# Financial independence: a tax-smart plan > How RRSPs and TFSAs are taxed going in and coming out, and how the OAS recovery tax can affect you once you live off your savings. - Web page: https://taxnotes.ca/guides/financial-independence/ - For: Everyone · Topic: Planning - Last reviewed: 2026-10-10 Financial independence means your savings can pay for your living costs. Tax decides how much of what you save, and later spend, you actually keep, so a good plan starts with knowing how each account is taxed when money goes in and when it comes out. ## Two accounts that work in opposite directions The two main registered accounts for long-term saving are the RRSP and the TFSA. Both let your investments grow without yearly tax, but they hand you the tax break at different times. **RRSP: a deduction now, tax later.** Contributions you deduct lower your taxable income for the year. Investment income earned inside the plan usually isn't taxed while it stays there, and you generally pay tax when you receive payments from the plan. **TFSA: no deduction, but tax-free later.** You can't deduct what you put in. In return, the income your TFSA earns, whether interest, dividends or capital gains, is generally tax-free, even when you withdraw it. ## How much room you get Your RRSP deduction limit for a year is generally 18% of your earned income from the previous year, up to the annual dollar limit ($32,490 for 2025), less any pension adjustment from a workplace plan, plus room you didn't use in earlier years. The CRA works this out for you. You can contribute to your own RRSP until December 31 of the year you turn 71. TFSA room starts to build when you're 18 or older and resident in Canada. Each year adds the annual dollar limit ($7,000 for 2025), and any room you don't use carries forward. When you withdraw, the amount is added back to your room on January 1 of the next year, not right away. Going over either limit costs you. TFSA over-contributions are taxed at 1% a month for as long as the excess stays in the account, and RRSP contributions that go more than a small margin over your deduction limit are also taxed every month. ## Why your tax rate matters Because an RRSP deduction saves tax at your rate in the year you contribute, and withdrawals are taxed at your rate in the year you take them out, the plan's value depends partly on how those two rates compare. A TFSA gives no deduction up front, so the rate you pay on withdrawals doesn't matter: they're not taxed. To see your own marginal rate, and what an RRSP contribution would save this year, use the [income tax and RRSP savings calculator](https://taxnotes.ca/calculators/income-tax/). For a side-by-side look at where to put new savings, see [RRSP, TFSA or FHSA: which first?](https://taxnotes.ca/guides/rrsp-tfsa-fhsa-which-first/) ## Drawing on your savings Once you start living off your savings, the source of each dollar matters: - **RRSP withdrawals** count as income in the year you receive them, so they can push you into a higher bracket. After the year you turn 71, you can no longer contribute to your own RRSP; see [Converting your RRSP to a RRIF](https://taxnotes.ca/guides/rrsp-to-rrif/) for what comes next. - **TFSA withdrawals** aren't taxed, and the CRA says neither TFSA income nor withdrawals affect your eligibility for federal income-tested benefits and credits, including Old Age Security (OAS) and the Guaranteed Income Supplement. ## Watch the OAS recovery tax If you receive OAS, a high income can take some of it back. When your net income for the year is above the threshold ($93,454 for 2025), you repay 15% of the amount over the threshold, up to the full pension. The repayment is generally taken off your OAS payments month by month, based on an earlier year's income. Taxable withdrawals, like RRSP payments, add to the net income used for this test. TFSA withdrawals don't. For more on timing your public pensions, see [When to start CPP and OAS](https://taxnotes.ca/guides/when-to-start-cpp-and-oas/). ## What to do - Check your TFSA room in your CRA account before you contribute, and compare it with your own records. Check your RRSP deduction limit too; the CRA calculates it for you. - If you take money out of a TFSA, wait until the next calendar year to put it back unless you know you have unused room. - Once you receive OAS, keep in mind that taxable withdrawals add to the net income used for the recovery tax, and TFSA withdrawals don't. - Look up current limits in the [registered plans table](https://taxnotes.ca/rates/registered-plans/). ## Sources 1. [Registered Retirement Savings Plan (RRSP)](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html) (canada.ca) 2. [How contributions affect your RRSP deduction limit](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html) (canada.ca) 3. [What is a TFSA](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/what.html) (canada.ca) 4. [Before you contribute to a TFSA](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributing/before.html) (canada.ca) 5. [Old Age Security pension recovery tax](https://www.canada.ca/en/services/benefits/publicpensions/old-age-security/recovery-tax.html) (canada.ca) Tax figures in this guide come from the TaxNotes.ca rates tables (https://taxnotes.ca/rates/), which cite the Canada Revenue Agency and, for Quebec, Revenu Québec. Last reviewed: October 10, 2026 How to cite: "Financial independence: a tax-smart plan", TaxNotes.ca, last reviewed 2026-10-10, https://taxnotes.ca/guides/financial-independence/. For a figure or rule, also cite the official source listed above. Licence: CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). 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