How to choose between an RRSP or a TFSA?

RRSP vs TFSA

In a perfect world you would not have to choose, you could maximize your contribution to both and resolve the issue that way. Unfortunately for the average canadian that is not an option. There are other demands on our money and as such we have to choose. There are a couple of variables you need to consider.

Length of goals

If you plan on accessing the money pre-retirement the TFSA is your main choice, otherwise RRSP withdrawals will be taxed on withdrawal and you lose one of their key elements. A TFSA is an ideal short term savings account, as long as you can withstand the temptation to access the money any time you want. The TFSA makes a good place for you to store your emergency fund.

Retirement

if you are saving for retirement you need to consider if your retirement income will be higher or lower than today. If you are a student working part time chances are your annual income is quite low and you won't get the maximum benefit from an RRSP contribution. If you are in your peak earning years then chances are your income will never be higher and the RRSP return will be considerable. But what if you already have a solid pension plan and your retirement income will already be significant? Then a TFSA becomes of interest.

Investments

Choosing between the RRSP or TFSA won't matter as much if you don't invest the money wisely. Leaving cash or GICs in a tax sheltered account is definitely not maximizing their benefits. The most important thing is to invest wisely, choosing products that match your investor profile and match with your goals for the future. Advanced investors will want to note that if they hold dividend-paying U.S. stock or US-listed ETFs these should be held in an RRSp, not a TFSA as the IRS will impose an additional 15% withholding tax. As a side note, also note if you are over 71 you can no longer invest in an RRSP, and you must be over 18 to open a TFSA so there are age limitations as well.