Both RRSPs and TFSAs shelter you from any tax on the income earned if the investments stay held within the registered account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund, but the money becomes fully taxable when you take it out. The TFSA is the reverse. You don’t get a tax break on contributions, but you don’t pay tax on withdrawals.
So, if you’re deciding between the two options, the question boils down to whether you should pay the taxman now or later. That answer depends on your tax rate. If you’re in a higher tax bracket when you put the money in than when you take it out, it’s better to use an RRSP. Basically, your original RRSP contribution gives you tax savings now, and the taxman takes a smaller bite on withdrawal. However, if you take the money out when you’re in a higher tax bracket than you’re in now, it’s better to go with a TFSA.
There are always other considerations when deciding which option is the best fit for you. Make sure to have a conversation with your accountant or financial advisor.
- At the retirement age, depending on your income level, if take out your RRSP’s this increases your income even more and you run the risk of Old Age Security Clawback and loss of Guaranteed Income Supplement or other provincial senior benefits.
- RRSP or TFSA contribution room and limits should always be verified.
- Are the contributions funded from cash withdrawn from a corporation? It might not be to your benefit to invest outside of the corporation.
- You can invest in the same types of investments in either, but the RRSP contribution gives you some cash back on your taxes paid during the year that you can use to pay off debt, book a vacation or invest more.