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Which is Better - TFSA or RRSP?


Every year we receive the same “classic” question from our clients, so which is really better? TFSA or RRSP?

The RRSP is better if:

  • The marginal tax rate for RRSP withdrawals will be lower than the marginal tax rate when contributions are made. In other words, you income will be less in the future when you withdraw money from your RRSP.

  • You are saving for emergencies. In other words, you won’t need to take money out of your RRSP unless you really MUST do that.

Note that if you are a self-employed, you must pay yourself in the form of salary in order to maximize your earned income for the purpose of creating or increasing your contribution room. Dividends do not count towards earned income calculation.

The TFSA is better if

  • You are in the lowest tax bracket, because it won’t affect your refundable or non-refundable tax credits.

  • The marginal rate for RRSP withdrawals will be higher than the marginal rate for contributions. In other words, your income will be higher in the

future and when you withdraw from the TFSA, it won’t affect your tax situation.

  • You are close to retirement age, and have little or no savings or pension. RRSP/RRIF withdrawals may cause loss of Guaranteed Income Supplement (GIS) or other benefits.

Further RRSP contributions will result in withdrawals which are high enough to cause a clawback of your Old Age Security.

The TFSA will be useful in some situations such as:

  • When there is no RRSP contribution room available

  • For savings goals such as a vehicle, appliances, down payment for a house, etc. The TFSA could be used instead of, or in combination with, the RRSP Home Buyer's Plan (HBP).

  • Seniors who are not eligible, because of age, to contribute to an RRSP

  • Young people just starting out, in a low tax bracket now, expecting to increase earnings and be in a higher tax bracket in a few years. At that time, the TFSAs could be transferred to an RRSP, making the contribution when the tax savings is greater. Make the transfer near the end of a calendar year, so that the withdrawal increases your TFSA contribution room sooner.

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