TFSA or RRSP When Your Income Is Low?

The Short Answer for Low-Income Earners

If you earn between $15,000 and $50,000​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ and you are trying to choose between a TFSA and an RRSP, use the TFSA first. Full stop.

The RRSP is a powerful tool, but it​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ is built around one core idea: you contribute money now at a high tax rate, and you withdraw it later at a lower tax rate. That math works beautifully when you earn $120,000 today and expect to retire on $45,000 a year. It works much less well when you earn $35,000 now and expect to retire on a similar or lower amount.

The TFSA flips the script. You contribute​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ after-tax dollars, your money grows completely tax-free, and you pay zero tax when you pull it out. No means tests, no clawbacks, no forms. That simplicity is exactly what most low-income Canadians need.

How Marginal Tax Rates Actually Work

Most people misunderstand how Canadian​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ income tax works, and that misunderstanding is exactly why some low-income earners waste years contributing to an RRSP that barely helps them.

Canada uses a progressive marginal tax​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ system. You do not pay the same rate on every dollar you earn. You pay a lower rate on the first chunk of income, and higher rates kick in only on the dollars above each threshold. Federal and provincial rates stack on top of each other.

The key insight for low-income earners​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ is this: an RRSP deduction saves you tax at your marginal rate, meaning the rate you pay on your last dollar of income. If that rate is low, your refund is small. Here is what that looks like at the federal level for 2024 using CRA bracket data.

A $1,000 RRSP contribution saves someone​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ earning $35,000 in Ontario roughly $290 in tax today. That same contribution saves a $120,000 earner about $430. The RRSP is a better deal the higher your income, because you get a bigger upfront refund. At $35,000, that refund is modest and the benefit is easy to overshoot.

Now here is the second side of the RRSP​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ equation: when you withdraw in retirement, those withdrawals are fully taxed as income. If your income in retirement is similar to what it is today, you are deferring tax, not eliminating it. And if your retirement income triggers clawbacks on government benefits, you could end up worse off.

Side-by-Side: TFSA vs RRSP at $35K Income Over 20 Years

Let us run a real scenario. You earn​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ $35,000 a year in Ontario, you invest $200 a month, you hold XEQT inside whichever account you choose, and you leave it for 20 years.

Assumptions: $200 monthly contribution,​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ 7% average annual return (consistent with long-run global equity averages), Ontario tax rates, income stays around $35,000 throughout, retirement income also roughly $35,000 from various sources. XEQT MER of 0.20% is already baked into the net return estimate.

The RRSP looks slightly better on paper​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ before you factor in the tax hit on withdrawal. Once you subtract income tax on those RRSP withdrawals, the TFSA comes out ahead by roughly $11,000 to $28,000 in net value for a $35,000 earner. That is a meaningful difference, and it grows even wider if GIS clawbacks enter the picture.

The GIS Clawback Trap Nobody Warns You About

This is the most overlooked financial​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ risk for low-income Canadians who use the RRSP, and it can cost tens of thousands of dollars in retirement.

The Guaranteed Income Supplement, or​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ GIS, is a tax-free monthly benefit for low-income seniors in Canada. If your income in retirement is below the threshold, you qualify for GIS and it can add hundreds of dollars per month to your retirement income. In 2024, the maximum GIS benefit for a single person was over $1,000 per month.

Here is the problem: every dollar you​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ withdraw from an RRSP or RRIF in retirement counts as taxable income, and GIS gets clawed back at a rate of 50 cents for every dollar of income above the exemption threshold. That means for every $2 you pull from your RRSP in retirement, you lose $1 of GIS. At scale, this can make the RRSP a genuinely costly choice for low-income Canadians.

TFSA withdrawals are completely invisible​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ to CRA for income-testing purposes. They do not affect GIS, OAS, or any other income-tested benefit. This is one of the most powerful advantages of the TFSA for low-income earners, and it is rarely talked about in plain language.

If you are in your 30s or 40s earning​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ $35,000 and you are not sure whether you will have a high income in retirement, the TFSA gives you options. If you end up needing GIS, your TFSA withdrawals will not hurt you. If you end up with higher income, you still got tax-free growth. It is a flexible tool that punishes you less for being wrong about the future.

When the RRSP Does Make Sense on a Low Income

There are real exceptions to the TFSA-first​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ rule, and you should know them before you dismiss the RRSP entirely.

The RRSP can still make sense for a​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ lower-income earner in a few specific situations. The rule is not that the RRSP is bad. The rule is that you need a genuine tax rate difference between now and retirement to make it worthwhile.

Outside of these scenarios, a low-income​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ earner with a choice between the two accounts should default to the TFSA. The flexibility, the GIS protection, and the tax-free withdrawal feature make it the right tool for most people in this income range.

How to Actually Get Started With XEQT Inside a TFSA

Knowing the theory is one thing. Here​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ is exactly what to do if you are ready to start investing in a TFSA on a low income.

The good news is that getting started​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ is much simpler than most people expect. You do not need a financial advisor, you do not need a complicated portfolio, and you do not need a lot of money to start. You need a brokerage account, a TFSA, and one investment: XEQT.

XEQT charges a management expense ratio​‌‌​‌​‌​​‌‌​​​‌​​‌‌‌‌​​​​‌‌​​‌​‌​‌‌‌​​​‌​‌‌‌​‌​​‍​​​​​​​​​‌‌​​‌‌​​‌‌‌‍‌‌​‌​‌​​‌​‌‌​‌‌‌​‌‌‌‌‌‌​​‌​‌​​​ of just 0.20% per year. That means on a $10,000 portfolio, you pay $20 a year in fees. Your bank mutual fund likely charges ten to fifteen times that. The fee difference compounds dramatically over 20 years and is one of the main reasons XEQT is the right answer for low-income investors who cannot afford to lose returns to fees.