Which should I choose?
If it fits into your budget, a good strategy is to contribute as much as you can to both. But if you have to choose one over the other, make sure you understand how they differ and make your choice based on your own individual financial and tax situation.
If you are making more income now than you will be making in retirement, it may be beneficial to contribute to RRSPs because of their income tax deferral advantages. Also, if you and your spouse have a large difference in annual incomes it may make sense to open a spousal RRSP to shift taxation in your retirement when the funds are cashed out.
If there is not a big difference in current income and future income, RRSPs are still a great way to shelter your savings from taxes for many years. Although, you may want to consider using your TFSA first. If you will make more income in retirement than you are currently or are just unsure, TFSAs are the simpler way to go as they offer a completely tax-free method to grow your investments.
What investment products are allowed?
TFSAs and RRSPs allow for investing in generally the same investment products; savings accounts, GICs, mutual funds, stocks, and ETFs to name a few.
I like flexibility with my money, how does that work?
The TFSA is generally known to be more flexible than the RRSP, partly for withdrawals. When money is withdrawn from TFSA it is not included as taxable income and therefore does not affect income tested benefits in retirement (or ever, as they can be withdrawn at any time) such as Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). You may also gift money to your spouse to contribute to a TFSA and this is considered a very legal form of income splitting.
RRSP vs. TFSA?
One of the most popular questions we get in the financial world today is “Should I contribute to a TFSA or an RRSP? To illustrate, I have used 2 examples below:
Example 1: Ron makes $90,000 at his job and wants to save for retirement. He expects to collect Canada Pension Plan (CPP) and OAS in retirement but doesn’t have any other savings and is not currently enrolled in a pension plan. The average recipient of CPP/OAS at age 65 will receive just over $15,000/year. Ron’s income will be substantially lower in retirement and he will be well served to contribute to his RRSP. By making a $4000 contribution this year, he will lower his taxable income down from $90,000 to $86,000 and likely receive a tax refund that he could reinvest. This $4000 would then eventually come out sometime in retirement and be taxed at a much lower rate, relative to his significantly smaller income. In this simplified example, there would be at least a 10% tax savings ($400) on his contributions based on current combined tax rates, along with the fact that Ron could reinvest his refund and the money would be tax-sheltered for a long time.
Example 2: Wendy used to work full time but has switched to part-time and makes $35,000 in annual income. She wants to continue to save more for retirement. She expects to receive CPP and OAS in retirement, plus she holds $200,000 in RRSPs and has a defined benefit work pension plan with an estimated retirement benefit of $2000/month. Since her pension will be $24,000 ($2000 x 12) + $15,000 minimum for CPP/OAS, she is already earning $39,000 plus the minimum withdrawals she will be required to take at age 71 once she has converted her RRSP to a Registered Retirement Income Fund (RRIF). She will be better served to contribute to her TFSA this year as it is quite likely that her income in retirement may be higher than her part-time work currently.
Ideally, you should spread out your savings and contribute to both. The important thing is to start saving now and make regular contributions to a TFSA or RRSP. That way, you know you have all your bases covered when it’s time to retire.
Contact your financial advisor or book an appointment online to review your financial goals and discuss how TSFAs or RRSPs could fit your investment strategy.
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