How retirement accounts save you tax

Take any employer match first, then choose between a tax break now and tax-free withdrawals later.

A desk setup with a notebook labeled '401k', a pen, cash, and a calculator representing financial planning. — Photo: Towfiqu barbhuiya / Pexels

Area: MoneyFrom age 22Time to learn: 45 minutes

You will be able to explain how a 401(k), IRA, RRSP and TFSA each lower your tax, and which one suits you.

Why it matters

These accounts let your money grow without yearly tax on the gains, which adds up over decades. The main choice is when you pay tax: now or later. Many people feel behind: in 2025, only 35% of non-retired US adults said their retirement savings were on track.

How to do it

Learn the two types. Tax break now: traditional 401(k), traditional IRA, RRSP. Tax-free later: Roth 401(k), Roth IRA, TFSA.
Tax break now: what you put in comes off this year's taxable income. If your top tax rate is 20%, a $1,000 contribution cuts this year's tax by about $200. You pay income tax when you take the money out.
Tax-free later: you put in money you have already paid tax on. The growth and qualified withdrawals are tax-free.
Get the employer match. If your employer matches 401(k) or group RRSP contributions, put in at least enough to get the full match.
Know the 2026 US limits: 401(k) $24,500, plus $8,000 more if you are 50 or older ($11,250 more at ages 60 to 63). IRA $7,500 ($8,600 at 50 or older), or your taxable pay if that is less, shared across traditional and Roth IRAs.
Know the US income rules. If you or your spouse have a workplace plan, your traditional IRA deduction can shrink at higher incomes. Roth IRA contributions are also limited at higher incomes.
Know the Canadian limits. RRSP room is 18% of last year's earned income, up to $33,810 for 2026, minus any pension adjustment, plus unused room from past years; your notice of assessment shows your exact room. TFSA: $7,000 for 2026, and unused room carries forward. You must be 18 or older with a valid Social Insurance Number to open a TFSA.
Choose. If you expect a higher tax rate later, lean toward Roth or TFSA. If you expect a lower rate in retirement, lean toward traditional or RRSP.
Leave the money in. Withdrawals from US retirement accounts before age 59½ usually add an extra 10% tax on top of income tax. RRSP withdrawals are taxed as income. TFSA withdrawals are tax-free, and the room comes back the next year.

Common mistakes

Skipping the employer match, which is money you would otherwise leave on the table.
Holding only cash in a TFSA or IRA for decades, so it barely grows.
Putting in more than your TFSA or RRSP room, which brings penalties.
Cashing out a 401(k) when you change jobs instead of rolling it over.

You can do this when …you can explain to a friend, with a $1,000 example, how a traditional account and a Roth or TFSA differ in when you pay tax.