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Someone asked a nearly unanswerable question recently – should they invest in an RRSP, a TFSA or do both?

It’s close to unanswerable because no other details were provided – age, debt levels, goals, current income, tax rate, expected retirement income and more. But let me try to reply, anyway.

First, any high-interest-rate debt should take precedence over the registered retirement savings plan or tax-free savings accounts. Balances on credit card and unsecured credit lines are an example.

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From there, let’s acknowledge that maximizing both the RRSP and TFSA is ideal. If pressed to choose one or the other without knowing someone’s personal details, I would vote for the TFSA. It’s quite possible you won’t get the best bang for your buck with a TFSA over an RRSP, but TFSAs are a savings and investing vehicle with a high level of customer satisfaction.

TFSAs offer an unbeatable combination of simplicity and transparency. You don’t get a tax break on contributions to a TFSA, but money compounds tax-free in these accounts and there’s no tax on withdrawals of your principal and investment or savings gains. A dollar in a TFSA is a dollar in your hand. People love that, especially in retirement. That’s because money withdrawn from a TFSA is not added to income and thus cannot trigger a clawback of Old Age Security benefits or the Guaranteed Income Supplement.

Contributions to an RRSP get you a tax deduction, which people also love. What they hate is having to pay tax on RRSP withdrawals in retirement. Those taxes in retirement can actually work out in your favour if your income and marginal tax rate after you leave the work force are lower than they were when you put money in the RRSP years earlier.

Still, I have heard a lot of complaints over the years from retirees about the tax they pay on RRSP withdrawals. Some of these retirees say they regret ever using RRSPs, which is more of an emotional reaction than a rational one.

The proper answer to the question of RRSPs versus TFSAs considers income, tax rate and a lot more. But if it has to be one or the other, TFSAs have a lot to recommend them.

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