Choosing between a tax-free savings account (TFSA) and a registered retirement savings plan (RRSP)? It’s one of those personal finance questions that can leave you spinning your tires like a bike messenger in February.

What’s the difference between a TFSA and a RRSP?

Both TFSA and RRSPs can hold various kinds of investments, including bonds, stocks, mutual funds and exchange-traded funds. And both vehicles offer a tax benefit. But each one offers a different type of tax benefit.

RRSP contributions are deductible on your annual tax return. Effectively, RRSPs provide a tax deferral - this means that you're only taxed when you make a withdrawal.

Unlike RRSP contributions, your TFSA contributions aren’t tax deductible. Contributions to your TFSA are made with after-tax dollars. This means you’ve already paid income tax on the money you put in your TFSA. So you won’t have to pay tax when you take it out. And any investment income you earn within your TFSA won’t be taxed. Not even when you take the money out of your TFSA.

In other words, it's up to you whether you take the tax hit now or later.

Which savings option do you need?

How do you decide which is right for you? It depends partly on what you earn now versus what kind of financial situation you  see for yourself in the future. "For younger people, especially lower-income people, the math might favour the tax-free savings account because they're in a lower tax bracket at the time," said Robert Brown, author of Wealthing Like Rabbits: An Original Introduction to Personal Finance.

There's another way to look at this, though. The fact that withdrawals from an RRSP are taxable is a powerful motivator for a lot of us. It's meant to make us think twice before drawing down retirement savings, and it works.

Is an RRSP right for you?

Are you in your early 30s and living with multiple financial responsibilities? Then there are real advantages to an RRSP from a behavioural finance perspective.

"You get the tax savings when you're 32 or 33," explains Brown. "You still have to pay the tax further down the road when you're 70 or 71. But hopefully, by that time, you won't have the mortgage. You won't be saving money for the kids' education. You'll be in a better overall position financially. So even if you pay a little more in taxes, it might be better from a timing perspective, because you can afford it at that stage of life."

Is a TFSA right for you?

TFSAs are ideal for less long-term savings goals.

"Are you saving to buy a car, make a down payment on a house or a shorter-term goal? Then I'm all over the tax-free savings account," says Brown.

A TFSA offers tax-free growth for your investments. And your investment return could potentially be in the high single- or even the low double-digits, if they perform well.

Need help figuring out what’s right for you? An advisor can help put together a solid financial plan that suits your goals. Find an advisor near you today.