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Should you save/invest in a TFSA or an RRSP?

First, let's start with the basics. 

When contributing to a Tax-Free Savings Account you use after-tax dollars (you pay your tax upfront) but your contributions plus any interest earned can be withdrawn tax-free. 

When contributing to a Registered Retirement Savings Plan your contribution is exempt from tax up front (you pay no tax upfront), but upon withdrawing your contributions plus any interest earned are fully taxed.  


Based on the chart above you can see that if you expect to be in a higher tax bracket in the future (which most young people will be), the TFSA is the better choice. And if you're income, and/or tax rate will be lower in the future, the RRSP is your better choice. If your income, and/or tax rate will remain the same it doesn't really matter what you choose. 

This is an over-simplified answer, so here are some questions that could help you make your decision:

Do you expect that your household will have a greater income in the future?

  • If your answer is yes, you will earn more annually during future working years, or you expect to earn about the same going forward, the TFSA is likely your better option. If your answer is no, you expect not to make any more money and maybe even less, opening up an RRSP could be for you. 

Do you expect the tax rate to increase? 

  • We do not know this answer for sure, but most tax experts believe tax rates will increase over the next 20 years. If this is the case, it makes the RRSP less desirable because even if you earn less, your tax-rate may not decrease.

Are you planning to pass down money to children? 

  • I'm a believer in saving for the next generation. If you are too, here are some things to consider. When you pass away, all your assets (including investments) are deemed sold and considered income for you on that day. This will likely push your income for that year into the top tax bracket - which in Manitoba is currently 50.4%. This means that over half the money you had saved in your RRSP will be taken by the Canada Revenue Agency before being passed to your children. With money saved or invested in a tax-free environment - such as the TFSA or a Cash Value Account through an insurance company - the entire amount is passed on to your children. 

If you answered yes to these questions, choosing tax-free saving and investment strategies are the way to go. However, there are times the RRSP can be beneficial. 

1) Group RRSP through employer. 

  • When your employer matches your RRSP contribution, you are literally doubling your money every time you contribute. This is one of the greatest investments. My encouragement: contribute the amount your employer will match, not more. Use any extra to save or invest in a tax-free environment. 

2) Spousal RRSP

  • The Spousal RRSP is a really good option for households with only one income or a significant income disparity between the two working partners. The higher-earning partner can contribute to a spousal RRSP and will receive the deduction for that year. After 3 years, the lower-earning partner can withdraw from the Spousal RRSP at their own tax rate. 
  • Here's an example of how this is beneficial in retirement:
    • Bob earns $100,000 annually. Jane earns $0. They retire wanting the same $100,000 annual income they had prior to retirement. Had Bob only had an RRSP for himself, withdrawing $100,000 he would owe 43% in taxes. Had Bob contributed to both his own RRSP and a Spousal RRSP for Jane, they could each withdraw $50,000, owing a total of 33% in taxes.

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