TFSA vs RRSP
I figured I’d cover one of the most asked questions, “Should I put my money in my RRSP first or my TFSA?”. For most Canadians, it is an interesting question to ask, but I think I have found the definitive answer the question on the order in which extra money should be used. I think the following explains it clearly:
Pay off your debt first¹
¹ – If you do not have debt please take the advice later on in this post.
Seems pretty straight forward doesn’t it? Maybe I am not being clear enough here, maybe I need a list of 10 Ways to Save ? I doubt it, you get my point.
Now that we have cleared up that one, let’s move on to the real question, which savings vehicle do you try to max out, if you are out of debt?
My opinion is that you should be putting as much as you can (within the guidelines and limits of the CRA) in your TFSA. If you have reached the maximum levels for your TFSA, then you can start thinking about your RRSP (which shouldn’t be too hard, given the low yearly allowances on the TFSA).
Why?
- When you look at the balances of your TFSA you are (in most cases) looking at money that you can have, and use (after brokerage fees or whatever similar costs might be involved). Depending on your portfolio, a TFSA is available in a short period of time, and when you transfer funds out of it, you can use that money without having to worry about paying taxes or the like.
- With an RRSP, you can withdraw money, however, on top of the brokerage fees you might pay, you are also going to have to pay the CRA. If you have made no money in the current year, the tax will be low, however, if you are John (or Jane) Paycheque, earning a normal income, taking this money out is going to cost a fair amount in taxes. The RRSP is there for when you have lower income (later in life) and thus taking money out of it will have you incur lower taxes (lower than when you were working). Yes, if you put money into an RRSP, you will get a tax refund, but, that “refund” will get repaid to the CRA when you take the money out of the RRSP (hopefully less than your refund initially).
What? Debt?
This is my opinion, I think there is no wrong choice here, maybe do both, but you must unburden yourself from debt first, then figure out how to save. Keep that in mind this RRSP season.
I have a Spousal RRSP. And my wife does not works.
In that case, when she withdraws later on, at what rate would her withdrawal be taxed.
As I said on a previous post, it depends on how long you left the money, how much your spouse makes, and how much is taken out of the Spousal RRSP. Read more from the CRA here.
I’m in the unique position of having access TFSA, RRSP, and RDSP. Obviously, as you know, there are juicy grants for the RDSP but am limited to the annual grant entitlement.
Currently, I contribute to my RDSP to cover the current year as well as 1 year carried-back (I still have prior years to catch up on and have about 2 more years to go), then contribute to my work group RRSP plan to get the free matching (50 cents for every dollar that I contribute up to max of 4% of my salary), then a bit of extra to my personal RRSP to try and build up my retirement savings for lost years and I am in a higher tax bracker than before. Any refunds that I receive goes directly to my TFSA. Then, about half year annual contribution limit to my TFSA. Basically, I’m building up my short-term savings with my retirement savings and taking full advantage of any free money out there.
Once, my RDSP is all caught up, the difference will then go to my TFSA for retirement purposes.
All this while we’re continuing to build up our personal savings for when we plan to expand our family in a couple of years.
So, I definitely a lot of competing priorities here but the balance is key.
This is an excellent strategy. The RDSP is the biggest bang (but for me, I can only put in $1000 that will get grants associated with it, but every little bit helps). Thank you for the excellent explanation.
Question specific for TFSA. If I pass away, my own TFSA can be given to my wife if she is the successor holder. If we have both TFSAs at 100% of the contribution room (without any excess), my wife can inherit all my TFSA’s amount and earnings without any tax obligation? In that case the TFSA will be hold independently as an account aside hers or all that money should be transfered to her account and benefit from the contribution exemption? If my account can still be hold as an independent account, will the contribution room increase over the years after my death?
I have no idea, but you can always check on the CRA web site say at:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/menu-eng.html
That seems to answer a few of your queries.
I always go for TFSA first then RRSP. TFSA is more flexible and easy to manage. RRSP can be used strategically as you mentioned later on before tax filing it due depending on the income level.
Cheers,
BeSmartRich
Hi BCM
Hope all is well. I agree with your conclusion ” I think there is no wrong choice here, maybe do both, but you must unburden yourself from debt first, then figure out how to save”.
The main issue with TFSAs IMHO is that they require discipline to be used as a retirement account, which quite frankly based on personal experience in viewing clients behaviour with RRSPs and TFSAs, many people do not have. So the first question in my mind is; do you have the discipline to leave the money in your TFSA to invest and grow. The next question is your marginal tax rate, if you are high rate, I still personally think a RRSP is the better choice, but then if u r high rate, you can probably contribute to both your RRSP and TFSA.
The tougher choice is for lower marginal rate people, if you have discipline, then a TFSA is probably the correct choice in many cases; however, if you lack discipline, you have to determine if putting money in a RRSP will act as an invisible barrier (with a potential tax cost to you, if your tax rate is higher in the future when you draw on your RRSP) or if you will just take the money from your RRSP, then the TFSA is the obvious choice.
So back to your conclusion, do one or the other or both, but if the money is for retirement, invest and don’t touch it.
Well stated good sir (as usual). ðŸ‘
Since I have a DB pension I now max out my TFSA before touch my RRSP. Honestly as long as you’re putting away money somewhere, you’re doing alright.
Yes, as long as you are saving it is a good thing.
I think saving is the wrong word… saving implies parking money for my definition, where it needs to be in motion, so I’d say as long as you are investing, which arguably implies an extra level of work 😉 – Cheers.
Touche!
I agree with your posts reasoning’s and have followed that path since TFSA’s were implemented. now that I don’t work, I am not adding any money to my RRSP, but actually have been contemplating taking money out, since I have no income…. That aside, our path has been debt, TFSA, RESP, RRSP then non-registered… Since I stopped working, it changed slightly in that I now use debt to invest to create an income, so we (I) always have an open LOC from which I invest, and then slowly pay down said debt as investments gain, and at the start of each year transfer from the non-registered account to the TFSA’s and RESP… As life changes we adapt, but everyone does not have the same goals, so what works for us might not for someone else… – Cheers.
And I think that is the other point is that each of us must choose our own path, as long as it works to build wealth.
RESP before RRSP, this made me think of this hypothetical, if you are in low income and have a kid, RESP first. If you get better income later, you can fill in RRSP (as low income, RRSP doesn’t make sense) and you still have the education grants. If you don’t get better income, roll the RESP into RRSP (and give the grant back, then get a refund).
This is aside from TFSAs though.
Fortunately, I am not in such a tight situation.
Yeh, if you are in lower income brackets, RESP and RDSP funding works much better for you, in terms of matching funds from the government, and lowering your taxable income really doesn’t come into play much.
Morning BC;
I can not quite agee with you on the TFSA vs RRSP question.
I have no debt except for my HELOC which I try to maximize. Funny how maximizing debt can actually work for you at times.
At any rate, I try to max out the RRSP first off in the year as 1) contributing in the first two months makes sure you have maxed out the previous year without any penalties for over contribution. 2) this all depends on the value of your RRSP but I try to get as much in there as possible at the begining of the year so as to profit from the increased dividends it will be paying me. Plus the dollar amount is significantly more than the TFSA so I like to kill that one first. 3) the amount allowed for the TFSA is fixed and therefor easily calculated – allowable yearly amount plus any withdrawals from the PREVIOUS year. For the RRSP, unless you have a fixed salary, the amount you can contribute can vary year to year. Now the CRA does give a $2K over contribution exemption but I just prefer to max out the previous year (2104) at the beginning of the year (2105)
As mentioned what you contribute to first depends on how much you are earning now versus your RIF when you retire and how much value you have in your RRSP at present. That will determine if it is worthwhile getting a tax return (RRSP) or putting your hard earned cash to work in a TFSA first.
I strive for a 10% dividend increase year to year. So far this year (2 months) I am up 18% in Jan and 29% for Feb. Looking good so far even with the dividend slashes in oil
RICARDO
I see your points, but the interesting side point is that for me, when I was younger, putting money into an RRSP was a good thing because I got maximum pay back on the tax refund, and taxes were much higher back then as well (added bonus). Given the small size of the TFSA I still think they are a good place to start saving in, but RRSP and then putting the refund in the TFSA could be another option as well.