Just give it to me straight, RRSP or TFSA?

Just give it to me straight, RRSP or TFSA?

Hey there! As Canadians, we have some pretty awesome investment options at our disposal. Today, we’re going to dive into a strategy that often flies under the radar but can have a big impact on your financial journey. We’re talking about why it’s smart to max out your Tax-Free Savings Account (TFSA) before diving into your Registered Retirement Savings Plan (RRSP).

First of all let’s talk about room.  How much can you contribute anyway?

TFSA Contribution Room:

Your TFSA contribution room is determined by the government’s annual contribution limit. This limit is adjusted each year based on inflation and rounded to the nearest $500. Unused contribution room carries forward, meaning you can make up for it in future years. To keep track, consult the Canada Revenue Agency (CRA) or your Notice of Assessment.

TFSA Contribution Limits by Year:

  • 2009 to 2012: $5,000 annually
  • 2013 and 2014: $5,500 annually
  • 2015 and 2016: $10,000 annually
  • 2017: $5,500 annually
  • 2018 to 2022: $6,000 annually
  • 2023: $6,500

RRSP Contribution Room:

Your RRSP contribution room is based on your earned income and previous year’s income tax assessment. Generally, you can contribute up to 18% of your earned income from the previous year, with a maximum annual limit set by the government. Unused contribution room carries forward, but withdrawals do not restore it.

It’s essential to keep track of your contribution room to make the most of these investment options. Check your annual Notice of Assessment from the CRA for detailed information. To optimize your contributions, consider consulting a financial advisor who can help navigate the intricacies of TFSA and RRSP planning.

So, you have money burning a hole in your pocket and you want to invest.  You’ve heard RSP’s are for retirement and it sounds like TFSA’s are a savings account.  I mean, it’s in the name right? The truth both should be used for retirement.  Both should be utilized when the tax benefit can be maximised.  But to drastically oversimplify it, you should always max out your TFSA before making a single RSP contribution,  and here’s why:

  1. Flexibility and Tax-Free Growth: Okay, picture this: with a TFSA, you contribute your hard-earned money after taxes, and guess what? The growth on your investments is completely tax-free! Unlike the RRSP, there’s no need to worry about taxes when you withdraw funds from your TFSA. It’s all about flexibility, my friend. You can access your money whenever you need it, without getting hit by any pesky tax consequences. By maxing out your TFSA, you unleash the power of tax-free growth, allowing your investments to compound over time and lay the foundation for your financial success.
  2. Protecting Your Future Tax Liability: Now, let’s fast forward to retirement. With the RRSP, you enjoy upfront tax deductions and tax-deferred growth, which sounds pretty sweet. But here’s the thing: when you start making withdrawals from your RRSP in retirement, those funds are subject to taxes at your future tax rate. Yikes! Here’s where maxing out your TFSA comes in clutch. By prioritizing your TFSA contributions, you create a tax-free income stream in retirement, reducing your dependence on taxable RRSP withdrawals. It’s like giving yourself a break and managing your tax burden like a pro.
  3. Handling Short-Term Goals and Emergencies: Life can throw some unexpected curveballs our way, right? Whether it’s buying a home, funding education, or dealing with unexpected emergencies, having a fully loaded TFSA can be a game-changer. With your TFSA in full swing, you’ve got a reliable stash of funds at your fingertips, and the best part? No taxes involved when you make withdrawals. So, go ahead and tackle those short-term goals and handle any surprises without messing up your long-term retirement savings. Talk about peace of mind!
  4. Maximizing Income-Tested Benefits and Retirement Planning: Here’s a neat trick: certain government benefits and subsidies are based on your income level. By carefully managing your income in retirement through TFSA withdrawals instead of RRSP withdrawals, you might just preserve your eligibility for income-tested benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS). It’s all about optimizing your retirement plan and making the most of the benefits available to you. Sounds like a win-win, right?
  5. When will this government generosity ever end? ;  The RRSP was originally designed as an incentive for Canadians to fund their own retirement savings.  The government said, if you start saving for retirement in our special program, we will give you a tax receipt to reduce your taxes in the year of contribution.  It wasn’t until 2009 that the Federal government added the Tax Free savings program. A Savings vehicle akin to the American Roth IRA. With that in mind, we are aware that the TFSA came in with one governments budget and it can just as easily be removed by another government’s budget.  In fact, the annual limit was $10,000 in 2015 and 2016 but reduced back to $5,500 by the government of the day in 2017. So of the many reason to contribute to a TFSA, one of the most pressing may be the uncertaintly of it’s future.  Now, I’m not saying the TFSA is here for a good time not a long time.  I’m just saying that it’s here now, lets use it!

There you have it, my friend! Prioritizing maxing out your TFSA before diving into your RRSP can be a game-changing strategy. The flexibility, tax-free growth, and protection against future tax liabilities make the TFSA a powerhouse in building wealth and achieving financial goals. While the RRSP remains important for retirement planning, giving your TFSA some love can provide you with greater financial security, short-term flexibility, and potential tax advantages.


Photo Credit: Wikipedia Commons

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