As normally we say “it depends”. Since RRSP and TFSA are two very different registered accounts and possibly can either be fitter to a specific life situation.
TFSA is not for retirement!
TFSA is a way for saving some amount for any objective, not simply for retirement, and the cash in TFSA is all the more promptly accessible.
Main Idea to contribute to the TFSA is not to save money only, but instead to grow your investments tax free.
Is RRSP only for retirement?
RRSP is a great way to save and build funds for retirement, you can contribute part of your income (18%) to your RRSP account to get potential tax deferral benefits.
But this is conundrum for many :
Most people think that you can only access your money from RRSP in retirement. But in reality you can withdraw your funds any time from RRSP. However, when you take out any amount from RRSP that will be added to your total income for that year, and therefore your marginal tax can go up. For this reason, it’s considered to be a retirement saving account as usually people don’t have other substantial income in retirement age.
So in which one you should invest?
Again it depends on your :
- Investment horizon
- your income level
- and your goals
Example 1
If you earn 100k as an annual salary and want to save and invest about 20% of your income for the long term. It makes sense to contribute 18,000 (18%) to RRSP and invest.
This will reduce your taxes as it will be counted now only on 82,000 instead of 100k and CRA will return some tax amount by end of year if it was already paid based on 100k. And if you want to save more, than comes the TFSA account.
Tip: usually it’s a good idea to reinvest tax credit received for RRSP contribution back to TFSA.
Example 2
If you are young and your income is 40k and you anticipate that your income will increase significantly in future, in such a case it’s prudent to leave the room in RRSP for future use as your current tax bracket is lower. But you should still use TFSA for investment to save up to 6,500 a year.
How to decide between TFSA and RRSP you can decide based on below questions:
1. Is your current income low now but you expect it to grow in the future?
If answer is YES: Then invest in TFSA
If answer is NO: Then invest in RRSP
2. Would your retirement income be higher than your current income?
If answer is YES: Then invest in TFSA
If answer is NO: Then invest in RRSP
3. Would you need the money before retirement, for something other than the purchase of your first home or education?
If answer is YES: Then invest in TFSA
If answer is NO: Then invest in RRSP
4. In retirement, will you mostly rely on the government pension?
If answer is YES: Then invest in TFSA
If answer is NO: Then invest in RRSP
Big Misconception about RRSP!
There’s been too much fuss created about withdrawal flexibility from RRSP before retirement and affect on your Government funded pension, such as OAS (Old Age Security), GIS (Guaranteed Income Supplement) due to having higher accumulation in your RRSP account, which is quite a misbelief.
Because, first it’s allowed to take out some part from RRSP for your first home purchase and education.
Second, do you really need to wait to retire at 65? If you have a hefty amount accumulated in your RRSP account, you can always stop working or take sabbaticals in between or take partial retirement early and start withdrawing some amount early to live the life of your choice.
I believe if you invest right, RRSP can truly enable you to buy time before retirement.
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