TFSA or RRSP?
What’s become one of the most difficult questions around retirement planning is the debate between whether you should contribute to an RRSP (registered retirement savings plan) or a TFSA (tax-free savings account.) Unfortunately, the answer is pretty personal, and depends on your unique situation.
RRSPs and TFSAs offer one thing in common, you don’t pay taxes on the growth inside of the account. However, where they differ is that with a TFSA you won’t ever need to pay tax on it, but with an RRSP you pay tax when you withdraw from the account.
So things are looking pretty negative for the RRSP, however, there’s a redeeming trait to that old workhorse. An RRSP offers you a deduction when you contribute to it, a TFSA, offers you nothing of the sort. So you save on your taxes when you contribute to an RSP. Which can lead to some great benefits and strategies.
Does the tax I save now benefit me more then the cost of those taxes later?
That’s not always easy to make a decision on when retirement is far in the future and a deduction sounds good right about now. However it’s important to think about your marginal tax bracket (the amount of tax you’ll owe on the next dollar you earn.)
If you can be fairly confident that your tax bracket will be lower in retirement then it is currently, and retirement is in the next few years, then it can make a lot of sense to contribute to an RRSP. Likewise if your tax bracket is lower now, or even the same as it will be in retirement, a TFSA is likely the better option.
There’s a lot of nuance that goes into making the right decision and whether a contribution to one or the other, or maybe even both makes the most sense for you. However the biggest concern is how it will affect your taxes.
The younger you are often the flexibility of a TFSA can be more beneficial because you don’t have to worry about paying taxes if you need to dip into your savings. However for big expenses like buying a home or going back to school there’s programs that make an RRSP a better choice.
If you’re not sure about how best to take advantage of your RRSP or TFSA, there’s help for that. You can book a complimentary consultation to find out more about how Inclusive Financial Planning can make sure you’re making the right choices this RRSP season.