For many years, Canadians have been taking advantage of tax-deferred investment growth in their RRSPs. However, TFSA provides Canadians with a valuable new opportunity to enjoy tax-free growth.

Should you contribute to your TFSA or RRSP? There is no right or wrong answer because both TFSA and RRSPs are valuable and beneficial. However, in certain circumstances, one may be better than the other. Choosing where to contribute your money to will depend on a number of different factors.

Factors your should consider:

1. Are you saving for a long-term or short-term goal?

RRSPs were designed to provide for a long-term goal retirement. When you contribute to your RRSP, you get a tax deducation which means withdrawals are taxable, unless they’re made under the Home Buyer’s Plan or Lifelong Learning Plan. 

TFSA has the flexibility to accomodate short-term goals. When you contribute to your TFSA, there is no deduction permitted for the contribution which means any amount can be withdrawn, tax-free, at any time for any reason.

2. Are you looking for an effective way to split income with your spouse who is taxed at a lower rate than you?

When you contribute to your spousal RRSP, this will reduce the amount you can contribute to your own RRSP. If you make any withdrawals from your spousal RRSP, it will be taxed if they are made in the same calendar year as a spousal contribution or either of the two subsequent calendar years. After that point, both the income earned on the first contribution and any withdrawals made by your spouse will be taxable.

TFSA is ideal when you want to split income with your spouse. You can give your spouse money contribute to their TFSA and any income earned is not attributed back to you. Any withdrawals by your spouse is tax-free and can be done at any time.

3. Do you want to maintain your eligibility for income-test federal government benefits? 

TFSA withdrawals do not count as income, so they don’t affect eligibility for income-teested federal government benefits such as the Canada Child Tax Benefit, Working Income Tax Benefit, or Employment Insurance benefits.

So should you contribute to your TFSA or RRSP? Your ideal strategy will be to contribute the maximum to your TFSA and RRSP. By contributing to both, you will maximum your tax savings. You can always contact a financial advisor for wealth management services like AWealth to help you decide on how you can allocate your contributions.