TFSA or RRSP – which to choose? @ Saver Queen

Tax Free Savings Account or Registered Retirement Savings Plan?

By Gail Bebee

Personal finance speaker and author of No Hype – The Straight Goods on Investing Your Money

E-mail: gbebee – at – nohypeinvesting – dot – com
Web: www.nohypeinvesting.com

It’s RRSP contribution season, but you would hardly know it. No print ads boasting about the great returns of mutual funds (no wonder; most lost bundles of their client’s money last year). No TV commercials about how fund managers travel the world looking for great companies to buy. Instead, the financial industry is selling Tax Free Savings Accounts (TFSA).

Canadians should look past the TFSA hype and make sure they invest their hard-earned money to best serve their own personal situation. That could be an RRSP, a TFSA or both.

Those who have the money to contribute to a TFSA ($5000 per year max) and RRSP (up to 18% of your previous year’s earned income) should in most cases do so and take advantage of two of the few legal ways to pay less tax.

If you have only enough money to contribute to one of these savings plans, the following are general guidelines to help you decide what to do:

Consider making an RRSP contribution and using the tax refund for your TFSA.

If your present and future tax rates will likely be similar, the TFSA is usually the better choice because it is more flexible.

If the money will be withdrawn from the plan when you expect to be in a higher tax bracket than present, a TFSA is probably the better option. E.g. saving up to buy a car

If your current income tax rate is higher than the rate you expect to pay when you need the money, an RRSP contribution likely makes the most sense. E.g. usually the case if the money is for retirement years

Those saving to buy a house or to return to school should investigate government programs which allow you to borrow money from your RRSP for a down payment on a first home (Home Buyer’s Plan) or for educational purposes (Life Long Learning Plan). In these cases, an RRSP contribution may be the better choice.

You can put money into a TFSA anytime. You’ll need to act by March 2, 2008 to make an RRSP contribution which creates a tax deduction for the 2008 tax year. So, take the time now to review your finances and determine, which the savings plan(s) best suits your situation.

Are you taking advantage of the RRSP, TFSA, or both?

6 responses to “TFSA or RRSP – which to choose?”

Karissa February 16th, 2009 at 15:46

Hmmm. I like the idea of putting my savings into an RRSP and then putting the increased refund back into savings. I’m very tempted to try this. Guess I’d better hurry up and make up my mind
Beef Up Your Piggy February 16th, 2009 at 17:08

Love this post and LOVE all the pictures. Thank you!
Barbara February 16th, 2009 at 18:34

If you’re young and currently are at the start of your career, and think you’ll be pulling in much bigger dollars in a few years, use the TFSA for now, and save up the contribution room so when you’re earning those big dollars you will have more room to get that tax deduction in your RRSP (you can even at that point take the money you’ve saved in your TFSA and put in your RRSP)
Saver Queen February 16th, 2009 at 21:27

Barbara, that was my thought as well. However Gail Vaz-Oxlade told me that you can roll over your tax benefit to a later year when you have a bigger tax load. That being said, I hesitate to lock my money away as a young person when there are so many big expenses ahead of me.
Saver Queen February 16th, 2009 at 21:28

Beef up your piggy – are you referring to the wing post? Glad you like the pics!
Andrea February 17th, 2009 at 12:24

My husband and I are planning using our TFSA’s for our emergency and car fund and then putting the rest of our savings in RRSP. The new saving account is great for us since I will have a pension, so we will try to max ours out eventually for retirement savings.

Thanks for the post!