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tax matters

When it comes to pensions, most Canadians don’t have a plan at work, so you should be saving for retirement through your registered retirement savings plan (RRSP) or tax-free savings account (TFSA). But which of these plans makes most sense? The truth is you should have both, and the plan you contribute to could change from year to year. Consider these guidelines.


If you’re in any of the following situations, contributing to a TFSA may be better.

Your tax rate will be higher in retirement. If your marginal tax rate (the rate of tax you pay on your last dollar of income) is expected to be higher in retirement, you’ll be better off contributing to your TFSA since the withdrawals later will be tax-free at a time when you’re facing higher tax rates.

You’re younger, and new in a career. Perhaps you’re a student, or a recent graduate. In this case, your income may be lower, and therefore your marginal tax rate is likely lower today than it will be in the future, making a TFSA a good option.

You’re on parental leave or a sabbatical. If your income is lower this year than it will be in the future because of a parental leave or sabbatical, your marginal tax rate is likely lower, and a TFSA likely makes good sense.

You’re a senior. You won’t be able to have your own RRSP beyond the year in which you reach age 71. It’ll have to be converted to a registered retirement income fund (RRIF) or an annuity by that time. So, if you no longer have an RRSP, a TFSA may be a great option if you’re still hoping to save money in a tax-sheltered environment.

You’re expecting supernormal returns. If you believe you’re likely to earn very high returns on an investment, it could make sense to hold it inside your TFSA if you can. This way, you’ll be able to sell that investment later, pay no tax on any capital gains, and withdraw those proceeds tax-free.

You’ll never need the assets. Withdrawals from a registered plan such as a RRIF are mandatory shortly after reaching age 71, but there are no mandatory withdrawals from a TFSA. So, if you don’t need the investments to meet your costs of living, a TFSA can make sense.

You’re saving for short-term consumption. If you’re saving for something that you intend to purchase in the short-term, the TFSA is a better solution since you won’t face tax when you withdraw the funds to make your purchase.

You want collateral for a loan. The assets inside your TFSA can be pledged as collateral for a loan, while RRSP assets cannot.


When should you consider contributing to an RRSP instead?

Your tax rate will be lower in retirement. If your marginal tax rate is expected to be lower in retirement, then the tax deduction from an RRSP contribution today will provide tax relief that will be greater than the amount of tax you will pay on the withdrawal later.

You’re in your high-income years. Once you’re established in your career and earning a higher income, contributing to an RRSP can provide a valuable tax deduction today, and is particularly effective if your marginal tax rate will be lower in retirement when you’ll face tax on withdrawals from the plan.

You receive a large bonus or taxable amount. In any year where your income is unusually high owing to a bonus or other taxable payment, your marginal tax rate could be higher than normal and an RRSP contribution can make good sense.

You’re inclined to dip into your savings. If you want to avoid the temptation to dip into your savings, an RRSP often provides a psychological advantage because of the tax cost of making withdrawals.

You need to set aside more money. If you simply need to save more, the amount you can contribute to an RRSP is typically higher than what you can put into your TFSA.

You also want to pay down debt. When you contribute to an RRSP, you’ll be entitled to a tax deduction, which often comes back as a tax refund that can then be used to pay down your mortgage or other debt.

Here’s the bottom line: Contributing to both an RRSP and TFSA is a wise move. But if you can only contribute to one plan, allow the life-scenarios above to inform your decision. Having both plans will provide flexibility later when making withdrawals.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at

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