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Am I better off making monthly contributions to an RSP or TFSA? Add to ...

The question

It is nearing the end of the year and like exercising my intention of making a contribution to my TFSA did not happen. I have instead been making monthly contributions to my RSP. Next year, should I direct my money into my TFSA instead? I like the deduction for the RSP contribution because I get a nice tax refund. What do you think?

The answer

The good thing about the contribution room for the TFSA and the RSP is that any unused allowance is carried forward for future years. There is not really a deadline per se. Since it seems that you are in the habit of saving money monthly, you should definitely keep it up. Whether you contribute the money to your RSP or TFSA should be examined by a financial planner or tax specialist. Since I don’t have your exact particulars, I will suggest a few options.

  • You continue to contribute to your RSP and then be sure to take the income tax refund and put it into your TFSA. This way, you are saving in both types of tax-sheltered accounts.
  • You split your monthly savings amount to contribute to both. Just look how the lower deduction will impact your final tax return. I’m sure you don’t want to have to pay an additional tax.
  • You contribute the monthly amount into your TFSA only and save up the allowable contribution room to the RSP. Then in the future, you make one large contribution to your RSP, lowering your income to pay no tax at all that year.

Remember that contributions to an RSP or a TFSA don’t have to be in the form of cash. It can be in the form or an already existing investment. (We refer to as "in kind".) If you have any non-registered investments such as stocks, bonds, mutual funds, GICs, etc., they are eligible to be contributed to an RSP or TFSA.

It is best to seek professional advice beforehand to avoid making over-contributions to either type of account.

Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can also send your questions to asknancy@rbc.com.

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