RRSP or TFSA Contribution?

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Contributing to a Registered Retirement Savings Plan (RRSP) can be good, but the same can be said of a Tax-Free Savings Account (TFSA).

How to choose between the two depends on your circumstances.

RRSP contributions are tax deductible so the higher your tax bracket the more beneficial it is to make a contribution.

If your income is increasing fairly significantly it might be beneficial to accumulate RRSP contribution room to be used later when tax savings would be more significant.

The length of time you plan to invest plays an important role. If there is a chance you would want to withdraw funds, then a TFSA would be more attractive.

Funds withdrawn from a TFSA are not added to your taxable income and can be reinvested later with no penalty. The only restriction is you have to wait until the following calendar year before putting withdrawn funds back in a TFSA.

Some Investors may be in the enviable position of being able to contribute to both a TFSA and an RRSP.

If this is the case and you are a long-term investor, you have an important decision to make on what type of investments should be held in either of these two separate accounts.

If you plan to hold both fixed income and equity investments it is often a good idea to hold the interest-bearing investments from fixed income in an RRSP.

It can make sense from a tax perspective to hold equities in a TFSA. The reason has to do with how the funds are treated when withdrawn from either of these two accounts.

TFSA funds withdrawn are not subject to income tax. The strategy in this case is to have the likely more profitable equity investments accumulating within the TFSA.

Investors have two attractive options on how to invest funds – a TFSA and an RRSP.