short-term challenges, these top Canadian value stocks could outperform the broader market by a wide margin in the coming…

Read more »

An investor uses a tablet
Dividend Stocks

Where Will BCE Stock Be in 5 Years?

Despite facing big short-term challenges, BCE stock’s strong market position, steady dividend, and long-term vision make it worth watching.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Want Safe Dividend Income in 2025? Invest in the Following 3 Ultra-High-Yield Stocks!

The market is full of great income stocks, but this trio can provide growth potential and safe dividend income for…

Read more »

A meter measures energy use.
Dividend Stocks

Power Up Your Defences: Canadian Utility ETFs for Steady Income

It is time to power up your defence strategy to withstand market uncertainty around a looming trade war with Canadian…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

What to Know About Canadian Railway Stocks for 2025

The Canadian National Railway (TSX:CNR) isn't the only railroad stock in town.

Read more »