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).
- 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).
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.