Should I start contributing to my RRSPs or max out my TFSA first?
Dear Cheryl&Mack,
I am at a crossroads.
Given my recent milestone of turning 31, I haven’t fully maxed out my TFSA. However, I am a homeowner.
Should I start contributing to my RRSPs or max out my TFSA first?
Best,
Financial Contemplator
Dear Financial Contemplator,
Congratulations, you sound like you’re in a great position financially!
Generally speaking, Registered Retirement Savings Plans (RRSPs) are better suited to individual earners who want to save for retirement.
RRSPs are great for saving for the long term because most people are in a higher income tax bracket during their working years.
So, an RRSP will shelter income during your life's high tax bracket phases. Plus, it’ll allow you to pay the tax when you’re in a lower tax bracket - aka when you’re retired.
Meanwhile, Tax-Free Savings Accounts (TFSAs) provide advantages for individual earners looking to save for short-term goals, like a vacation or a wedding.
However, the significant difference between RRSP and TFSA accounts is tax implications. RRSPs offer a tax deduction when you contribute, but you must pay tax when you withdraw the money.
TFSAs offer no up-front tax break, but you don’t pay tax on any withdrawals, including growth.
Remember that the true power of the TFSA comes when funds are allowed to grow tax-free within the account due to compound interest.
So, I’d recommend doing both if possible. Contribute a little bit to your RRSP and a little bit to your TFSA until it is fully maxed out.
Feel free to call us and set up a complimentary call so we can help with your specific needs, as this is generalized advice.