RRSP or TFSA: Which is right for me?

Colin Younker, CPA, CA, FCA points out some important differences between these two savings vehicles

The Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA) are two government-run tools for saving for your retirement. The question often is, which is a better investment? There are quite a few differences between the two that may influence which one you decide to invest in.

           

The best option for most Canadians is to invest in both the RRSP and TFSA. However, the amount of funds available in most cases will require a choice between one or the other, or a partial contribution to each.

When deciding whether to invest in the RRSP or TFSA, certain factors should be considered:

Tax Rates

  • If both your current and expected retirement tax rates are in the top tax bracket, financially both investments are the same
  • If your retirement income is in the Old Age Security clawback range, the TFSA is a better option as the RRSP income increases the net income and the amount of clawback
  • For taxpayers who have two or more dependent children, the RRSP is the best option for those in the $25,000 to $95,000 range as they will receive greater child tax benefits; this is because the RRSP contribution decreases net income

 

Flexibility

  • The TFSA is a more flexible investment tool. If you withdraw funds from your TFSA there is no tax impact. If you withdraw from your RRSP the withdrawals are taxable
  • If you withdraw from your TFSA your contribution limit is reinstated the following year, allowing the funds to be reinvested; this is not the case with an RRSP
  • After you reach 71 there are mandatory minimum withdrawal requirements for RRSPs and you cannot make further contributions; these rules do not apply to the TFSA
  • If you feel you require a savings plan from which you want to withdraw funds at different times, the TFSA is the better option, although one should bear in mind that a TFSA is easier to withdraw from and investors may not be as diligent to reinvest funds

 

There are a couple of other factors to take into account when deciding between the RRSP and the TFSA. For example, if your employer matches your contributions to an RRSP then you should be contributing at least the maximum amount the employer will match. Also, the tax savings you realize from RRSP contributions should be reinvested for maximum savings.

The advice above may not apply or provide maximum benefits for all taxpayers, depending on their income and investments. Each taxpayer should talk to a professional advisor before making changes to your retirement savings plan.