Matthew Stewart |

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This has become one of the most common questions I receive from clients. “Should I invest in an RRSP or a TFSA. They both have their advantages but depending on your situation, one might be better than the other.

Before we get into the details, I always ask my clients, “Why are you saving or investing in the first place?” The answers range from retirement to a new house or other big purchase, wedding, emergency fund, vacation, etc… There is no wrong answer, just depends on what is important to you. So my first challenge to you is to decide why you want to save and invest.

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Now let’s dive into the details:

When should you use a Registered Retirement Savings Plan (RRSP)?

When you contribute money to your RRSP you create a tax deduction. Tax deductions are a good thing. Simply put, this means when you make an RRSP contribution you will pay less income tax that year. However, the downside is your money grows tax-deferred within your RRSP. So what this means is when you go to withdrawal your money out of your RRSP, that money will be taxed like income, just like your paycheque is today. Regardless of when you withdrawal from your RRSP, you'll eventually pay taxes on that money. Very important: to use the RRSP properly, you need to make sure that your tax bracket is high when you're contributing to it but that your tax bracket is low when you withdraw from it.

Here are a few simple examples of when you should generally invest in an RRSP:

  1. You're investing towards your first home, are making more than $50,000 a year, and plan to use your RRSP for a First Time Home Buyer’s Plan.
  2. You're investing for retirement, are making more than $50,000 a year and don't expect your income to grow significantly.
  3. You're investing for retirement and are making over $90,000 a year.

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When should you use a Tax-Free Savings Account (TFSA)?

TFSA offers more flexibility. When you contribute to your TFSA you do NOT create a tax deduction. This is a downside of saving and investing within a TFSA. However, the TFSA has a couple of huge benefits. One; the money you invest in your TFSA grows tax-free. Two; when you want to withdraw money from your TFSA you can also access your money tax-free.

The biggest challenge I find with the Tax-Free Savings Account (TFSA) is in the name. Many people treat it like a savings account and have their money sitting at the bank in savings or a Guaranteed Investment Certificate (GIC) earning them less than 1% interest. I wish the government would have named it the Tax-Free Investment Account (TFIA) because that is truly what it is. You can hold many different investments within your TFSA like stocks, bonds, mutual funds or investments funds, equities, etc… These investments can still grow tax-free and you can access the tax-free regardless of the investment within your TFSA. 

A few simple examples of when you should invest in a TFSA:

  1. You're investing towards an objective that is sooner than retirement (a home, wedding, vacation, car, etc).
  2. You're investing for retirement and are making less than $50,000.
  3. You're investing for retirement, are making more than $50,000, but expect your salary to go up significantly. Using a TFSA, in this case, allows you to use your RRSP contribution room later, when you're at a higher tax bracket, to take advantage of a greater tax deduction.

Year TFSA Annual Limit

TFSA Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500

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To put this chart in perspective, if you were over 18 years old in 2009 and haven’t utilized a TFSA, you have $63,500 of unused room to save and invest. For a couple, that is $127,000 of unused room to save and invest.

Pro tip: If an RRSP is right for you, consider maximizing your RRSP contributions to get a large tax refund and put that refund into your TFSA. That way, you have more money working for you and you'll have a mix of long-term retirement funds (RRSP) and flexible funds (TFSA).

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My last challenge to you is to just get started saving and investing. Does not matter if it is $25 a week or $25 a month, just start! After the first few weeks or month, you won’t even notice it missing from your bank account. You will adjust and learn to live on what is left. The other thing that will happen is you will start to get excited when you see your savings or investing account growing.

If you have any questions about which account is right for you. Feel free to reach out.

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Matthew Stewart