RRSP or a TFSA?

Question of the week: “Which one is better in terms of saving for retirement - RRSP or a TFSA?”

Questions like this are hard to answer without knowing the details about a person’s specific situation.

Let’s start with the basics.

• An RRSP is a retirement savings account offering tax-deductible contributions.
• A TFSA is a tax-free savings account. The withdrawals are free of tax.

The answer to the question is that generally, it depends on your marginal tax bracket.

• If you are in the 35-40% tax bracket or higher, it is usually better to use an RRSP to save for retirement.
• If you are in a lower tax bracket than 35%, a TSFA is typically a better choice.

The tax deferral from an RRSP isn’t completely a use-it-or-lose-it type of thing. On the contrary, there is a cumulative amount (18% of the previous year’s income) that you can put into the RRSP, with a limit of $31,560. If you don’t use that “contribution room,” it accumulates over time.

The decision is not as straightforward if you have unstable income. Suppose you are starting a business and expecting your income to grow over time. You may be better off deferring the contribution to the RRSP for a year when your income is higher (due to business growth or perhaps sale of a real estate asset) and leaving the money in the TFSA.

The decision to use a RRSP or a TFSA is impacted by several factors, many more than we’ve mentioned here in this newsletter. This commentary should not be interpreted as a recommendation for any one individual, but rather general guidance. If you seek guidance specific to your situation, set up a time to speak with us.

Sources

RBC Global Asset Management. RRSPs vs TFSAs: Understanding the differences between them. https://www.rbcgam.com/en/ca/learn-plan/retirement-resources/rrsp-vs-tfsa/detail