RRSP vs. TFSA: Which is best for you?

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RRSP season kicks into high gear every year. The same question often comes up: should I invest in an RRSP (This hyperlink will open in a new tab) or a TFSA (This hyperlink will open in a new tab)? Well, that all depends on what you want to save for and what your tax rate is based on your taxable income. Each savings plan has its own features and advantages. We can walk you through these, so you can make the choice that's right for you.

Definitions: TFSA is short for Tax-Free Savings Account and RRSP for Registered Retirement Savings Plan. Both of these registered accounts are designed to help you save thanks to different types of tax incentives.

RRSP versus TFSA

Let's look at the main differences between the two plans.

Your goals

Looking to save for your golden years? Or maybe you want to get a head start saving for a cushy retirement in the distant future? RRSP is how you spell retirement savings.

Your kitchen needs renovating? Or better yet, a hot tub would look great next to your new patio for some quality outdoor living. Then think TFSA. It’s your go-to for those short- and mid-term goals.

Either way, the challenge is the same: saving without busting your budget or sacrificing your lifestyle.

Your contributions

There’s no age limit to set up a TFSA and make contributions. On the other hand, you can’t contribute to an RRSP after age 71.

TFSA annual contribution room is capped at $7,000 in 2024. The RRSP allows you to contribute much more. You're allowed to contribute 18% of your income, or up to $31,560 on $175,333 per year.

Last, but certainly not least, RRSP contributions are tax-deductible when you file your tax return. By lowering your taxable income, you can also enjoy considerable tax refunds, and may be able to increase your child benefit and family allowance. The strategy behind RRSPs is to contribute when your tax rate is higher and withdraw when it's lower.

Your withdrawals

You've saved enough money for your project? Withdraw the needed amount from your TFSA, anytime you like. And once your TFSA annual contribution room resets on January 1, start saving for a new goal!

On the flip side, resist the temptation to withdraw funds from your RRSP. It's simply counterproductive since each withdrawal is taxable.

Now that you understand the difference between an RRSP and a TFSA, what's the best way to choose?

Questions to ask yourself

The choice between these two savings vehicles depends on both your goals and your financial situation.

What are you saving for?

Are you looking to build an emergency fund? Choose a TFSA and withdraw money anytime. Are you saving for education, retirement or a first home? Both TFSAs and RRSPs are suitable.

First home: Read up on the new First Home Savings Account (FHSA) introduced in April 2023. This tax-free savings account is an excellent strategy to accumulate a down payment for your first home, combining the advantages of an RRSP, TFSA and HBP.

What's your income?

You need to consider your current and future income. Why? To determine your tax bracket so you can decide whether to pay income tax now (with a TFSA) or later (with an RRSP). Remember: contributing to an RRSP reduces your taxable income, while withdrawing money increases it.

In a nutshell, the more you earn now, the more taxes you save with your RRSP. Expecting to earn more in the future? Then you can also expect to pay higher taxes. And those taxes will apply to all your withdrawals, on both contributions and earnings.

Conversely, TFSA contributions aren't tax deductible, so they won't lower your income or generate a tax refund. But you'll never pay a dime in taxes on your withdrawals later on.

If you expect a marked increase in your income in the coming years, you can defer the tax benefits while contributing to your RRSP.

Does your employer offer benefits?

Some companies offer employer contributions to an RRSP or TFSA. Ask your employer about it, you wouldn't want to miss out. For one thing, your savings will grow steadily with zero effort. Secondly, your motivation to save is at its peak, knowing that your employer could double your contributions.

TFSA or RRSP? Bottom line, whichever you choose, both registered accounts provide tax incentives to help you save money over time. It's then up to you to decide if you prefer paying income tax now or later. To help you decide, work out a strategy with your advisor and save within your budget. While you wait to enjoy your retirement, go ahead and save towards as many projects as you can!