A very common question I’m asked is, “Should I be utilizing my RRSP or my TFSA for long-term saving?” In a perfect world, the answer is "both," however, most people do not have the financial flexibility to maximize both plans at the same time. If this is your situation, here are a few considerations to help make the decision easier:
- Timing: if you need to access your savings in the short or medium-term or any time before retirement, then they should be saved in a TFSA. Withdrawals from an RRSP are fully taxable as income and sometimes incur administrative charges. That said, please note that there are a couple of exceptions to this rule. First Time Home Buyers and adults going back to post-secondary school have options to access RRSP funds without triggering tax. However, these should be researched and fully understood before implementing.
- Tax Deduction: can you use the tax deduction? If the answer is yes, then you should save in the RRSP. Note that some people may be in a position where they'll be saving to an RRSP today, but due to circumstances, they will be withdrawing from the RRSP in the future at a higher tax rate. In these cases, you will need to evaluate if it is really better to use an RRSP today, or to save these funds in a TFSA or somewhere else. Business owners are particularly susceptible to this problem. Talk to your accountant about this if you suspect this might be a problem.
These two factors simplify the decision-making process, but there may be other factors specific to your situation that you need to consider. Where to save, either to a TFSA or RRSP, is a good discussion to have with your financial planner or accountant as you plan around your savings goals.
Maria Dawes, Portfolio Manager
Capstone Private Wealth