Q:
Which is better – an RSP or a TFSA?
A: I don't love giving a vague answer like “It depends", but this question is kind of like the “Should I contribute to my RSP or pay down my mortgage?" question. That is – it's not quite as simple as one versus the other. Both RSPs and TFSAs are great account types, and they complement each other well. The RSP is still my go-to account for retirement savings, but the TFSA is a great option for short-term or medium-term goals.
Two scenarios where I would choose an RSP over a TFSA:
1) If you're in a high income tax bracket right now and expect your tax bracket to be lower when you retire, choose an RSP. The short-term benefit here is that you reduce your taxable income by the amount of your contribution, the result of which is likely a tax refund.
2) If you're not the best saver and are prone to using easily accessible money, then choose an RSP for long-term retirement savings. If you pull money out of an RSP, there are upfront withholding taxes, and the full amount of your withdrawal is added to your taxable income for the year. This is a pretty big deterrent for someone who wants to buy something and is thinking of pulling funds out of their RSP.
When would I choose a TFSA over an RSP?
1) If you're in a lower income tax bracket now, and you expect your income to rise prior to (or even in) retirement, then a TFSA is probably better for you than an RSP. You get a bigger bang for your RSP contribution buck when you're in a higher tax bracket. If you're in a low one, you aren't looking at as much of a tax refund, so the TFSA is going to win out.
2) TFSAs are great for specific goals like an emergency fund or a short-term to mid-term purchase like a new car. This is where RSPs fall short. They're accessible for the Home Buyers' Plan or the Lifelong Learning Plan, but apart from that, they're geared entirely for retirement savings. TFSAs are more flexible this way. So if you're saving for something a year or more out, let's say, and you have the contribution room, then you may as well shelter your money from taxes by using a TFSA.
If you'd like to submit a question about investing for Joe to answer, you can email it to: askanadvisor@tangerine.ca
This article is intended to provide general information only about RSPs and TFSAs. If you need further information about your specific circumstances you should speak to an investment advisor.
