Should I contribute to my RRSP or TFSA?
“So like… I’ve got some money saved up and I’m ready to start investing - do I do it in my RRSP or TFSA investing account?”
It’s probably one of the most popular Canadian personal finance questions I get. For good reason too, there are options, and all the terminology usually doesn’t help. When I was younger and my parents first explained to me, I remember scratching my head and yelling - just tell me what to do!
Time has passed, and it makes much more sense, I’ll share the 6 straight forward rules I was taught around making the choice.
Rules I was taught to decide on funding TFSA or RRSP:
If you currently make less than $50,000 a year, a TFSA should be funded first, since you’re in the lowest tax bracket. Reducing your taxable income won't really help lower your tax rate.
If you earn between $50,000 and $90,000, it makes the most sense to fund TFSA and RRSP equally until you max out your TFSA.
If you make over $90,000, your tax rate goes up to 40%, so the RRSP will typically benefit you most by bringing down your taxable income.
If you have a pension or deferred profit sharing plan (DPSP) through your employer that offers matching funds, prioritize that above everything else - because free money.
If you think your income will be higher after retirement, your money should go into your TFSA first - because it's better to pay the lower income tax rate on that money now, than the higher rate you'll pay when you take it out in retirement. (usually income would be lower in your working years than in your retirement, unless you become an entrepreneur, investor, business mogul or just a total boss)
If you think you might need your money before retirement age, TFSAs are more flexible and you can withdraw your money anytime. Withdrawing cash from your RRSP not only counts towards your income (more income tax), they will also be hit with a very steep withholding tax penalty. Though RRSP's do allow for one time penalty-free withdrawals for first time home buyers.
For myself, I always follow the rules of making my money work for me, and it can’t work for me if I’ve lost a lot of it to penalties or tax. I usually always try to streamline things and make them efficient - pay tax once, grow the money as much as possible, and receive no penalties.
Currently I’m stretching my money as far as it can go through investments based on my current lifestyle - I’m not going to withdraw my investments until I’m retired, so it doesn’t really matter which account I contribute to first. My goal has always been to fill my TFSA and RRSP accounts to the max and continue investing in unregistered investing accounts. If all goes well, the only time I would withdraw from my RRSP before retirement would be to take advantage of the First Time Home Buyers program if my wife and I decide to eventually buy a home (I see advantages and disadvantages to investing in real estate - I don’t believe the decision is as clear-cut as most believe).
Do you follow the same rules? What rules do you follow? Share with me!
Hope this helped clear that question up. If you have different questions, or more follow questions about this popular question… feel free to send me an email, hit me up on instagram or if you’re someone who prefers to not have social contact with other people (you know who you are), simply stay tuned for the next post :)
Hang in there.