It’s an old debate: Should you maximize your RRSP or your TFSA first? It depends on your personal situation.
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“The basic rule is simple: If your RRSP deduction rate is higher than your tax rate when you retire from your RRSP in retirement, maximize your RRSP before your TFSA,” explains Dany Provost, Director of Tax Optimization at SFL Expertise.
Specifically, the Registered Retirement Savings Plan (RRSP) is a retirement provision instrument. The Tax-Exempt Savings Account (TFSA), but also for other projects: emergency funds, upcoming holidays, back-to-school expenses, renovations, buying a car or even a boat.
A majority should still contribute to both plans.
“For every $2 you invest in your RRSP, you can use $1 in your TFSA,” adds Dany Provost.
Not for everyone
The Registered Retirement Savings Plan is less attractive to those who have a generous retirement plan or have modest retirement income and benefit from the guaranteed income supplement. Additionally, households with incomes less than $80,000 are proportionally more likely to contribute to a TFSA (33.8%) than an RRSP (20.1%), according to Statistics Canada.
For those whose income is substantial but insufficient to maximize both the RRSP and TFSA, the latter should theoretically favor their RRSP.
But it is not easy.
A study by Professors Luc Godbout and Matis Allali shows that the average unused taxpayer rights who contributed to both plans in 2016 were $55,800 for the RRSP and $33,900 for the TFSA among 35-30 year olds and 68,400 USD for the RRSP was the RRSP and $39,300 for the TFSA for the 55-59 year olds!
projects ?
Those who have expensive projects before retirement would rather save with the TFSA than go into debt with a credit card.
But if the loan rate to buy a car is lower (e.g. 2%) than the expected average return on your TFSA investments (e.g. 4%), contribute to your TFSA and take out a car loan . If the interest rate on that loan is 8%, use your TFSA to pay for the car (in whole or in part) in cash.
advice
- A line of credit (especially a mortgage) is used to replace the water heater or repair the roof, but not to meet your financial obligations in the event of a job loss. Automatically contribute to your TFSA with every payment for a few years to build an emergency fund.
- If your TFSA is used as an emergency fund or for large projects, go for conservative financial products: mutual funds or money market ETFs, guaranteed GICs that mature around the holidays or back to school.
- You can lose a lot if you don’t maximize your RRSP or TFSA. Example: A person who invests $10,000 at age 30 and invests $1,000 per year will have a $149,996 pot by age 65 if the average return is 5%.
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