Should I contribute to RRSP or TFSA?

RRSPs allow you to build wealth by deferring gains and income (and taxes) on investments until the funds are withdrawn or your RRSP is closed (age 72). This means you will save taxes when you contribute to your RRSP, but you will pay taxes at withdrawal. Ideally, funds contributed to RRSPs should not be touched until retirement, when people will generally be in a lower tax bracket than when the contribution was made.

If you are fortunate enough to earn a higher income during retirement, RRSPs will not be the best option for you. With TFSAs you contribute after-tax income and are able to withdraw funds tax free at anytime. So this offers the tax free growth of an RRSP plus tax free withdrawals, minus the tax savings at contribution. However, as the TFSA was only introduced in 2009, your contributions are limited.

Depending on your financial goals in the short-term (1-10 years) and long-term (retirement), one may be more advantageous than the other.

The TFSA would be a better option if you have short-term goals (1-10 years), like saving for a down payment on a cottage, saving for a car, etc. This will allow you to take advantage of the tax-free withdrawals in the near future.

If, however, you wish to save for retirement, it makes sense to contribute early to your RRSP and take advantage of time and compound interest, if you are confident your income will be lower in retirement.

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

Related Resources