Tuesday Tips: RRSP or TFSASubmitted by Foundation Private Wealth Management on August 13th, 2019
I follow on a prominent online forum for young investors, as it provides me a great opportunity to keep a pulse on the concerns of investors my age. Unfortunately, I can never really comment there as financial professionals are not to be soliciting clients. That said, someone recently asked a great question that, I believe, required a more in-depth response that what that forum often provides.
The question was, “I have a bit of disposable income for the first time in my life, all my debts are paid, and I want to start building up my savings. Should I start contributing to a TFSA, RRSP, or both?”
This is a question we are often asked, from people of all stages of life. Typically, there are a couple of follow up questions we ask that can quickly help you decide where to put your money.
1. Is there a chance you will need this money before retirement?
If the answer is yes, then the best course is to direct the contributions to your TFSA. There is no tax consequence to withdraw from a TFSA, as the withdrawals will not increase your income, and any money you can take out can be replaced at any point in the future, as early as the following calendar year.
This is not the case in an RRSP, as any withdrawals from an RRSP (except for a few instances, like for first-time home buyers) are included as taxable income (you will receive a T4RSP) and you cannot replace the withdrawals in the future, so the contribution room will be gone permanently.
2. Do you need the tax deduction to lower your income and reduce your current taxes?
In most cases, when you’re young and not earning into the highest tax bracket yet, it makes sense to defer your RRSP contributions to later years when the deduction will have more of an impact and your cash flows will allow for a larger contribution. With that, unless you need the deduction to lower your taxes today, it’s likely the best course of action to allocate your contributions to your TFSA.
In most cases, people just starting to build their savings early in their careers will start allocating it to a TFSA. They are the most flexible registered investment vehicle, offering the same tax-sheltering on growth that an RRSP provides, but giving more options if you need to access the capital and withdraw from the account. Furthermore, if you’ve built up your TFSA and decide later that the money would be better served in an RRSP, you can always redeem from your TFSA and use that cash to make a lump-sum RRSP contribution at any time, provided you’ve invested in liquid investments within your TFSA.
As with all financial decisions, it’s always best to consult with a financial professional, like us, as we’ll be able to help you take the best course of action for your personal situation. To book a no-obligation consultation, click here : http://www.foundationpwm.com/meet-us-0