Are RSPs Becoming Obsolete?

Q: Should I contribute to a TFSA instead of an RSP?
A: The launch of Tax-Free Savings Accounts (TFSAs) in 2009 opened up a whole new world of financial decision making for Canadians. Most people I speak with are big fans of TFSAs, while there seems to be a growing number who are also quite negative about RSPs. But as with most personal finance decisions – there's no one-size-fits-all when it comes to TFSAs vs. RSPs.
Popularity Battle – TFSA vs. RSP
It appears that the (relatively) new kid on the block – the TFSA – has won the popularity contest for the account registration type of choice. Data from the Office of the Superintendent of Financial Institutions (OSFI) showed that 30% of Canadian taxpayers contributed to a TFSA in 2015, with 23% of taxpayers contributing to an RSP. That's nearly 8 million Canadians contributing to a TFSA, and only 6 million contributing to an RSP.
Who's Using What?
It's not all bad news for RSPs, though. While TFSA use is increasing across the board, RSP use is still holding steady among older, wealthier Canadians, with an increase in use for those making between $60,000 and $80,000 a year. TFSAs are most popular for lower-income, younger Canadians. And it makes sense. When you're in a lower income tax bracket, you don't benefit nearly as much from the RSP's tax deduction for your contributions. And if you're in a lower tax bracket, you'll likely be in a higher one at retirement, which is where TFSAs provide the biggest benefit over RSPs. That's because TFSA withdrawals are tax-free, and RSP withdrawals are taxed.
There's a Cautionary Tale Here, Though…
One of the reasons why Canadians love TFSAs is their flexibility. That is, it's easy to withdraw – and without having to pay tax. Statistics Canada has reported that approximately half of all money deposited into a TFSA in a given year is withdrawn. The frequency of withdrawals from TFSAs is much larger than it is for RSPs. And this makes sense, even if it's not ideal behaviour. Withdrawing from an RSP almost always has consequences, so casual withdrawals aren't the norm – they're the exception. The only times where tax-free withdrawals are allowed from RSPs is for either the Home Buyer's Plan (HBP) or Lifelong Learning Plan (LLP), and even these have strict rules around repayment of the amount borrowed.
If TFSA use is increasing and RSP use is declining, are Canadians just redistributing harder-to-access RSP contributions into easier-to-access TFSA accounts? Does this mean less money is being saved overall for retirement, since more is going into easier-to-access TFSAs rather than into harder-to-access RSPs? Is a significant amount of it then withdrawn and spent because there's aren't any real consequences for withdrawing? I certainly hope not, but the data does seem to suggest some of this is happening…
Are RSPs Becoming Obsolete?
Even though I, too, love TFSAs for both short and long-term goals, the RSP is still my go-to account type for retirement savings. Personally, I find the withdrawal penalties for RSPs are so steep that most people don't access their RSPs outside of the HBP, the LLP or an extreme emergency. This is in contrast to the amount of TFSA money that is contributed and then withdrawn each year. It's just human nature – make it easy for me to withdraw, I'll take advantage; penalize me for it, I'll be less inclined to do so. Our own behaviour is often our worst enemy when it comes to personal finance decisions, and that's why I hope TFSAs are used in conjunction with RSPs, not in place of them.
If you have a question Joe can answer in a future article or have a topic suggestion, please email it to: askanadvisor@tangerine.ca
This article is intended to provide general information only about RSPs and TFSAs. If you need further information about your specific circumstances you should speak to an investment advisor.
Related posts
/Images/Top-14-Investing-Terms-to-Know-2.jpg)


Legal Stuff
This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content....
The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.
Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.