Whether you’re just entering the workforce or moving into your retirement years, you are likely grappling with the question of how to get the most out of Canada’s two main tax-deferred savings accounts. The tax-free savings account (TFSA) allows Canadians aged 18 and up to make limited after-tax contributions each year that grow tax-free and that can be withdrawn at any time without penalty or taxes. The registered retirement savings plan (RRSP), meanwhile, offers an immediate tax credit, but treats withdrawals as income in retirement. These differing profiles mean one can outshine the other at different points in your life, depending on your horizon to retirement, current and expected tax brackets and other financial needs. Here, the Financial Post breaks down the key challenges that Canadians from gen Z to millennials to gen X and the baby boomers face, and strategies for overcoming them. 

Generation Z (ages 18-29)

The Challenge: For younger savers, retirement is almost a lifetime away. Many are starting or still in post-secondary education. Some are just beginning to earn an income and many have other financial priorities, from paying off debt to buying a car to simply paying the rent as they grapple with inflation and an uncertain economy. Paradoxically, these are the years when starting to save can have its biggest long-term benefit, due to the power of compounding.  

The Strategy:  Freeing up money to invest in your teens and twenties can be a struggle, and not everyone will have the luxury. For those who are able to start saving early, Jason Heath, a certified financial planner and managing director at Objective Financial Partners Inc., leans  toward the TFSA due to its more flexible nature.  

Many younger Canadians have intermediate savings goals, such as buying a house or starting a family, and a TFSA will not only shelter any growth in those savings from taxes, but also allow the money to be withdrawn — and later recontributed — without penalty. That differs from an RRSP , which is geared toward saving for retirement, and where contributions generate a tax credit up front but are taxed as income upon withdrawal. Since incomes are likely lower now than in later stages of life, the up-front tax benefits of an RRSP are not as useful now.  

“By and large, I think somebody with a lower income is probably better off contributing to a TFSA,” Heath said, noting that y oung people living with their parents, renting in a relatively affordable city or splitting expenses with a partner may have more wiggle room for building longer-term savings .  

Janet Gray, an advice-only certified financial planner at Money Coaches Canada, said $60,000 is the  threshold above which someone at this stage could start to benefit from the future tax advantages of an RRSP.  

Gray added that the RRSP may be useful in some circumstances, especially for those thinking specifically about home ownership.  That’s because of the  Home Buyers’ Plan feature, which allows first-time homebuyers to withdraw up to $60,000 from an RRSP to purchase a home, though the money must be repaid within 15 years.   

The RRSP should also be considered if your employer offers matching contributions or if it gives you access to certain government benefits, Heath said.

However, before starting to save, it is important to first pay down high-interest debt, such as credit card debt, Gray said.  

TFSA vs. RRSP : For this life stage, the TFSA generally works better, but consider the RRSP Home Buyers’ plan and the potential for matching employer contributions, too.   

Millennials (aged 30 to 45)

The Challenge: Millennials are further along in their careers and have higher incomes than their gen Z counterparts, but many are dealing with a double whammy of high housing and childcare costs. And there is a significant divide within the generation between older and younger millennials — or those who got in on the housing boom and those who didn’t.  

The Strategy:  Today’s millennials straddle a wide range of life experiences, with some still paying off student loans and others well into raising a family.  While the immediate tax benefits of an RRSP are becoming more appealing at this stage of life, those with children might want to wait to prioritize it until the early childcare stage, which can be expensive, is over, Gray said. It may be more useful to bulk up on emergency savings in a TFSA and make “placeholder” contributions to an RRSP, which can be increased over time as income grows.  

The savings equation for millennials also depends on the amount of mortgage debt they carry. “This was a demographic … who, unlike gen X and boomers, did not get a deal in the housing market,” said certified financial planner Shannon Lee Simmons.  “You paid top dollar and then everything else got more expensive as well.”  

Simmons said the TFSA’s flexibility remains appealing for millennials.   Heath, however, warns that it’s easy for millennials to get “pigeonholed” into building a healthy TFSA while forgetting about their RRSP contributions.

Older millennials in their 40s are entering their peak earning years, which Heath called the “sweet spot” for RRSP contributions. At that point, Heath said millennials might have worked through some of the larger expenses, such as a home down payment, that made it hard to  maximize their savings.  

“Hopefully by your 40s, you’re in a situation where you’ve got better cash flow and you can start to actively dedicate some towards retirement,” he said.  

Heath recommended millennials in particular should revisit their retirement and savings strategy on an annual basis, as there might come a point where “the switch needs to flip” from emphasizing TFSAs to RRSPs.  

TFSA vs. RRSP: TFSA for younger millennials or those still paying for childcare, and RRSP for older millennials near their peak earning years. 

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Generation X (aged 46 to 61)

The Challenge: Today’s gen Xers are typically in their peak earning years and quickly approaching retirement. While their incomes are high,  they are facing an uncertain job market that could interrupt the trajectory of their savings at any time. They’re also squarely in the “sandwich generation,” juggling the costs of raising a family and caring for aging parents at the same time.

The Strategy: Canadians in their fifties know the clock is ticking on their working careers and retirement is fast approaching. The time to save is now. “You’re probably 10 to 15 years out, and so you need to take it super seriously,” said Simmons. “Gen Xers need to be thinking about hammering mortgages down and turbo-saving for retirement.”

With earnings near their peak, prioritizing RRSP contributions is a must, provided one has paid off major debts and one’s mortgage is under control, Heath said.

Being in a higher tax bracket means the tax advantages of the RRSP are at their highest.

Gray gave the example of someone in the 53 per cent tax bracket who invests $10,000 into their RRSP and reduces their tax bill by $5,300. By comparison, someone with a lower income might only achieve a $2,000 deduction for the same contribution.

“The deductions are more rewarding as you get higher up in your income, and then you’re creating a source of income in your retirement (when you’re more likely to be in a lower tax bracket),” Gray said.

That doesn’t mean generation Xers who have available funds for long-term savings should forget about contributing to their TFSA, however.

“It’s a strategic split,” said Simmons. “The TFSA is a powerhouse retirement account, and it can also be used in a pinch to pay off a mortgage.”

TFSA vs. RRSP: Prioritize RRSPs to maximize the tax benefit in your highest earning years. Put what’s left in your TFSA.

Baby boomers (aged 62 to 80)

The Challenge: Many baby boomers are now in their retirement years and making regular withdrawals from their investment accounts. But others are working beyond the traditional retirement age, whether by choice or necessity. And many are looking at helping children or even grandchildren through hefty gifts.

The Strategy:  Overall, baby boomers who don’t expect to be in a higher tax bracket in retirement should prioritize the RRSP up until the year they turn 71, said Simmons. That is the last year you can contribute to an RRSP, at which point the funds must be withdrawn as a lump sum, converted to an annuity or converted to a

registered retirement income fund (RRIF). Because of varying time horizons or inheritance plans, boomers can consider differing strategies based on their circumstances.

“TFSAs may be a sizable source of inheritances for kids of boomers, second only to their home values,” said Heath. He added that most boomers are already in the decumulation stage at this point, but still have the option of taking extra withdrawals from their RRIFs (if they can do so at low tax rates) to fund financial gifts for their children if desired.

Gray said she often advises her retired clients to use their RRSP for income and TFSA for emergencies and goal spending, such as home repairs and travel, as funds can be withdrawn at any time tax-free.

While some will want to defer the tax hit from drawing down their RRIF for as long as possible, hoarding money in the RRIF can become a problem if a large health or long-term care issue crops up.

“A big jump in expenses, let alone a premature death, can result in a large taxable withdrawal from an RRSP or RRIF account — with a lot of tax associated,” he said. “Tax deferral can therefore backfire.”

“If somebody has a lot of money in their RRSP, sometimes it can make sense to take withdrawals from an RRSP prior to age 72,” said Heath. Heath said there’s also the option to make early RRSP withdrawals and invest the proceeds in a TFSA ahead of retirement (if you think you’ll be in a higher tax bracket at that point).

After turning 72, as you can no longer contribute to an RRSP, the TFSA would again take precedence.

TFSA vs. RRSP: Most baby boomers should prioritize the RRSP until retirement, but will want to avoid leaving too much money in for too long.

Read more from our TFSA vs. RRSP series

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