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Time of the year again, rrsp or tfsa???

Every January, I always get this question from several clients. Which one should I contribute?


Choosing between contributing to a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) depends on several factors related to your personal financial situation and goals. Here are some considerations to help you decide:


Tax Bracket Now vs. Retirement:

  • RRSP: Contributions are tax-deductible, reducing your taxable income now. This is beneficial if you're currently in a higher tax bracket and expect to be in a lower bracket at retirement. Withdrawals during retirement are taxed as regular income (regular tax bracket)

  • TFSA: Contributions are made with after-tax dollars, but withdrawals are tax-free. This is beneficial if you're currently in a lower tax bracket and expect to be in a higher one at retirement, or if you prefer tax-free income in retirement.

Contribution Room:

  • RRSP: Your contribution room is based on 18% of your earned income from the previous year, up to a maximum limit. Unused contribution room can be carried forward.

  • TFSA: The contribution room accumulates each year and is the same for everyone, regardless of income. Unused room is also carried forward.


Flexibility of Withdrawals:

  • RRSP: Withdrawals before retirement can have tax implications and permanently reduce contribution room.

  • TFSA: You can withdraw money at any time without tax penalties, and the amount withdrawn is added back to your contribution room the following year.


Impact on Government Benefits:

  • RRSP: Withdrawals count as income and may affect eligibility for income-tested benefits and credits in retirement, like Old Age Security (OAS).

  • TFSA: Withdrawals do not count as income and do not affect such benefits.


Estate Planning:

  • RRSP: Funds are taxed as income in the year of death unless rolled over to a spouse or financially dependent child or grandchild. I have seen it more and more that my deceased client still has a sizeable RRSP in the year of death and get taxed at a high-rate.

  • TFSA: Generally transferred to beneficiaries tax-free.


Ultimately, the choice may also be influenced by other personal factors such as your risk tolerance, investment goals, and the need for liquidity. Many Canadians choose to contribute to both RRSPs and TFSAs to take advantage of the different benefits each offers. It may be beneficial to consult with a financial advisor who can provide advice tailored to your specific financial situation.

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