With a TFSA, you can contribute up to $5,500 each year. Unlike an RRSP, though, this contribution is not tax deductible. However, your money grows tax-free while it remains in a TFSA.
When it comes to withdrawals, a TFSA is much more flexible than an RRSP: Withdrawals from a TFSA are tax-free, you aren’t required to withdraw from a TFSA if you don’t need to, and you’re able to recontribute any TFSA withdrawals during the next calendar year.
So, to go back to your original question, should you contribute to a TFSA or an RRSP? While the answer depends on each person’s unique circumstances, there are some general guidelines you can follow.
If you think you’ll need the money in the next couple of years for a car purchase, a home renovation, an emergency fund or a family vacation, a TFSA is the better option because of its greater withdrawal f lexibility.
An RRSP is the better choice if you are in a higher tax bracket now but expect to be in a lower one in retirement. The math behind this is that you’ll get a nice tax refund for contributing at a higher tax rate today while paying at a lower tax rate when you withdraw funds during retirement.
If you don’t think your tax rate will change in retirement, a TFSA may be the better choice. The rationale is that the tax refund you would get from an RRSP contribution today would be identical to the tax you would have to pay on withdrawal in retirement. Noting this equivalence, a TFSA may be more attractive given the fewer rules regarding withdrawals.