If nothing else, tax-free savings accounts (TFSAs) have provided plenty of fertile ground for Canadian financial writers and bloggers. Two notable examples include a Boomer & Echo post by CFP Robb Engen — also a MoneySense ETF expert panelist — comparing TFSAs and registered retirement savings plans (RRSPs), and a Cash Flows & Portfolios piece that goes as far as suggesting a TFSA alone could fund retirement.
I’m not ready to endorse the idea that a TFSA is the only account you’ll ever need, but I do agree we’ve come a long way since 2009. That year my wife and I made our first tentative TFSA contributions of $5,000 each. At the time it felt like a drop in the bucket. Still, we opened TFSAs for ourselves and our daughter — who conveniently turned 18 just in time — and every year since we’ve aimed to contribute the annual maximum as close to January 1 as possible. (Editor’s note: the TFSA contribution limit for 2024 and 2025 is $7,000 per year.)
We treat these accounts as tax-free investment accounts rather than mere savings vehicles, and because of that mindset they have grown considerably. In practice, TFSA often functions as a long-term investing account — a tax-free investing account, if you will — which makes them powerful tools for wealth accumulation over decades.
Engen’s piece, “A sensible RRSP vs TFSA comparison,” highlights how TFSAs and RRSPs can mirror each other in purpose depending on how you use them. He reiterates three classic points popularized by David Chilton:
- If you go the RRSP route, don’t spend your refund.
- If you go the TFSA route, don’t raid your TFSA for discretionary spending.
- Whatever route you choose, save more.
On the Cash Flows & Portfolios blog, Mark and Joe begin their post “Can you retire using just your TFSA?” by praising the TFSA’s long-term tax-free growth potential, calling it one of the modern financial system’s standout features. Their conclusion: if you start early and remain disciplined — much like my daughter did — a TFSA could form the backbone of a retirement strategy.
Cumulative contribution room
If you accept the time value of money, contributing the full annual TFSA limit as soon as the new year starts makes sense. For many people, making that contribution on January 1 is an easy, high-impact financial habit — think of it as “New Year’s Resolution Number 1.” Using an online discount brokerage makes it quick to fund and invest your TFSA right away. (Try the MoneySense TFSA contribution room calculator if you’re unsure about your available room.)
Young savers with decades ahead may choose to hold mostly equities inside their TFSA to maximize growth, rather than leaving funds in low-yield guaranteed investment certificates (GICs) that often trail inflation. An 18-year-old has roughly 45 years to compound investments before a conventional retirement age of 65, and unlike RRSPs, TFSA contribution eligibility continues late into life — some people even contributed past age 100.
Those close to retirement can shift toward more conservative, balanced ETFs — for example, multi-asset funds that blend equities and bonds in a roughly 60/40 mix — to reduce volatility while still maintaining a diversified portfolio. Try tools like the MoneySense ETF Finder to identify suitable ETFs.
A practical tip: avoid holding U.S.-based dividend-paying stocks or ETFs within a TFSA because Canadian tax rules make RRSPs or RRIFs a better home for those holdings. TFSAs are well suited for Canadian dividend-paying stocks, interest-bearing investments, and speculative non-dividend-paying foreign stocks.
TFSA or RRSP? Use both if you can
Which account to prioritize — TFSA or RRSP — is a frequent question. My short answer is to use both when possible. If you must choose, TFSAs are often the better option, especially for younger savers in low tax brackets or for older individuals whose RRSP withdrawals could reduce income-tested benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).
That said, RRSPs remain valuable. As Matthew Ardrey, a wealth advisor with Toronto-based TriDelta Financial, points out, many younger people dismiss RRSPs as a “tax trap,” but they can be highly effective when the contributor’s tax rate at contribution is higher than their expected tax rate at withdrawal. If you deposit while at a higher tax rate and then withdraw in retirement at a lower rate — and you invest the tax refund from the RRSP contribution — the RRSP can outperform a TFSA over time.
Save that refund!
The success of an RRSP strategy depends largely on saving the tax refund generated by the contribution instead of spending it. Likewise, TFSA success depends on not using the account as a revolving spending pool. Both approaches require financial discipline: TFSAs allow penalty-free withdrawals, which is a strength but also a potential weakness for those tempted to spend.
Ardrey calls the TFSA “the best thing the government has done for retirement savings in a long time,” noting its flexibility and utility for Canadians across income levels. Because TFSA withdrawals are tax-free, they typically don’t affect OAS or GIS eligibility, which can be crucial for lower-income seniors. Conversely, RRSP and RRIF withdrawals can reduce those benefits.
For high earners, maximizing RRSPs usually makes sense, and many of those individuals can afford to maximize TFSAs as well. If you carry high-interest debts like credit cards or an onerous mortgage, consider using TFSA funds to pay down debt — you can always recontribute the room in future years once the debt is gone. After becoming debt-free, pursue a comprehensive strategy that uses all available tax-advantaged vehicles, such as RESPs for education savings and RDSPs for disability savings.
Don’t let the advantages of TFSAs blind you to the value of other tax-effective accounts. As Adrian Mastracci, a portfolio manager with Vancouver-based Lycos Asset Management, recommends, families should coordinate which spouse accumulates savings and consider a mix of TFSAs, RRSPs (including spousal RRSPs), and RESPs where appropriate. For many households, a combined approach will produce the best long-term tax and retirement outcomes.
MoneySense Investing Editor at Large Jonathan Chevreau is the founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
More on retirement:
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- Are energy stocks a good buy right now?
- What the Rule of 30 can mean for your retirement
- How much money to take out of your RRSPs if you’re in your 60s