RRSP and TFSA: Which one should you consider first?

This concept should be used when you do not have the cash flow to fully fund both your annual registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. It will help you decide which type of investment you should contribute to first: an RRSP or a TFSA. The better choice depends on your needs, as well as your current and future tax rates.

Generally, if your are likely to be in a lower tax bracket after retirement, contributing to an RRSP first is still the right option. However, if you will be in a higher tax bracket after retirement, you should maximize TFSA contributions first. In reality, when income allows, most people will eventually want to consider contributing to both to attain their long-term retirement goals.

Contributing to a TFSA provides you with a flexible way to earn investment income (including capitals gains) tax-free. Any unused contribution room is also carried forward to future years, which means your tax-saving potential grows annually. Plus, if you need to make a withdrawal, it’s tax-free and you gain back that contribution room, unlike those from an RRSP. 

If you expect to earn more income in the future, it may be a good strategy to contribute to a TFSA now, when they’re paying less tax, and contribute to an RRSP later when you will be subject to a higher tax rate and your RRSP contribution will generate more tax savings.

Lastly – just because it is called a Tax Free SAVING ACCOUNT does not mean it cannot be an investment account.  Talk to your advisor or myself which type of investments make the most sense in your TFSA.

Doug Frain, CFP