Should You Contribute To An RRSP or TFSA?

15 Comments

It’s not always easy to know if you should contribute to an RRSP or a TFSA, but there are some clear rules of thumb to follow. Which account you should focus on depends mostly on your income, but there are other things to consider as well.

Which is better: RRSP or TFSA?

The TFSA is better than the RRSP for most Canadians. However, if you can afford it, you should make use of both of these awesome tax-advantaged accounts!

The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) have a lot in common. They’re both registered accounts in which you can hold cash savings, GICs, stocks, bonds, and ETFs. They both have contribution limits, and both are designed to lower your income taxes.

The TFSA is more flexible than the RRSP because it can be used for anything. Where the RRSP is specifically designed for retirement (with a few loopholes that let you use it for a house downpayment or to go back to school), the TFSA can be used for anything.

While the TFSA is way more flexible than the RRSP, its contribution limits are much lower. Currently, you can only put $6,000 per year in your TFSA, but you can put up to 18% of your gross income in your RRSP. This means even though the TFSA is preferable based on its tax-sheltering potential, most people will end up with larger balances in their RRSP.

READ MORE: The TFSA vs The RRSP

Should You Contribute To An RRSP or TFSA?

What most people struggle with in their 20s not how much they’re allowed to contribute to each account, but which account they should contribute to in the first place. Here’s an easy suggestion:

  • If your income is less than $50,000, focus on maxing out your TFSA first and put anything extra in your RRSP.
  • If your income is between $50,000 and $70,000, contribute to both an RRSP and TFSA, while still favoring the TFSA.
  • If your income is greater than $70,000, you can afford to max out your TFSA, fund your RRSP, and even open unregistered accounts for additional savings.
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A ROUGH GUIDELINE of where to allocate your savings based on your income. These graphs are based on a savings rate of 15% for incomes under $50,000 or 30% for incomes greater than $50,000. As your income increases past $70,000, you will save less of a percentage in registered accounts and increasingly more in unregistered accounts.

Many Canadian personal finance websites and blogs will insist the rule is always to max out your TFSA first, before you start contributing to an RRSP. For many 20-somethings this is good advice, because their incomes are typically low and they want to have ready access to their savings. However, if your income is above $50,000, which account is best for you gets a little murkier. Below is some general guidelines for contributions to a TFSA, RRSP and unregistered accounts based on your income.

If your income is less than $50,000 per year, contribute only to a TFSA until it’s maxed out. 

There’s no point in contributing to an RRSP on a small income if you still have contribution room in your TFSA. It doesn’t do anything for your tax-wise, and you likely can’t afford to aggressively tackle RRSP contributions after you max out your TFSA.

It’s in your best interest to treat your TFSA as a retirement savings vehicle rather than a revolving-door savings account. Even though you can save for items like a house downpayment or a wedding within the TFSA, there’s no point. You don’t need to avoid taxes on your procrastinated spending! And you’re probably not being taxed much to begin with.

If you’re earning $50,000 or less per year, the annual TFSA contribution room essentially represents 14%+ of your net pay.

I’m a big advocate of saving at least 30% to 35% of your income, but that’s hard to do if you have a lot financial obligations. Depending on how high your expenses are or if you have debt, maxing out your TFSA may be enough of a challenge itself.

If you are lucky enough to have money left over for more savings after maxing out your TFSA, you can put it in an RRSP and claim the deduction in future years. Alternatively, you can save in unregistered accounts, particularly for future purchases that don’t contribute to your long-term wealth building, like a wedding or a car.

If your income is between $50,000 and $70,000 per year, contribute both to a TFSA and RRSP. 

With an annual income greater than $50,000, you can reduce your taxes by contributing to an RRSP, but the TFSA is still a great wealth-building tool. For this reason you should contribute to both of these accounts, with the intention of maxing out your TFSA and secondly building up your RRSP.

I started contributing to an RRSP when I was 25. My income was ~$50,000 and I found it was relatively painless to tackle both the RRSP and TFSA… mostly because my RSP contributions were mandatory through my employer. I continued to make small contributions to my personal RRSP throughout the 2 years I worked at my old job, but my primary focus was maxing out my TFSA (and paying off my $21,000 student debt, of course!).

How much you choose to contribute to each account is ultimately up to you, but your ultimate goal should be to max out both. If you succeed in saving 1/3 of your income at a $70,000/yr salary, this will be enough to max out both your TFSA and RRSP annually, with some leftover to catch up on missed years or begin building wealth in unregistered accounts.

If your income is greater than $70,000 per year, contribute to an RRSP before you contribute to your TFSA.

If your income is north of $70,000, savings should go towards your RRSP before your TFSA, but you definitely earn enough to tackle both. By contributing to your RRSP, you’ll reduce your income taxes and you can use that money you save to put into your TFSA. If you’re living well within your means, you probably even have money leftover after both the TFSA and RRSP to invest in unregistered accounts.

You can use the “TFSA vs. RRSP” tool on WealthBar.com to determine how to best split your savings between a TFSA and RRSP if your income is >$70,000.

For ease of bookkeeping, you might wish to max out your TFSA first in the first 1-2 months of the new year, and then spend the rest of the year focusing on your RRSP. Or you can allocate a monthly contribution to both accounts, and an unregistered account. Regardless, you’ll be able to do both. 

Individual circumstances can determine which strategy is best for you.

As a student that funded my own education, I’ve enjoyed a tuition credit for my taxes almost every year. By the time I finished off all the the tuition credits I had amassed for my undergraduate degree, I went back to school for my MBA, which earned me a whole bunch more.

Tax credits like these can change which account works best for you: if you have a lot of income tax advantages, you might not need more from contributions to an RRSP. Likewise, things like running your own business or having an unpredictable income can influence where you put your savings, since the TFSA is more liquid than the RRSP.

Your ultimate goal should be to max out both the TFSA and RRSP, and you should focus on ways to increase your income in order to do so.

Right now I’m contributing over $1,000/mo to each of my RRSP and TFSA. This will let me max out my TFSA this year, at which point I’ll redirect the funds to maxing out my RRSP. Because my income is >$70,000, the RRSP is a huge focus for me, but since I can max out my TFSA in less than 1 year I want to get that done as soon as possible. I will likely claim some of the income tax deductions for my RRSP contributions, but I think I’ll carry most over to future years, as I’m expecting my income to continue to increase.

Do you contribute to an RRSP or TFSA? What is your strategy for maxing out either or both?

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15 Comments. Leave new

  • How would you address the allocation if you also contribute to a defined benefit pension plan? I fall into the $60000 salary range and make regular contributions to my employer pension plan which are also increasing for this year. Would you allocate more to the TFSA or should I wait and see what my contribution limit is for my RRSP in 2015?

    Reply
    • More to the TFSA, since your contributions through your employer plan will count in your RRSP room. At the end of the year, you can top up either (or both) the TFSA/RRSP based on room you have left!

      Reply
  • Right now I am working on my RRSP because I have a great company match. By the time all is said and done I’m getting about 14% into my RRSP from mandatory contributions, pension matches, and a small RRSP outside of it to try to minimize my taxes. As soon as my debt is gone and my emergency fund is fully funded (by the end of 2015) I will be going to my company and adding the extra 5.5% to my RRSP to max out every year – I know that math doesn’t work out, but it’s because of the extra amount I’m putting away outside of work. Plus I have loads of contribution room left over right now.

    If I can keep current with my RRSP (18%), and then work on my TFSA, I think I’ll be in good shape. I’ve said it before and I will say it again: Having both the RRSP and TFSA is a great perk for young people who have two great retirement vehicles, but it’s a daunting amount of space. Like you said, if someone was making 50k, $9k for RRSP + 5.5k for TFSA – and that’s only to keep current, ignoring many years behind us, and it’s still roughly 30% of gross income. I’ll just keep plunking away at it, and I’ll get somewhere eventually.

    Reply
    • A company match is a perfect reason to put the RRSP before TFSA, regardless of income! I’m in the same boat with loads of contribution room leftover… but I’m going to make a big dent this year, so that’s motivating at least.

      I think maxing out both accounts will be a challenge for anyone that’s not earning a ton of money and living way, way below their means (which isn’t an easy combo). I’m afraid to see what my contribution room in my RRSP will be when I file my taxes this year… I’m guessing I’m not even halfway to maxing it out fml

      Reply
      • Bridget — Your site has been such a great help for me and the discussions in the comments make my visits all the more beneficial!

        My employer offers a company match program for RRSPs as well, but I make significantly less than $50,000 (less than $30,000 actually) and am still working on paying off loans and debt. The idea of squirrelling even a small amount away for decades in an RRSP seems crazy when TFSAs offer easy access; however, ignoring the company matching feels like saying “no” to free money!

        Should I take advantage of this opportunity ASAP or at least wait until I have my head above water?

        Reply
        • Don’t say no to free money! Definitely accept the match. If your income is still low, don’t claim the RRSP contributions when you file your taxes, just carry them forward to future years and then you can use them when you’re at a higher income!

          Reply
  • Thank you for this article. I made my financial goals for 2015 already, and included both my RRSP and my TFSA in my list, but am definitely putting more emphasis on the RRSP. I wasn’t sure if I was doing the right thing, but seems like I’m doing alright according to this. Lots of room for improvement on my end though, first step is to get my spending under control so I can actually save enough to keep up with the limits. Thanks for providing more information to help me learn!

    Reply
  • This is a great outline of how to decide where to put your money. We’re contributing solely to a TFSA right now, aside from our automatic pension contributions from work. Once we buy a house though, we’ll be contributing again to an RRSP (but mostly into the TFSA still!)
    Great post!

    Reply
  • This is great! I’m hoping that I’ll be able to start contributing to either a TFSA or an RRSP this year, and I was trying to decide which would be best. At first, I thought RRSP, but I have lots of tuition credits to use, so the tax advantages of an RRSP don’t really impact me. I’m starting to lean towards a TFSA for something more liquid… or maybe both, like you suggested!

    Reply
  • Here’s hoping the TFSA limited is increased to $10K for 2016 for savers like us. Too bad the Conservatives wasted all the surplus on income splitting.

    Reply
  • Great Post. I love contributing RRSP for all that sweet tax return and TFSA for flexibility.

    Reply
  • Well done, Bridget! Best article on this subject I have seen!

    Reply
  • Bridget – I reread this post today for a 2016 tax season refresh. I have a vague question that I’ve been asking myself when I have to choose between the TFSA and RRSP: If I anticipate a much higher income in retirement, should that impact my decision of where to prioritize savings now?

    I gross $60K right now and contribute all long term savings to both accounts, 50% each. BUT, I anticipate my income later in my career and in retirement to be north of $100K. I expect to live a more expensive retirement lifestyle than I do right now, and want easy access to my savings – is it logical to fund my TFSA as much as possible right now to avoid the tax hit later in life?

    My sister has a fat six-figure income and federal gov. pension to boot, and refuses to use an RRSP no matter how much I suggest it. She predicts her retirement income to be so plum, that she doesn’t want her personal savings inside a taxable account so she can be free to spend how she wants. She’s pro TFSA, and I can’t help but ask – Is she right?

    Reply
    • Hi Keith! If you expect your income to be higher in retirement than it is now, definitely focus on the TFSA! Remember the limit is back down to $5,500/year now, so if you max it out, put whatever is left over in your RRSP.

      If our sister is making $100,000+ she definitely has the income to put money in both her TFSA and RRSP! She should be putting $10,000+ into her RRSP each year. She can claim this when she files her income taxes to receive a refund, and then deposit that refund into her TFSA. Boom! Two birds with one stone! With an income that high it’s a shame she’s shunning the RRSP, it’s a massive tax shelter for high-earners. If she expects her income to be lower in retirement, she needs to seize the income tax benefits of the RRSP now.

      Reply

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