TFSA vs RRSP: Where Should Working Retirees Invest Extra Income?

Where to place retirement income: RRSP or TFSA

Gary, the short answer is that, in most situations, contributing to an RRSP or a TFSA produces the same after-tax outcome if your marginal tax rate is the same at contribution and withdrawal. There are important nuances, though — especially around the timing of Canada Pension Plan (CPP) and Old Age Security (OAS) benefits — so let’s walk through the key points and the math to help you decide.

Should you delay CPP and OAS beyond age 65?

CPP increases by 0.7% for every month you delay past age 65, which equals an 8.4% annual increase. This locked-in boost is attractive because CPP payments are then indexed to inflation (the CPI) for life. That said, CPP benefits are calculated in part using your average yearly maximum pensionable earnings (AYMPE) over recent years. If your AYMPE rises faster than inflation, delaying CPP could be less valuable than it appears, since once you start receiving CPP the benefit grows only with CPI.

OAS increases by 0.6% per month delayed past 65 (about a 7.2% annual increase), slightly lower than CPP’s rate. A major difference is the OAS clawback: in 2024, OAS begins to be recovered when net income exceeds $90,997, with a recovery rate of 15% on each dollar above that threshold. If your income is likely to exceed the clawback threshold, delaying OAS may be worthwhile to avoid losing payments to recovery tax.

Administrative differences matter too. You must apply to start CPP, while OAS normally begins automatically; you must apply to stop OAS within six months if you wish to defer it. If you plan to invest CPP or OAS payments, consider whether tax withholding on those payments would reduce the amount you can invest immediately.

Also consider CPP contributions while you keep working past 65. If you have not yet maximized your CPP, working an extra year can increase pension credits. If you start CPP and continue working, you may still make CPP contributions and earn a lower-value post-retirement benefit unless you complete the appropriate form to stop contributions.

In short: a guaranteed, inflation-indexed increase like an extra year of CPP (roughly 8.4%) is a strong return. Compare that to the expected returns you could earn by investing the money yourself, and weigh the risk of OAS clawback if your income is high.

RRSP vs TFSA for retirees

Now to the core question: should you put money into an RRSP or a TFSA? The crucial factor is your marginal tax rate when you contribute versus when you withdraw. If your tax rate is the same at both times, contributing to an RRSP or a TFSA will typically yield the same after-tax result. If your tax rate will be lower at withdrawal, an RRSP can be more advantageous because you get the deduction now and pay tax at a lower rate later. If your tax rate will be higher at withdrawal, a TFSA is likely better because withdrawals are tax-free.

Practically speaking, RRSP contributions are made with pre-tax dollars and create a tax deduction, whereas TFSA contributions are made with after-tax dollars and grow tax-free. That’s why a fair comparison needs to account for the taxes paid or deferred at contribution and withdrawal.

RRSP vs TFSA comparison on a $10,000 contribution over one year

	RRSP	TFSA
Gross contribution	$10,000	$10,000
Income tax (30% rate)	$0	$3,000
Net contribution	$10,000	$7,000
5% investment growth	$500	$350
Value of account	$10,500	$7,350
Tax owing on withdrawal	$3,150	$0.00
After-tax value	$7,350	$7,350

How the math works for retirees

The example above shows why an RRSP and a TFSA can produce identical after-tax outcomes if your marginal tax rate is unchanged between contribution and withdrawal. The RRSP gives you the tax deduction up front, while the TFSA requires you to pay tax before contributing; both approaches can lead to the same after-tax balance.

One common point of confusion: when the table shows a $10,000 contribution ending up as $7,350 after tax, remember that $10,000 is a pre-tax figure. If your marginal tax rate is 30%, receiving $10,000 in income would leave you $7,000 after tax if you didn’t shelter it. Investing through an RRSP lets you invest the full $10,000 immediately, and after tax on withdrawal the net position can match the TFSA’s after-tax value.

Practical considerations and finer details

There are additional factors that may influence your decision:

• If you expect to receive a large lump sum (inheritance, home sale, severance), you might preserve TFSA contribution room for that event and use RRSP room now.
• RRSP contributions are only allowed until age 71; TFSAs can be contributed to throughout life. That timing affects which shelter you can use.
• Consider whether the RRSP tax deduction helps you qualify for age-related tax credits today, and whether future RRSP withdrawals could trigger OAS or Guaranteed Income Supplement (GIS) clawbacks.

Because you’re only asking about one year in your situation, the long-term difference may be small. If your expected tax rates now and later are similar, either choice is reasonable. Pick the option that gives you confidence and fits your broader retirement plan.

Where should Canadian retirees put their money?

To recap: if your marginal tax rate today equals your expected rate in retirement, contributing to an RRSP or a TFSA will generally lead to the same after-tax outcome. If your tax rate will likely be lower in retirement, RRSPs tend to be better; if higher, TFSAs win. Factor in contribution limits, age rules (RRSPs close at 71), the potential for lump-sum income, and the impact of RRSP withdrawals on OAS or GIS clawbacks.

For your specific situation — starting CPP and OAS in June 2024 and working one more year — weigh the guaranteed, inflation-indexed benefit from delaying CPP against the potential investment returns and possible OAS clawback. Ultimately, since this choice concerns a single year of contributions, it is unlikely to create a major long-term difference. Choose the option that aligns with your tax expectations and gives you peace of mind.

Further reading on TFSAs and RRSPs

• How does a TFSA work?
• What investments can I hold in a TFSA?
• How much should I have in my RRSP for my age?
• Should you keep unused RRSP contribution room?