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The TFSA: Should I Invest in My RRSP or TFSA (Part 4 of 4)
Posted on January 21, 2009 at 4:08 pm
Filed Under Financial Planning, Investment Planning, Retirement Planning
With the recent development of this latest CRA initiative, the biggest question most are asking is “Should I invest in my RRSP or my new TFSA?”. Truth is, that’s a very fair and personal question all at the same time.
It’s personal mainly because of the fact that each person’s situation is very unique and that means that there really is no easy answer or one size fits all solution, except one. That one exception is based on whether or not you contribute the annual maximum towards your RRSP every year, because if so, your new TFSA is by far the next best place to put your additional retirement savings.
If you don’t fall into the small percentage of Canadians who max out their RRSP contributions every year, we need to make a couple of assumptions and look forward to the day you begin to redeem money from either account. In other words, your retirement. Take a look at a couple of the different scenarios below:
- If you expect your tax rate during retirement to be the same as it is today, the choice is really yours as to whether you invest in your RRSP or TFSA as the benefits will remain fairly equal.
- If you expect your tax rate during retirement to be lower then it is today, you are far better off to maximize your RRSP contributions first and use your TFSA to fund your additioanl retirement needs.
- If you expect your tax rate during retirement to be higher then it is today, then there is no question that you are better off to maximize your $5,000 contribution limit inside of your TFSA first, and then use your RRSP room to make up the additional savings you will need for your retirement.
Your Take-Away: As I mentioned above, there is definitely no one size fits all answer to the question we are addressing today. My suggestion is that you take an overall look at your entire portfolio, revisit and maybe even redefine your goals, and then decide which account is better for you in your specific situation.
In the end, your best bet is to try and take maximum advantage of both your RRSP and your TFSA. If you’re like most and do not have that luxury, why not invest in your RRSP and then put your tax refund back into your TFSA? Just a thought.
Until next time, have a Wonderful Wednesday!
Chris
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