Since the TFSA became available to Canadians in 2009, there has seemed to be a long-lasting debate over the new tax free saving account and traditional RRSP investments. The misconception of this debate is that Canadians have to choose one or the other, but that is not at all the case. So which one is better?
They Are Both Great
We can back to the age-old debate of investing in RRSPs or paying off your mortgage. Some will suggest that investing in RRSPs is better than the latter, others will say the opposite. The truth is both strategies work very efficiently, and what’s more is they can actually work together. Say you invest in an RRSP and use your tax refund to pay off your mortgage. This is a tried, tested and true method of financial planning. With this in mind, let’s apply this same strategy to the TFSA and RRSP debate.
Why Not Do Both?
You want to invest let’s say $5,000 dollars. Here’s an excellent strategy. If you invest the $5,000 in an RRSP, you will generate a tax savings based on a marginal tax rate. Let’s assume that tax rate is 35 percent -- that translates to $1,750 in tax savings. You can now take that tax savings and put it into a TFSA. When everything is all said and done, you now have $6,750 from your original $5,000 investment. Now you can let the government contribute to your TFSA and get your money working in your favour.
Not Sure Where to Start? Choose the TFSA First
At the end of the day, the TFSA is more flexible. If you invest in an RRSP, you not be able to make withdrawals without getting nailed with a tax penalty. On the flip side, is you invest in a TFSA and choose to move it to a RRSP later, you’ll be free from any tax consequences.