Should you contribute to your RRSP or your TFSA?

by Achieva Financial
Jan January 03

During the first part of the new year, RRSPs are often on people’s minds. The deadline to contribute to your RRSP for the 2017 tax year is March 1st, so it is common for people to be putting a lump sum into their RRSP to increase their tax refund. But, with the TFSA being another savings option, which one is better? The answer to that depends on your circumstances and when you need your savings.

In general, people earning a lower income (under $35,000) benefit more from contributing to a TFSA. Individuals in lower tax brackets see a smaller tax deduction than people who are in higher tax brackets, so the tax-free growth is more beneficial. Contributing to an RRSP when you’re in a higher tax bracket also means that you will pay less tax on the income in retirement, when your income is likely to be lower.

Saving for a new car or vacation? Use a TFSA to save. RRSPs are a retirement savings vehicle, so if you withdraw from your RRSP to buy a new vehicle, you will be taxed on the withdrawal, and you will lose the contribution room!

There are two instances when you can borrow from your RRSP before retirement: to take part in the Home Buyers’ Plan, which allows you to withdraw up to $25,000 from your RRSP to purchase a home, and re-pay it over the next 15 years. The other option is the Lifelong Learning Plan, which allows you to finance full-time education, with a limit of $10,000 a year, up to a maximum of $20,000. You will have 10 years to re-pay the withdrawal; the Canada Revenue Agency has a questionnaire to help determine when the 10-year period begins.

If you have the means to do so, it is best to contribute to both. One strategy to try is depositing your RRSP tax refund into your TFSA to benefit from tax-free growth.