What is RRSP?

A Registered Retirement Savings Plan is a savings plan registered with the federal government that one can use to save towards your retirement. Funds contributed to an RRSP are “taxadvantaged” meaning they are not subject to taxes in the year the contribution was made. Any income earned from the investments held in your RRSP will continue to grow “tax-deferred” as long as it remains within the account, tax is only charged when the funds are withdrawn

You should consider prioritizing RRSP, if;

  • Your income is over $50,000
  • You have enough to set aside for longer-term goals
  • You are looking to invest in foreign stocks; while TFSA and RRSP can both hold foreign stocks, the US doesn’t recognize TFSA as a retirement account, so you will be liable to pay 16 non-resident withholding taxes on your gains. This is not the case for RRSP

Which is better?

Both TFSA and RRSP provide productive ways to grow financially; they are both effective investment vehicles. Determining which one is best for you at a particular point in time depends on a number of factors

  • 1. Tax rate

If you are in a higher tax bracket when you deposit funds, than when you take it out, then it makes a lot of sense to use an RRSP. Taking the funds out when you are in a lower tax bracket means you will pay a lower amount in taxes. Conversely, if you withdraw the funds when you are in a higher tax bracket than you are currently in, then TFSA is the better option. If tax rates remain the same from when the money was contributed and when it was taken out, then both options will yield similar outcomes.

  • 2. Objective

Objective is another factor that you need to consider when choosing between these two. RRSP is best suited for long-term retirement goals, while TFSA is a better option if you plan on taking money out before your retirement. TFSAs are designed to be easily accessible before retirement. In addition, TFSA allows you to make withdrawals without paying tax on every withdrawal. Also, unlike RRSP, TFSA allows you to keep contributing for as long as you live. There is no age limit – you are not required to close your TFSA at a particular age.