Personal Finance

Is it almost always better to max out RRSP prior to TFSA contribution?

  • Last Updated:
  • May 27th, 2015 2:25 pm
Tags:
None
Deal Expert
User avatar
Apr 21, 2004
58648 posts
24637 upvotes

Is it almost always better to max out RRSP prior to TFSA contribution?

I understand some of you out there have made a killing on your TFSA accounts:
http://business.financialpost.com/perso ... =3d99-6730

but for a typical tax payer who make at least minimum wage, does it make sense to max out the RRSP contribution first, then use the refund to fund the TFSA account?


Also, because TFSA accounts are new, aren't most online brokerage TFSA accounts more limited than their RRSP counterparts?


======NOTE the advantages of a co-mingled Spousal RRSP: =======
I forgot to mention that for those thinking of opening RRSP's or have them and are married or will be getting married, consider opening Spousal RRSP's instead as there is flexibility trying to adjust portfolio balances depending on whose portfolio is growing faster and predicted income at retirement.

There's the 3 year attribution rule people should be aware about though.

Annuitant - person opening the Spousal RSP account and who will draw on the amount upon reaching retirement age.
Contributor - spouse of the annuitant and who can claim the deductions on the tax return

The great thing about this is either the annuitant or contributor can make contributions to the Spousal RRSP.

http://www.theglobeandmail.com/globe-in ... e17032098/

And the Spousal RRSP accounts have to be co-mingled so that the annuitant and contributor can make contributions to the same Spousal RRSP account:
http://canadianmoneyforum.com/showthrea ... SP-account
64 replies
Newbie
Apr 12, 2015
76 posts
34 upvotes
Shady side of Narnia
No beacuase the taxes you pay when you withdraw the rrsp are more costly than the 0 percent taxes you pay on your TFSA. All Canadians who save 10k or less per year should save the TFSA first. Tax free growth and tax free withdrawals.
popbottle wrote: I hereby and solemnly declare, with a touch of formality, and bits of pomp & circumstance, with a red wax seal, +1
Deal Expert
User avatar
Apr 21, 2004
58648 posts
24637 upvotes
tesomd wrote: No beacuase the taxes you pay when you withdraw the rrsp are more costly than the 0 percent taxes you pay on your TFSA. All Canadians who save 10k or less per year should save the TFSA first. Tax free growth and tax free withdrawals.
Thanks, you make a good point for those saving 10k a year and will possibly need some of it for emergency funding but that tax free withdrawal is once per calendar year and re-contribution isn't possible until the first of the following year, correct?

So for those who are saving a bit more than $10k/year, does it make sense to make a little RRSP contribution?

Also, don't most people start withdrawing from the RRSP or RIF when they are retired and no longer have income besides OAP and CPP? I understand there will be income clawbacks.

=====

As an aside, with riskier bets (hopefully not many are doing that), it seems RRSP is the way to go since if the investment blows up, at least one get's to use the tax deduction and won't have to pay taxes anyway, haha.

For those who do plan on opening or already have RRSP's, please look into opening Spousal RRSP's instead for the added flexibility of the annuitant or contributor being able to make contributions into the RRSP.
Sr. Member
Sep 29, 2007
515 posts
196 upvotes
Toronto
alanbrenton wrote: I understand some of you out there have made a killing on your TFSA accounts:
http://business.financialpost.com/perso ... =3d99-6730

but for a typical tax payer who make at least minimum wage, does it make sense to max out the RRSP contribution first, then use the refund to fund the TFSA account?


Also, because TFSA accounts are new, aren't most online brokerage TFSA accounts more limited than their RRSP counterparts?

If you plan to withdraw funds at a lower marginal tax rate, then contribute to the rrsp and then use the refund to even further the rrsp. Otherwise, contribute to the tfsa.
Deal Fanatic
May 13, 2005
5148 posts
5848 upvotes
Montreal
alanbrenton wrote: So for those who are saving a bit more than $10k/year, does it make sense to make a little RRSP contribution?
No, people saying you need income > $35000 for RRSP. For me, I would only contribute to RRSP if income > $60000.
In general, those earning a low income (under $35,000 or so) should favour the TFSA, while high-income earners are likely to be better off with an RRSP. For those earning a moderate income, however, it’s a coin flip.
Image

http://www.moneysense.ca/invest/rrsp/rr ... t-for-you/
Sr. Member
User avatar
Dec 27, 2007
511 posts
70 upvotes
tesomd wrote: No beacuase the taxes you pay when you withdraw the rrsp are more costly than the 0 percent taxes you pay on your TFSA. All Canadians who save 10k or less per year should save the TFSA first. Tax free growth and tax free withdrawals.
I agree with your answer, but your logic is incorrect. RRSP savings come at the outset, TFSA savings come at the end. As a result, if you are re-investing your RRSP tax refund into your RRSP each year, when it comes time to pay the tax later in life, you will be left with the same after-tax amount as the person who is withdrawing from the TFSA tax-free. This is assuming you remain in the same tax bracket. If you drop to a lower tax bracket when you withdraw from the RRSP, you could come out ahead of the TFSA person. Conversely, if you are in a lower tax bracket when you make your TFSA contribution and withdraw when you are in a higher bracket, you could come out ahead of the RRSP person.

If you are making minimum wage, use the TFSA. The main benefit of the RRSP vs TFSA is that you can withdraw at a lower tax rate later in life. If there is no tax bracket lower than the one you are in, your gain is limited.
Newbie
Apr 12, 2015
76 posts
34 upvotes
Shady side of Narnia
Legend24 wrote: I agree with your answer, but your logic is incorrect. RRSP savings come at the outset, TFSA savings come at the end. As a result, if you are re-investing your RRSP tax refund into your RRSP each year, when it comes time to pay the tax later in life, you will be left with the same after-tax amount as the person who is withdrawing from the TFSA tax-free. This is assuming you remain in the same tax bracket. If you drop to a lower tax bracket when you withdraw from the RRSP, you could come out ahead of the TFSA person. Conversely, if you are in a lower tax bracket when you make your TFSA contribution and withdraw when you are in a higher bracket, you could come out ahead of the RRSP person.

If you are making minimum wage, use the TFSA. The main benefit of the RRSP vs TFSA is that you can withdraw at a lower tax rate later in life. If there is no tax bracket lower than the one you are in, your gain is limited.
Ok I see your point but I also dont think many people are disciplined savers. I know I am but I also know people like me are a rarity in my life. So I guess is OP should invest in an RRSP if he's disciplined enough to inevst the rebate as well?
popbottle wrote: I hereby and solemnly declare, with a touch of formality, and bits of pomp & circumstance, with a red wax seal, +1
Deal Addict
User avatar
Feb 24, 2015
1032 posts
234 upvotes
Fort Mac, AB/Lambton…
Intricated wrote: I like this treatment on the question, with points #7, #3, and #8 more pertinent to (current) minimum wagers.
Yep. Definitely an excellent analysis.

I just feel like point #1 required more emphasis. Many people do not re-invest the tax refund received as a result of RRSP contributions, either that or they don't invest more in expectation of that return, which is required to compensate for taxes upon withdrawal. Given that most people are financially stupid, the TFSA is actually probably better because it's simpler, at least in regards to its taxation.
Deal Addict
User avatar
Nov 9, 2003
2689 posts
282 upvotes
A simple rule is if you plan to have a higher income when you retire put it on TFSA, if you think you'll have lesser income put it in RRSPs.

If you income right now is low, do TFSA until your income gets to a decent level banking the room

If you plan on making the same money in retirement as when you are working they pretty much break even in terms of having more to invest now in an RRSP compounding that greater amount and being taxed on it when you take it out vs having less money now, making less compounding benefit and not being taxed on it at all when drawing it out.

It really depends on how you realistically see your retirement
Deal Addict
User avatar
Dec 26, 2010
1736 posts
776 upvotes
Calgary
X360 wrote: No, people saying you need income > $35000 for RRSP. For me, I would only contribute to RRSP if income > $60000.




http://www.moneysense.ca/invest/rrsp/rr ... t-for-you/
If we only use the analysis of taxes, yes. There's more to it.

The analysis isn't so simple when there are a ton of government goodies and programs throwing money out to people. In fact, that income range between $30k-$50k are the ones that are most likely crossing those thresholds that would have them making a larger return on government programs. Simply lowering your income in those ranges can make you eligible for money. Ie: GST check, money for kids, etc.

http://www.financialwisdomforum.org/for ... p?t=102608
Indexer, non-yield chasing, low cost, broad based, as simple as possible investor.
Deal Addict
Oct 29, 2010
4475 posts
811 upvotes
In general, i would max RRSP as long as i have employer matching funds on top of it. Once the matching part is done, max TFSA.
You have so much more flexibility with TFSA that it's better for your peace of mind IMO.
Deal Addict
Nov 14, 2010
1090 posts
354 upvotes
flafson wrote: In general, i would max RRSP as long as i have employer matching funds on top of it. Once the matching part is done, max TFSA.
You have so much more flexibility with TFSA that it's better for your peace of mind IMO.
This is my exact thought as well.
Deal Expert
May 30, 2005
49009 posts
10302 upvotes
Richmond Hill
flafson wrote: In general, i would max RRSP as long as i have employer matching funds on top of it. Once the matching part is done, max TFSA.
You have so much more flexibility with TFSA that it's better for your peace of mind IMO.
Pretty much this.

If your employer doesn't match RRSP, I wouldn't even consider contributing to it unless your salary is extremely high, or you are close to retirement.

Sometimes, it is actually better to invest in a non-registered account than a RRSP account, especially if you are young, or your RRSP is already fairly large. This is because when you turn 72, your RRSP has to be changed into a RIF, which forces you to take out a certain percentage of your RRSP yearly. If you have a huge RRSP (say a 6-figure value), chances are you might pay more in taxes when you are forced to withdraw at 72 than if you never received the tax deduction at all. In addition, if you had invested in non-registered, only half of your capital gains are taxable, but in a RRSP, they are 100% taxable since they are treated as income.
Tons of things for sale!
Silver Coins and Numismatics | Heatware
Deal Addict
Nov 6, 2007
1373 posts
664 upvotes
North York
My husband saves $19000+ for RRSP every year so is it smarter to do TFSA instead? Or split it? He will be saving $24000 RRSP this year.

What do you guys do with your TFSA?

We aren't very good with numbers ... (he is in mid 30s)

Thanks
Member
User avatar
Oct 9, 2014
397 posts
49 upvotes
Winterpeg
Jon Lai wrote: Pretty much this.

If your employer doesn't match RRSP, I wouldn't even consider contributing to it unless your salary is extremely high, or you are close to retirement.

Sometimes, it is actually better to invest in a non-registered account than a RRSP account, especially if you are young, or your RRSP is already fairly large. This is because when you turn 72, your RRSP has to be changed into a RIF, which forces you to take out a certain percentage of your RRSP yearly. If you have a huge RRSP (say a 6-figure value), chances are you might pay more in taxes when you are forced to withdraw at 72 than if you never received the tax deduction at all. In addition, if you had invested in non-registered, only half of your capital gains are taxable, but in a RRSP, they are 100% taxable since they are treated as income.
thats a really good point. I've never looked at it that way. At the end of the day I guess the tax refund you get to reinvest is really where the big benefit lies
Deal Addict
User avatar
Feb 24, 2015
1032 posts
234 upvotes
Fort Mac, AB/Lambton…
Aritzia wrote: My husband saves $19000+ for RRSP every year so is it smarter to do TFSA instead? Or split it? He will be saving $24000 RRSP this year.

What do you guys do with your TFSA?

We aren't very good with numbers ... (he is in mid 30s)

Thanks
There are so many considerations. But, one consideration that may be applicable to you guys is the advantages of withdrawing from a TFSA. The dollar amount you withdraw from a TFSA increases dollar-for-dollar your TFSA contribution room. In other words, if you take $20,000 from your TFSA, then your TFSA contribution limit immediately increases by $20,000. This means you could, if you had a change of heart, immediately re-deposit that $20,000 into the TFSA. If you were to withdraw $20,000 from your RRSPs, then you never get that contribution room back. If you had a change of heart, immediately re-contributing that amount would very likely mean that you get taxed on those contributions.

Generally speaking, RRSPs are usually slightly better than TFSAs, but if you think that you'll need to withdraw funds from savings, then you should put some of your savings into TFSAs. The more you plan on withdrawing, the more you should put into TFSAs. And, in that light, TFSAs do function much better as a place to keep your emergency funds.
Deal Addict
Feb 16, 2014
1849 posts
454 upvotes
Brampton
Still in my 20"s and here's what I do:

- put $400/month & company matches 1.1: 800/month to my cpp
- 250/month to RRSP or $3000/year

Doing this for 3years now...

Never put anything into tfsa yet... Currently at 0
Deal Expert
Feb 29, 2008
30106 posts
5547 upvotes
Montreal
Aritzia wrote: My husband saves $19000+ for RRSP every year so is it smarter to do TFSA instead? Or split it? He will be saving $24000 RRSP this year.

What do you guys do with your TFSA?

We aren't very good with numbers ... (he is in mid 30s)

Thanks
If your husband is contributing 20k or more, he likely makes more than 100k a year putting him in the highest tax bracket. It's very difficult to recommend a TFSA, since the tax savings are so large in that bracket. I would suggest him maxxing his RRSP out, and then using any the tax refund, if any for TFSA contributions. If you have a decent job, you should max out your RRSP before contributing to a TFSA.
Deal Guru
Aug 5, 2006
10747 posts
7905 upvotes
Global Village
IMO it makes sense to max your tfsa every year 1st, unless you are in a high income bracket. As others have mentioned the tfsa gives you greater flexibility now and much easier access later. The trick, though, is to avoid the temptation of tfsa withdrawals unless there is an absolute emergency, let those funds grow untouched with the premise they are only to be used in retirement. And it will take more discipline to max your tfsa 1st each year, after all, $ used for tfsa is already taxed vs $ used for rrsp provides that short-term tax relief which should be resisted as a better investment for the future.
As to the question of what to do with the tfsa $ that depends on your willingness to accept investment risk, diversification is key, a combination of savings accounts, gics, bonds, stocks, mutual funds, etfs, etc can be used. Check out the couch potato investing site for ideas if you want to do it on your own or consult with a financial advisor.

Aritzia wrote: My husband saves $19000+ for RRSP every year so is it smarter to do TFSA instead? Or split it? He will be saving $24000 RRSP this year.

What do you guys do with your TFSA?

We aren't very good with numbers ... (he is in mid 30s)


Thanks

Top