The decision may not be as straight forward as you think.

In situations where you’re not able to maximize contributions to both your RRSP and your TFSA, how do you figure out which plan is the best one to contribute to for your situation?

Both RRSP’s and TFSA’s shelter you from tax as long as the investments are held within the plan. With an RRSP, you can deduct the contribution from your income, but the money is fully taxable when you take it out. The reverse is true of a TFSA: you don’t get a tax deduction on your contribution, but you don’t pay tax when you take it out either. So what the question really boils down to is whether you should pay the tax man now or later.

RRSP's Make Sense

This choice would be much easier if you could predict what tax bracket you’re going to be in years from now. Most people tend to live on far less income in retirement than what they earned in their peak working years, so RRSP’s make sense in a lot of situations. 

TFSA Flexibility

However, TFSA’s offer way more flexibility. Dipping into your TFSA never impacts your tax situation. Even more importantly, you’re not forced to convert your TFSA into a mandated income-producing investment at age 71. You could pay a large amount of tax if you had to draw from your RRSP in an emergency situation, so if you think you might need the money while you’re still working, the TFSA is the way to go.

Another consideration is contribution limits. RRSP contribution limits are based on your earned income up to certain maximums. TFSA contribution limits are not tied to earned income, but still have annual limits. Both plans allow you to carry your unused contribution room to a future year. 

Let Us Help

There are other factors to keep in mind when trying to decide between a TFSA or an RRSP. Our TCU Wealth Management Specialists can help you make this decision by analyzing your unique financial position and make a recommendation based on your goals. Please contact a TCU Wealth Management Team Member or book an appointment online to customize a solution for you.


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