Canadians won’t be penniless when they retire at 65 because of Old Age Security (OAS). An eligible recipient of the Canada Pension Plan (CPP) would have more. However, both benefits may not be enough to secure your financial future or sustain your desired retirement lifestyle.
The federal government introduced the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) to encourage Canadians to save and invest for the future. Find out when you need to prioritize one over the other or how much should go into your RRSP and TFSA. You can maximize tax savings with the right contribution split.
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Build tax-efficient wealth
The RRSP and TFSA are not competing but complementing retirement accounts. Their tax rules are different, although you can use them to your advantage and to build tax-efficient wealth. The RRSP lowers your tax bill in the year you contribute but you pay taxes when you withdraw later. In contrast, the TFSA gives you tax-free growth and withdrawals, provided you follow the rules.
RRSP: Tax-deferred advantage
RRSP contributions, made with pre-tax dollars, provide upfront tax deductions that reduce your taxable income in a given tax year. The maximum limit for the tax year 2026 is $33,810 or 18% of your 2025 earned income, whichever is lower.
Your principal, along with capital gains, dividends, and interest, grows 100% tax-free as long as the funds remain inside the plan. However, withdrawals are fully taxed at your future marginal rate.
Prioritize your RRSP when your current income is high. Save your RRSP contribution room for your peak earning years. Make strategic withdrawals in post-retirement when total annual income drops into a lower tax bracket.
TFSA: Tax-free advantage
TFSA contributions don’t get tax breaks, though interest, capital gains, and investment income earned inside the account grow 100% tax-free. Unlike the RRSP, withdrawals aren’t considered taxable income and can be taken at any time. Your TFSA is essentially a lifetime tax shield.
Prioritize your TFSA in the early stages of your career when annual income is relatively low. As income grows in mid-career years, consider splitting your savings for an immediate tax refund (RRSP) and flexible tax-free cash flow (TFSA). You can also reinvest your RRSP tax refund into your TFSA.
Dividend compounder
Stocks are eligible investments in an RRSP and TFSA. Toronto Dominion Bank (TSX: TD) is an ideal anchor holding. This $276 billion bank, TSX’s third-largest company by market cap, is a dividend compounder. With its 169-year dividend track record, you need to do little to supercharge your RRSP or TFSA.
At $169.61 per share, TD pays an ultra-safe 2.6% dividend. Whether held in an RRSP or TFSA, a $30,000 investment will compound to $50,677.20 tax-free in 20 years.
The Big Bank stock stands out for its long-term capital stability, dependable earnings growth, and impressive dividend history. As of this writing, current investors enjoy a 35% market-beating, year-to-date gain. Price appreciation is a welcome bonus to the quarterly cash stream.
Pillars of retirement planning
The RRSP and TFSA have become pillars of retirement planning in Canada, helping to supplement the OAS and CPP. Today, a retirement planning strategy needs both savings tools to be successful.
