TFSA VS RRSP | Which one is better for me?

TFSA VS RRSP | Which one is better for me?

When retirement planning or savings are on your mind, you’ll likely wonder whether investing in an RRSP (Registered Retirement Savings Plan) or TFSA (Tax-Free Savings Account) is better. Or, should you invest in both? The truth is that both have some advantages, but it largely depends on your situation. 

Contributing to a TFSA is more advantageous if you think you’ll need to take money out before you reach the age of retirement, as you won’t face tax penalties with TFSA withdrawals. However, if you want to withdraw from your RRSP, you will be taxed on the funds withdrawn.

To answer the question as to whether the RRSP or TFSA is better, the answer may depend on your particular tax or financial situation. Get to know how they differ so you’ll know better what to do moving forward.

RRSP Investing: When Is It The Best Way To Go?

The major advantage of investing in an RRSP is that the contributions are tax-deductible. This means that when tax time comes around, the money you invested in your RRSP is deducted from your taxable income.

For example, let’s say you make $80,000 this year and contributed $15,000 to your RRSP. At tax time, you’ll only be taxed on $65,000, which means you pay less taxes. You should keep in mind, however, that later on, when you make withdrawals from RRSP, you will be taxed on those amounts. 

Generally, the idea is that once you reach retirement and stop earning income, your overall income decreases quite a bit, so come tax time you’ll owe less taxes because you’re only withdrawing a certain amount each month and your marginal tax rate may be lower than in your prime earnings years when you got a tax break from your RRSP contributions.

When Should You Invest In An RRSP:

Keep in mind that effective tax rates in Canada decrease as taxable income decreases, so RRSP deductions aren’t necessarily going to help you out if you are in the lower tax brackets.

You may want to invest in an RRSP if:    

  • - You’re strictly saving for retirement without wanting to dip into the account along the way;
  • - You’re earning more than $50,000 per year;
  • - You’re earning at least $50,000 each year and plan on using the RRSP Home Buyer’s Plan; or
  • - You’re earning at least $50,000 each year and plan on using the RRSP Lifelong Learning Plan.

When You Should Invest In A TFSA

A TFSA acts more like a savings account, where you can grow your money tax-free, but you don’t get to cash in on any tax deductions come tax time as you do with the RRSP. However, the great advantage that the TFSA has over the RRSP is that withdrawals from TFSAs are not taxed.

You may want to invest in a TFSA if:

  • - You’re planning on using some of that accruing money before you retire, such as for a vacation home, renovation, or wedding;
  • - You earn less than $50,000 and you’re saving for retirement; or
  • - You’re earning less than $50,000, but you believe your income will increase greatly. By investing in the TFSA, you can wait and invest in an RRSP later when you’re earning more money, which means you’ll be able to get a better tax deduction because of the higher tax bracket.

Invest In Both The TFSA And RRSP

A great way to save for the short and long-term is investing in both the TFSA and the RRSP. Each year, you’ll be able to contribute a certain amount to each, creating the kind of financial lifestyle you desire as you move into your retirement years.

As of 2019, you can contribute $6,000 to your TFSA and 18% of your income or $26,500, whichever is lower, to your RRSP. Also, if you have not fully contributed in either/both plans in prior years, you may have unused contribution room which you can use anytime.

Key Takeaways

The timing of your taxes is the biggest difference between using a TFSA or RRSP. If you want to defer taxes and pay less tax during retirement than now, an RRSP is the way to go. If your income may be about the same when you retire, it may be better to go with the TFSA and pay taxes on the money now.

 Planning and saving for retirement are smart actions, so be sure you’re going at it with a short and long-term approach. Whether you’re investing on your own or you’re working with a finance professional, planning for a secure financial retirement can help you feel more at ease along your life journey.

Not sure where to start? There are plenty of financial advisors that can help you manage short and long-term strategies for growing wealth.


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