Is it Better to Contribute to an RRSP or a TFSA?

Both Registered Retirement Savings Plans (“RRSPs”) and Tax-Free Savings Accounts (“TFSAs”) are important vehicles in helping to build your nest-egg before retirement. They each offer tax incentives and encourage you to invest for your future.

We are often asked if it is better to make a TFSA contribution or an RRSP contribution. While both vehicles have advantages, their differences make them more suited for different personal circumstances, income levels and goals.

The following table provides a quick comparison of the attributes of RRSPs vs. TFSAs:

Is it better to contribute to an RRSP or to a TFSA?

It depends on many factors, including your current income level as well as that of your spouse, if applicable, what you think your future income levels will be, your age and your cashflow goals and needs.

If you have already contributed the maximum amount to your RRSP, you should contribute the maximum amount permitted to your TFSA before depositing funds into your non-registered account.

If you have both RRSP and TFSA contribution room, then the following should be considered:

~ contributing to an RRSP and TFSA have almost equivalent results when your income levels and the marginal tax rate at the time the RRSP contribution is made is the same as your anticipated income level and tax rate when you withdraw from your RRSP.

~ Making an RRSP contribution is advantageous when your current income and marginal tax rate are higher than what you expect your income and marginal tax rate to be when you take money out of your RRSP.

~ if you and your spouse have significantly different income levels, contributing to an RRSP creates the opportunity to split income with your spouse down the road. You can make a spousal contribution, which means you will get the tax deduction now, and the income will be taxed in your spouse’s hands down the road. In addition, you may be able to take advantage of pension splitting once your RRSP is converted into a RRIF, which can result in further tax savings.

~ Making a TFSA contribution is more advantageous to you if:

• You might need access to capital in the shorter term. You can withdraw money from your TFSA tax-free, and the withdrawal will be added back to your TFSA contribution room in the following year.
• You are currently in the lowest tax bracket. If earnings are expected to increase and you will be in a higher tax bracket in a few years, make a TFSA contribution now and then use the amounts in your TFSA to make an RRSP contribution when you are in a higher tax bracket so that the tax savings are greater.
• It is anticipated that your marginal tax rate at the time of RRSP withdrawal will be higher than the marginal rate when you contribute. If your anticipated tax rate will be higher down the road, you will be negating any tax benefit you receive now.
• You are over age 71 and can no longer make RRSP contributions.
• RRSP contributions will result in withdrawals down the road which are high enough to result in a clawback of old age security.
• You are close to retirement age and have little savings or pension, so RRSP or RRIF withdrawals may result in the loss of the government guaranteed income supplement and other benefits which are based on earned income levels.

~ It is worth noting that even if you have higher income levels upon retirement, once you have maxed out your TFSA contributions, it may still make sense to contribute to your RRSP now. Instead of taking advantage of the tax deduction right away, you can save it for down the road to offset your higher income levels.

As you can see, a simple question does not always have a straightforward answer. The right answer for you will depend on your personal circumstances. Mirador can help!

With over 30 years of experience in investment management and wealth advisory services, we can help you decide whether an RRSP contribution or TFSA contribution is best for you to help build your nest-egg for retirement. We can help ensure your nest-egg is working for you now and through your retirement years to provide excellent income and comfortable stability in your portfolio values so that your retirement lifestyle dreams become reality. To learn more visit miradorwealth.com.