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Good to know: RRSP vs. TFSA (2019)

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The RRSP deadline is approaching (Wednesday, March 1) and 2019 brings an additional $6,000 of contribution room for Tax-Free Savings Accounts, bringing the cumulative maximum to $63,500. You’d probably love to maximize contributions to *both* investment tools, but most people can’t afford to do that. So what’s the best way to save if you have limited funds? Here’s the scoop:

Both RRSPs and TFSAs shelter you from tax as long as the investments are held within the account and stay in the account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund, but the money becomes fully taxable at your highest marginal rate when you take it out. The TFSA is the reverse: you don’t get a tax break on contributions, but you don’t pay tax on withdrawals either. So if you’re deciding between the two options, it’s really a question of whether to pay the taxman now or later.

In general, those earning a low income should favour the TFSA, while high-income earners are likely better off with a RRSP. If you expect your income to be higher in future years than it is in this current year, you’re usually better off saving your RRSP contribution room for your higher earning years.

Here’s a breakdown of the contribution numbers for a RRSP:

Table showing a breakdown of the contribution numbers for a RRSP, comparing this to a TFSA

When TFSAs are better

1. You are using the account for short-term savings (ie. a home renovation fund, or trip fund) and you are earning less now that you expect to earn later

2. You earn a low income (under $30,000)

3. You expect to be in a higher tax bracket in retirement

When RRSPs are better

1. You expect to be in a lower tax bracket in retirement

2. You earned a high income this year and can maximize ROI