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rrsp season

Many Canadians are weighing their options as RRSP deadline looms, trying to decide between putting their money in a retirement plan or a tax-free savings account.Geoffrey Holman/iStock

Do I put money into my RRSP (registered retirement savings plan) or my TFSA (tax-free savings account)?

As the deadline for RRSP contributions rapidly approaches, many Canadians may be asking themselves that question as they decide where to invest money for their future or their retirement.

The answer to the question will depend on a number of factors, but Canadians should be looking at both options when making their decision, says Carol Bezaire, vice-president of tax and estate planning with McKenzie Financial.

"While the two savings plans have different features and benefits, they are designed to complement each other," Ms. Bezaire said.

"As a Government of Canada brochure states, while an RRSP is primarily intended for retirement, the TFSA is like an RRSP for everything else in your life."

In general, deciding where to make your contributions depends on your tax rate when you contribute funds and your tax rate when you withdraw them.

If your tax rate is lower when you contribute you are better to use a TFSA; if your tax rate is higher you are better to contribute to your RRSP because you will receive a tax refund.

Conversely, if you expect to be in a lower tax bracket when funds are withdrawn, an RRSP is probably a better vehicle for investments. If you expect to be in a higher tax bracket when money is withdrawn, a TFSA may be the better choice because withdrawals are tax free..

"For investors looking to stretch their RRSP contributions further, consider rolling your RRSP tax refund into a TFSA," Ms. Bezair suggested. "This can add considerable assets to your retirement fund."

Another strategy is to take money out of a TFSA with no penalty, put it into an RRSP for the tax deduction, and then take the tax refund and put it back into the TFSA, although the re-contribution only can be made in the year following the withdrawal.

There are some strong correlations between demographics and which savings vehicle Canadians use.

TFSAs tend to be more popular among younger Canadians while RRSPs are more popular among older Canadians who are closer to, or in, retirement.

"The older generation like boomers tend to have a long-term view of their investments," Ms. Bezaire said. "They have been working for a number of years, tend to have higher salaries and therefore can reduce their taxes through the deductions they get from RRSP contributions."

Generation X-ers (those born between 1964 and 1980), however, seem to want more flexibility in their work and investments, she notes. This generation tends to change jobs frequently, wants financial flexibility for education and other things, and seems to prefer TFSAs, which have no tax implications for withdrawing money, unlike an RRSP.

Many Canadians in the millennial generation – in their 20s – have borrowed for their education and generally are better off investing in a TFSA because they either can withdraw money to pay off debt or for other things without being taxed, and can put the money back in later.

Regardless of which vehicle they decide to use, statistics show that Canadians are not using either their RRSPs or TFSAs to full advantage, with contributions to either or both well below the allowable limits.

Ultimately, the decision about which savings option to use is based on individual circumstances.

"Each case is individual: one size does not fit all," Ms. Bezaire said. "They complement each other but people need to look at the options and choose what's right and best for them."

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.