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TFSA vs RRSP - The Great Contribution Debate

Jan 05, 2021

We are into the first month of the year and those that regularly make retirement savings contributions are gearing up to make an allocation to their long-term plan. 

New clients often ask which type of account is better for them.  Should they contribute to their RRSP or TFSA?  My answer is that it depends.

Deciding where to contribute ultimately depends on what happened in 2020 with your taxable income. If you have the means to save, then a quick discussion about which option will benefit you in the long run should be had. An RRSP contribution is not a decision about last year’s income, it is really about creating a long-term retirement income stream. 

Readers, please note, when you read blog articles such as this and you see the word “income” always equate that to “tax is applied” (think RRSP/RIF, capital gains, employment income, business income, rental income). If you read “cash flow”, it’s entirely different.

Cash flow tends to be used with the understanding that no tax is applied (think TFSA, savings account, collateral in your primary residence).

There are a variety of taxable impacts one must consider first as opposed to blindly dumping money into an RRSP and ignoring the long-term tax consequences. Mishandled, RRSPs are tax bombs that give the gift of your money to the CRA when a single person dies.

Here are a few questions that I ask clients:

  • How much money did you earn in 2020?
  • If you are employed, did you make pension or group RRSP contributions this past year?
  • If you are self-employed, how much is your accountant going to knock your income down by this year?
  • If your income is above $60,000, is it a salary or a dividend? One creates RRSP contribution room and the other does not.
  • 3. How much have you already saved in your RRSP? I start to cringe when I hear of balances that exceed $500,000 as they can become future tax bombs if not de-accumulated correctly.
  • How much does your spouse have saved? Perhaps you should consider making a Spousal RRSP contribution instead.
  • If your TFSA is empty and the RRSP is creeping north ($500,000 is my suggested limit where I want people to start to cool it on contributions), then a discussion is well needed on which to prioritize and why.

When it comes to managing wealth, everything that I think about for a client always considers the taxable impact. As I tell my clients, the priority is the type of account you invested in, not necessarily what you invested in.

If you are a teacher, firefighter, police officer, nurse, or someone else who has and will continue to make serious pension plan contributions and it’s managed by OMERS, HOOP or OTPP or by a company like CN, please don’t make an RRSP contribution until you speak to a Certified Financial Planner. RRSPs tax hinder people in those industries more than they assist them.  TFSAs are the way to go.

If you are looking for advice on which direction to go in this year, please call our office at 1-866-550-6932 or contact us here.  We’re here to ensure that you make the most of your long-term retirement savings plan.

Taivi Tayler has been in the financial services industry for over 20 years. She specializes in estate planning and risk management solutions that are integrated into comprehensive wealth management concepts. Tax minimization is at the forefront of every client relationship while developing suitable retirement and financial planning strategies. Her primary focus is client financial literacy and she uses simple illustrations to teach retirees, business owners and high-income earners how to recognize current and future financial challenges while demonstrating that they have choice in how to better manage their wealth.


Learn more about how Taivi can make life's biggest financial decisions easy to understand at https://www.taylerinsurance.com/about.

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