Columnist image
Pattie Lovett-Reid

Chief Financial Commentator, CTV


The registered retirement savings plan itself is almost the same age as most retires.

Introduced in 1957, for years RRSPs were the vehicle of choice for Canadians to save for retirement.

Well that was then and this is now.

Today, more Canadians have used tax-free savings accounts (57 per cent) than those who have an RRSP (52 per cent), according to RBC’s Financial Independence in Retirement poll, conducted by Ipsos. And while there are likely many reasons for this, the flexibility of the plan  could be one of the most appealing.

If you haven’t opened a TFSA, here a few reasons why you might want to consider it:

1. The need for a flexible savings plan: Your intent might be to save for retirement, but the reality is you might need the money sooner. With a TSFA, if you need to withdraw money from the plan, you can put the amount withdrawn back at a later time and still be allowed to save the maximum each year. In fact, you can carry forward any unused contribution room indefinitely. This is a contrast to RRSPs, where  - if you take your money out - there will be a penalty by way of a withholding tax in addition to that contribution room is lost forever.

2. Looking to reduce taxes on investments that would normally be taxed at your highest marginal tax rate. With a TFSA you don’t get a tax break when making contributions. However, the upside is that you don’t pay taxes on investment gains in the plan.

3. Managing your marginal tax rate is enhanced when you use a TFSA. This results in more money in your pocket . If you think your marginal rate will be higher going forward, investments put into the plan have already been taxed. So, ultimately, when you take the money out, less will be paid in taxes. The opposite is true when you contribute to your RRSP. A higher tax rate over time increases the amount you pay in taxes when you withdraw the money.

Now, if you use both plans, consider taking money out of your TFSA first. The money is tax-free and your government plans such as the Guaranteed Income Supplement will not be compromised. It’s wise to delay withdrawing from your RRSP, as you will have to pay taxes on those withdrawals.

It really shouldn’t be an either/or when it comes to using an RRSP or TFSA, as there are clever ways to incorporate both plans into your investment strategy. RRSPs are a good choice for long term goals such as retirement and while TFSAs will also work. Meanwhile, some prefer the TFSA for shorter-term purchases like a home.

Bottom line: If you have been the savvy retirement saver and maxed out your RRSP contribution limit, the TFSA is the plan that can help you to keep on saving.