A common question every year is whether to invest in a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Both products have their place in a good financial plan, offering shelter from taxes. But is there ever a time when one is better than the other?
If saving for a car, vacation or wedding, a TFSA will usually win. Withdrawals are tax-free and you won’t be penalized like you would with a RRSP. As a common rule, for short to medium goals, TFSAs beat RRSPs.
Your income will determine where to make contributions
If your earnings are less than $50,000 per year, it would be better to contribute to a TFSA as you are in the lowest tax bracket. Reducing taxable income (via an RRSP) won’t have much of an impact on your savings or lower the tax bracket anymore.
It’s common that people will on occasions fall into this bracket throughout their life. Whether that’s taking time off to look after children, or leaving work to study again. That said, this general rule isn’t only for lower to middle income earners. All Canadians should think about the following:
If you are in a low-income tax bracket, utilizing a TFSA would be better than saving in a RRSP. This is because the tax savings in the RRSP are less, and when you make withdrawals at retirement, you may be in a higher tax bracket.
If you are in a middle-income tax bracket, there usually isn’t a clear winner in this case. It may be better to use a TFSA now and accumulate contribution room in a RRSP to be used later in life when your earnings might be higher. At this point, you’ll be in a higher tax bracket and can take advantage of the tax benefits from an RRSP.
If you are in a high-income tax bracket, it may be best to use both products. An RRSP could be better if you believe your tax rate will be higher when you withdraw your savings. You’ll receive a tax deduction when you make your contribution. And you will be taxed at a lower future rate when you make withdrawals. Any surplus (including refunds from RRSP contributions) can be put towards a TFSA.
Speak with an advisor
Note that this guidance is very much generic. Where you save will depend on your own financial situation, goals and future earnings. It is best to speak with a financial advisor who can help determine the best tax-advantaged strategy for you.
Essential information
It’s important you understand how cents+change works and the constraints of this site. This is a journalistic website that aims to provide a guide on different aspects of finances. We can’t promise to be 100% accurate, so note that you use the information on this site at your risk. We can’t accept liability if things go wrong.
Information found on this site does not constitute financial advice. You must do your own research to determine if it’s right for your specific circumstances.
We do not and cannot recommend specific financial products. We may provide examples of products or companies, but always do your own research. Speak with a financial advisor to understand whether a product is right for you.
Note that providers often change the price and terms related to their products. So whilst we aim to provide accurate information, check or speak with a provider to get the latest deals.
We provide links to other websites, but we cannot be responsible for their content.