There are a number of considerations to look at when choosing to deciding between an RRSP vs TFSA investment, including your current tax bracket.
A Registered Retirement Savings Plan (RRSP) is a tax deferral vehicle introduced by the government to encourage investors to save for their retirement. An RRSP has only become more important as company sponsored pension plans (also referred to as ‘Defined Benefit’) have all but disappeared over the last several decades.
An RRSP contribution is made with ‘before’ tax dollars. An individual receives a tax benefit in the year of the contribution but will pay taxes when the funds are ultimately withdrawn during their retirement.
The best way to use an RRSP is to make contributions when your personal tax rate is at its highest and make withdrawals when it is at its lowest. The highest tax rate usually coincides with a person’s peak earning years which is typically from ages 35 to 55. The lowest usually occurs during retirement.
An investor in their twenties or early thirties usually has a lower personal tax rate, so a TFSA may make more sense. The TFSA is also more flexible and funds can be withdrawn with no penalties.