Managing the refund well is the linchpin in the RRSP vs. TFSA debate

Managing the refund well is the linchpin in the RRSP vs. TFSA debate

You need to know why managing the refund well is the linchpin in the RRSP vs. TFSA debate. 

While you can and should strive to max out contributions to both accounts (the TFSA and RRSP), if you ignore the power of the RRSP-generated tax refund I think you’re missing the point. 

RRSP vs. TFSA account structure compared

I’ve got my preference for which account I focus on for wealth-building purposes, what account to max out contributions to first, but let’s recap some key points about each plan first:



A tax-deferral plan.A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution.Contributions are made with “after-tax” dollars.


Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate.Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost.If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate.Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits.Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year.You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money.The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no tax consequences.

Why managing the refund well is critical in the RRSP vs. TFSA debate

The RRSP refund is great but it’s actually temporary; you need to give it back at some point. 

This makes reinvesting the RRSP refund year after year absolutely critical to optimize wealth building – to take major advantage of an essentially long-term but not permanent government loan.

That said about this loan I firmly believe using the RRSP will work out very well for the majority of Canadians, hopefully myself included!

Contributing to the RRSP makes the most sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal.

If this tax situation applies to you this RRSP season then by all means use the RRSP as much as you can to defer tax now, grow your portfolio and get your refund back to reinvest money back into your RRSP.

If however for whatever reason, you need to use the RRSP refund for other things this spring (like a vacation?) that’s fine. Just be mindful, as David Chilton, respected financial guru and widely successful author of The Wealthy Barber Returns once said:

“If you’re going to put money in a registered retirement savings plan and “blow the refund on something stupid,” then a major advantage of the RRSP – the immediate tax benefit – is lost, he says.”

Well put. 

As part of this tax season just be mindful of the potential consequences of not managing the refund well this and every “RRSP season”.

Are you contributing to your RRSP this year?  If so, what is your strategy to manage the refund?

Want to know the RRSP contribution limits from CRA? I have you covered in this link.


My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

14 Responses to "Managing the refund well is the linchpin in the RRSP vs. TFSA debate"

  1. Hello Mark, I am new to your news letter and appreciating your savvy financial Can-con!

    An idea I am puzzling out around cash flow in the current inflationary climate is to withdraw from my RRSP to pay off a line of credit that payments on are hampering my overall savings plan. Now, with inflation being what it is, I’m still solvent with some discretionary funds at months end bit it’s noticeably less and seemingly only going to lessen with things like carbon tax increases and cost of living going up.

    Besides the withholding tax I’d pay now is there a future risk or implication that might make this withdrawal of tax sheltered funds a doubly penalizing idea to follow through on? The reward is being able to direct cash flow back into TFSA or RRSP instead of servicing interest on debt.

    1. Hi Lance!

      I think withdrawing from the RRSP to pay down debt should be a last resort but I can appreciate with higher rates, it’s sometimes required by some. There is really no doubling of tax when it comes to RRSP withdrawals since you were never taxed on the money in the first place – you got a RRSP-generated tax refund everytime you made a contribution to the account.

      Happy to discuss more.

      1. Thank you Mark for helping me understand that nuance. Agreed, it’s not ideal to use those rrsp savings versus making other adjustments to financial plan or budget.

          1. Even with my bi-weekly RRSP contributions and any taxes held on capital gains from profit share, I regularly would have to pay income taxes each year so I don’t usually get a ‘refund’ to reinvest. If I did I would be doing that and not doing something else less productive with it. I am happy if I can forecast upcoming taxes mid Feb so for RRSP season I contribute to counterbalance pending income tax. That is a win, if things go well, which is always the case. I like the TFSA more than RRSP but employers are more into RRSP, so it’s a bit of take what you can get.

  2. Hi Mark, I was directed to your page by Robb Engen, and I have to say it’s a great looking site. Do you believe it would be worth it to make a lump sum RRSP contribution to lower taxable income? I hold most of my investments in a TFSA, but I’m also looking at a pretty hefty tax bill from my job and I’m torn on what do. My employer withholds a large amount of tax so I should be receiving a return as it is. Thanks!

    1. Thanks Jordan – I hope you subscribe!

      I can tell you what I do Jordan: I max out contributions to my TFSA every year, then I work hard to save and max out contributions to my RRSP for that latter reason you noted, to lower my taxable income. Then I take the RRSP-generated refund without fail to invest that money back into my RRSP. Essentially, after the TFSA is maxed I always max out my RRSP. Both accounts are out of contribution as I type this back. I do that to build wealth as much as I can and not rely on my employer.

      Hope that helps your wealth building too.

  3. Jane Savers @ The Money Puzzle · Edit

    I contribute enough to my work pension to get the maximum match.
    I contribute enough to my RRSP to get a nice tax return.
    I prefer to put my money in my TFSA.

    Right now my savings are very tiny because I am concentrating on debt but I can’t let any opportunity to get a nice tax return pass me by.

  4. We contributed the max to our RRSPs before we met, married, bought a home, and had kids. Now the mortgage is paid off and the TFSAs are maxed, we are quickly maxing out our RRSPs. For us it worked well. If TFSAs had been available back then when the dinosaurs roamed, we would have probably maxed TFSAs first, then RRSPs if we had enough. At $5000ish/year a TFSA isn’t really enough retirement savings unless you have a very low income or a very high work pension.

    If they make a voluntary CPP plan available, we would max TFSA, max voluntary CPP, then max RRSP.

    1. Maxing our your RRSPs is an excellent thing to do. My position is, if this account is used wisely, it’s phenomenal. I suspect many people don’t use this account wisely, which is why the TFSA is a consideration for them.

      Congrats on having your mortgage paid off. We’re 9 years away from that…

  5. First $5500 into TFSA, any funds above this that you can set aside place in too RRSP.
    This will be the best option for the vast majority of people. If you can’t leave your savings alone, then skip the TFSA and enjoy the lock in power of an RRSP.

  6. I’m enrolled in omers, so i put most of my money into a TFSA instead of RRSP’s. i still put $100 a month into RRSP’s but i spend the refund instead of reinvesting. if i leave my omers employee, then i would change my strategy


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