TFSA vs. RRSP – The Dilemma

One month down! Are you meeting your goals, or already scrambling to catch up?

I can’t help you with that pesky stomach fat, but as tax season looms closer, it’s a good time to think about everybody’s top investing question: RRSP or TFSA?

Ideally, you are able to max out your contribution room in both accounts this year, but if this isn’t the case, then some planning is in order.

Each account has its own advantages, and understanding their basic mechanics will help you make the best possible choices. The big difference you need to know is that RRSP accounts help you avoid taxes now, whereas TFSA accounts help you avoid taxes in the future. With an RRSP, you defer taxation by depositing income in your account. These funds grow over the years, and usually you withdraw them and pay taxes on them through retirement. In contrast, you pay taxes on the income going into your TFSA now, but never get taxed on it again. The money is completely sheltered from the CRA, and can grow unhindered.

Several variables affect your contribution room for both accounts, but for now, all you need to know is three things. First, both accounts allow any unused contribution room from prior years to be carried forward indefinitely.

Second, the 2019 TFSA contribution room is $6,000, and if you have yet to contribute since inception of the program which was 2009, your maximum limit is $63,500.00. And finally, your RRSP allows you to contribute the lower of 18% of your previous year’s taxable income or a maximum of $26,500.00. Over-contribution to either account can come with hefty penalties, so double check your math and confirm the details with your wealth advisor.

There are a few considerations that come into play depending on your situation. If you are trying to minimize your tax burden, then an RRSP lowers your taxable income and may even earn you a refund. However, if you expect your income to go up significantly in the future, then it’s clear you should be funnelling all your savings into your TFSA. Yes you pay tax on it now, but you’ll never have to pay tax on it again.

Assuming you have no immediate cash needs and your marginal tax rate were to remain the same forever, both cases would play out pretty much the same way.

Making good choices is a long-term competitive advantage that costs you nothing. One way to ensure you manage your money with maximum efficiency is by scheduling a meeting with our Wealth Management Team. You’ve already got access to best-in-class asset managers, so make sure you take advantage of their wide breadth of investing knowledge.