February 2015

Monday March 2, 2015 is the last day to contribute to your RRSP and use the tax deduction on your 2014 taxes. As the deadline approaches I am often asked: is it better to add money to a TFSA or contribute to a RRSP? There are positive and negative aspects to both accounts. Both the TFSA and the RRSP benefit from tax sheltered investment growth. The ability to have your investment growth compound tax free cannot be understated. Even a modest growth rate when compounded tax free can produce significant gains over time. Tax free growth is a large benefit of both accounts.

The attraction of contributing to an RRSP, however, is that you receive an immediate tax deduction. In my opinion, the tax deduction is best viewed as a deferral of tax because you will have to pay tax on those funds when you withdraw them down the road. Although a TFSA does not have the immediate tax deduction, it is far more flexible and you can withdraw the funds at anytime without tax consequence. If you are in a high tax bracket when you contribute to an RRSP and a low tax bracket when you withdraw the funds, contributing to an RRSP makes sense. The difference in tax rates works in your favour; the larger the difference in tax rates the bigger the benefit. In addition changes in assets can create temporary spikes in income. The sale of a cottage, the sale of land or receiving a severance package from work are all common examples that create a bump in your tax bill. If you have a large tax burden an RRSP contribution makes sense, it can significantly lower your tax bill.

As a general rule when there is a temporary bump in your income or if you are in a high tax bracket when you contribute and you expect to be in a low tax bracket when you withdraw an RRSP contribution makes sense. However, if your tax rate at the time of contribution is lower or the same as your expected tax rate at withdrawal, it would make more sense to use the TFSA.

In an ideal world, if you have enough funds, contribute to both accounts. A note from experience, I work with a number of retirees and in most cases folks maintain their pre-retirement lifestyle in retirement. Often that means they are in a similar tax bracket in retirement, reducing the benefit of the RRSP. Although every case is different, if an individual only has enough funds to contribute to one account I often suggest the TFSA.

Clinton Orr B.Comm (hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.


This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.