With the 2018 RRSP deadline of March 1 looming, Canadians looking to make good on their new year's resolutions to save more money are faced with the same question they were last year: TFSA or RRSP?
The short answer is "both," according to most financial experts. But depending on your income level, savings goals, and long-term plans, it may be best — or easier— to maximize one tool before the other.
The differences between the two
Dilys D'Cruz, vice-president of wealth management at Meridian Credit Union, describes TFSAs and RRSPs as "brother-sister products."
"Both are very good and you can't really go wrong with either," D'Cruz told HuffPost Canada.
A Registered Retirement Savings Plan (RRSP) is exactly that — it's money intended for your retirement. If you put money into an RRSP, that amount is deducted from your annual income — which could potentially mean money back from the government at tax time.
On the flip side, pulling money out of an RRSP means you're adding to your annual income for the year. A Bank of Montreal survey showed Canadians are increasingly dipping into their RRSPs for short-term needs.
It's important to note the money you take out is subject to a withholding tax, which could be anywhere from 10 to 20 per cent, D'Cruz said.
Money put into a TSFA, or tax-free savings account, on the other hand, does not count against your income, and is taxed normally — so no big return at tax time. However, any interest or returns made on the account are tax-free, and you can take the money out at any time without penalty, provided it's not the same year you put the money in.
Are your saving goals short-term or long-term?
By definition, RRSPs are for the long run.
Ratehub co-founder James Laird told HuffPost Canada the only thing an RRSP is good for in the short term is a down payment on a first home.
Laird pointed to the RRSP home buyer's plan, which allows first-time buyers to borrow up to $25,000 from their RRSP tax-free (or up to $50,000 for a married couple).
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TFSAs, on the other hand, are better for short-term savings goals like a vacation or a wedding.
"You do pay tax on the money before it goes in, so it's post-tax dollars that go in, but the return that you earn on it is tax-free," Laird said. "That's also a powerful and unique thing, to be able to earn a return on your earnings in a tax-free way."
Can you actually lower your tax bracket?
A major draw for the RRSP is that the money isn't taxed until you take it out, allowing you to effectively lower your income bracket (and thus your taxes) when you put the money in.
However, if you're finding it difficult to max out your TFSA contributions, you probably aren't making enough to lower your tax bracket.
TFSAs have a contribution limit is pre-set by the government. For 2018, the maximum contribution is $5,500. But for RRSPs, that number is determined by your income, and is cumulative over every year.
D'Cruz said if you're lower income, it would make sense to max out your TFSA, because you wouldn't get as big of a tax reduction putting that same money into an RRSP.
"But as you move up on the income side, it would likely make more sense to invest in an RRSP because you'd get a better tax savings, and you get the benefit of a tax return as well, but you are reducing your taxes," she said.
"If you're kind of in that middle, it also makes sense to max out if you have the money, to max out on your TFSA and then use your RRSP."
Laird said "most Canadians should be thinking about how to maximize both."
"These are two unique tax savings vehicles that we have, and it's not like there's another eight available, these are really two of two," he said.
Talk to someone
Both Laird and D'Cruz recommend talking to an advisor once you have an idea of what your savings goals are and what you want to achieve.
"So (a person) should be thinking about and educating themselves, but also speaking to people who do this for a living as well," Laird said.
D'Cruz said trying to figure out all your finances can be overwhelming.
"My biggest piece of advice is to go in and find an advisor that will actually sit down and listen to you and help you plan out to where you want to go, and you shouldn't be embarrassed," she said.
"Some people will come in and feel embarrassed if their financial situation ... I say if you're getting that sense from your advisor, get another advisor."
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