Ah, the great TFSA vs. RRSP debate (or, for the American readers, the great IRA vs. 401(k) debate)!
This is probably going to be one of the shorter posts that I’ve written, simply because I think that the answer is clear. But first, some facts:
TFSA: A maximum of $25 500, post-tax dollars can be contributed as of December 2013 ($31 000 in January!)
RRSP: Varies depending on income. Personally, I have about $18 000 in unused contribution room. The amount contributed is not-taxed, resulting in an automatic refund on your yearly taxes.
I think that a lot of the debate stems from people’s quest for instant gratification. In 2010, when I did my taxes, I noticed that I could claim my RRSP and pension contributions for a large tax return. I did it and took the money saved and promptly deposited it into my savings account. Yay! Free money as a reward for saving/contributing to my retirement!
In reality, that money should have been contributed to my TFSA. Here’s my logic:
In 2009, I would have paid a tax rate of about 21% — instead, I socked the money away, tax-free until 2053 when the tax rates will be……?
And therein lies the issue. Nobody knows what the future tax rates will be like 40 years from now. Given the social reality of the Canadian population (a lot more old people than young people) and the fact that the governments are not shy to raise tax rates, I believe that it is entirely realistic to assume that the lowest tax bracket when I retire will be more than 21%.
Contrarily, if I had put my money into a TFSA, I would have paid 21% tax on it today and none in the future. Additionally, the money is solely under my control — no mandatory withdrawals or RIF conversions with a TFSA!
So please, please ignore complicated advice that you read online about when it’s best to make the switch from contributing from a TFSA or an RRSP (or vice versa) and just think for a moment:
Would you rather pay taxes at your current rate or at a potentially higher, unknown rate?
Simply put: Max out your TFSA, then consider contributing to an RRSP.