May 2022

“Should I contribute to an RRSP or a TFSA?”  That is the question.  As is often the case, the answer is “it depends on the circumstances.”
Whenever you’re paying tax at a marginal rate of at least 40% and can afford it, you should contribute to both. If you’re paying tax at a lower rate, you’ll need to estimate what rate the RRSP will be taxed at when it’s withdrawn.
You should still consider contributing to both if your marginal rate of tax is in the 30 – 40% range. It could also depend on your age. If you’re in your early 30s and contributing to an RRSP, it will generate income on a tax-free basis for close to forty years before anything has to be withdrawn! Relatively small amounts have to be withdrawn annually after you turn 71, with the remaining balance continuing to earn income on a tax-free basis. By comparison, the income earned in a TFSA will always be earned on a tax-free basis, but there’s no tax break when you contribute.
What should you do if your marginal rate of tax is at least 40% and you don’t have the means to contribute the maximum amount to both your RRSP and TFSA?  Consider contributing as much as you can to your RRSP, take the tax savings and contribute it to your TFSA. Both an RRSP and a TFSA are essential to building a healthy retirement plan.

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