Should I contribute to an RRSP or a TFSA?
Great question! And one that we get a lot. And the great news is, it has an easy answer:
It depends.
RRSPs and TFSAs are generally used for two totally different reasons …
RRSP (Registered Retirement Savings Plan) or TFSA (Tax-Free Savings Account): which is the right choice for you? Probably both! But it depends how you plan to use them.
Here’s a comparison on how we see the two side by side:
or download the comparison chart right here
But which will get me more money, an RRSP or a TFSA?
Generally speaking, if you’re earlier in your working life and saving for retirement, you can get a bigger bang for your buck with an RRSP, but with one condition …
… If you were to invest the same amount of money in the same investments, over time an RRSP can out-perform a TFSA – it generally gives people the chance to reduce their taxes in their highest income-earning years. Consider this example:
If this person chose to invest in their RRSP instead of their TFSA, they’d end up with about 8% more as a net amount. However, there is one big catch: what you do with your tax savings.
If they take those savings and put it back into their RRSP, the RRSP comes out ahead. If they get their return and blow it on beer and pretzels, then the TFSA starts to take the lead.
So how do you make sure you’re getting ahead? If you can put money into your RRSP through Payroll Deduction, you have a big advantage: you can set an amount every month that’s based on your budget – and unlike contributing at your bank, you get the savings back every month.
So, for example, $100 might go into your RRSP, but only $69.50 comes out of your account. For a lot of our clients, they’ll look at this and say,
“Well, if $100 is my budget, I have some room to play with. I’ll put $140 into my RRSP. $100 will come out of my account, but I’ll be putting the extra into my RRSP!”
This is how you get ahead in savings.