What are RRSPs and TFSAs, and how do you use them?

Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are two key long-term savings and investment tools that help Canadians plan for retirement, optimize their tax situation, and grow their wealth. Despite their similar names, these accounts have fundamentally different tax treatment, contribution limits, and withdrawal rules. For Calgary residents, RRSPs and TFSAs offer a wide range of opportunities to build a financial cushion for the future and manage assets strategically throughout their lives.

Registered Retirement Savings Plan (RRSP)

Essence and tax advantages

RRSP is a registered retirement savings plan designed to encourage long-term savings for retirement. Contributions to RRSPs are tax deductible: every dollar contributed to the account reduces your taxable income for the year of the contribution.

For example, a contribution of CAD 5,000 will save you approximately CAD 750 in federal taxes (at a rate of 15%) and nearly CAD 500 in provincial taxes (at a rate of 10% in Alberta). Investment income (interest, dividends, capital gains) on RRSPs is not taxed as long as the funds remain invested.

Contribution limits and carry-forward

Your annual contribution room is calculated as 18% of your previous year's earnings, up to a maximum ($30,780 for 2025).

Unused contribution room is carried forward indefinitely, allowing you to catch up on missed years in the future. Your earnings are taken from your tax return (Form T1), and your contribution room is shown on your Notice of Assessment from the CRA.

Withdrawals: Home Buyers' Plan and Lifelong Learning Plan

RRSPs allow you to withdraw funds without tax consequences under two programs:

  • Home Buyers' Plan (HBP): Single first-time home buyers can withdraw up to CAD 35,000 from their RRSP to purchase their first home. The funds are repaid in equal installments over 15 years.
  • Lifelong Learning Plan (LLP): allows you to withdraw up to CAD 20,000 to finance your own or your spouse's full-time education. The repayment is spread over a period of up to 10 years.

Taxation upon withdrawal

Upon retirement, funds received from an RRSP are transferred to a Registered Retirement Income Fund (RRIF) or withdrawn directly. The amounts you withdraw are included in your taxable income for the year and taxed at the normal rates.

Proper planning of the period of transfer to RRIF and subsequent withdrawal can reduce the effective tax rate.

Tax-Free Savings Account (TFSA)

Principle of immediate growth

A TFSA is a tax-free savings account introduced in 2009 for individuals aged 18 and older. Contributions do not provide a tax deduction, but all future income in the account (interest, dividends, capital gains) is tax-free, both during growth and upon withdrawal.

A TFSA is ideal for short- and medium-term goals: creating an emergency fund, saving for large purchases, or investing outside of a retirement strategy.

Contribution limits and space renewal

The contribution limit is set each year: for 2025, it is CAD 7,000 — and has been accumulating since 2009 for those who were eligible to open an account each year.

If you have not contributed in previous years, the available “room” increases. Importantly, amounts withdrawn from your TFSA are added to your contribution limit for the following year.

Flexible withdrawals

A TFSA allows you to withdraw any amount at any time without reporting it on your taxes. For example, if you withdraw $5,000 in 2025, that amount is returned to your available contribution room in 2026.

Combined use of RRSPs and TFSAs

Tax optimization strategies

Given the different tax characteristics of RRSPs and TFSAs, Calgary residents should consider combining both accounts:

  • High income during working life: focus on RRSPs to take advantage of the contribution deduction.
  • Low income or career breaks: use a TFSA to preserve interest growth without losing future contribution room.
  • Retirement planning: a TFSA is useful for unexpected expenses and heirs, as it does not affect government benefits.

Examples: middle-income family

A married couple with an annual income of CAD 120,000 in Calgary:

  • Contribute CAD 15,000 to an RRSP → reduce taxable income to CAD 105,000 → save ~CAD 3,500 in taxes.
  • Contribution of CAD 7,000 to a TFSA → tax-free investment income and flexible use of funds.

Practical steps for Calgary residents

  1. Choose a financial institution: banks (RBC, TD, BMO, Scotiabank) or online platforms (Wealthsimple, EQ Bank).
  2. Register an account: RRSP requires a SIN, TFSA requires only identification.
  3. Determine your investment strategy: ETFs, mutual funds, bonds, stocks.
  4. Automate contributions: set up regular transfers for steady accumulation.
  5. Monitor and rebalance: review your portfolio every six months.

Local context: Alberta

Alberta has no provincial income tax, so the benefits of RRSPs are purely federal savings. TFSAs allow you to protect your investment income from any future tax changes.

Conclusion

With RRSPs and TFSAs, Calgary residents can not only save for retirement, but also tactically manage their taxes, plan for large purchases, and create financial security. The key is to combine both tools, make regular contributions, monitor your portfolio, and choose a strategy that fits your income and goals.