Combining RRSPs and TFSAs to maximize retirement savings
By Linda Lamarche, CFP - Senior Solutions Analyst, Financial Planning 8 March 2019 2 min read
Both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) can and should be used when investing for retirement savings.
Generally, RRSPs are used exclusively for saving for retirement whereas TFSAs can be used for both retirement saving as well as other investment goals.
The benefits of an RRSP
RRSPs work well for long-term saving because they come with strict rules that deter you from withdrawing your funds for non-retirement-saving purposes. If you do take some money out, you will lose that contribution room forever. You’ll also have to pay taxes on that withdrawal. These mechanisms are in place to encourage a more stringent savings plan that is more likely to stay in place until it’s time to retire and so you can reach your financial goals.
RRSPs can also benefit you before retirement by reducing the amount of taxable income, thus reducing your tax bill or even resulting in a tax refund. Any earnings you make on the growth of your investments in an RRSP are also tax-deferred. Learn more about how to make the most of your RRSP contributions.
When should you use a Tax-Free Savings Account?
“Contributions to a TFSA may make more sense if you are currently in a lower tax bracket,” said ATB Wealth Senior Solutions Analyst, Financial Planning, Linda Lamarche. “As long as you have room in your RRSP, the value of the TFSA can always be transferred into your RRSP at a later date, like when you are in a higher tax bracket and you can get more bang for your buck. In the meantime, the assets in the TFSA are growing tax-free.”
Having some of your retirement income provided from the assets in a TFSA would also be beneficial. If all of your retirement income is derived from your RRSP and other fully taxable sources, you might find yourself paying a high tax bill in retirement and it could also affect other income sources.
“However, when using TFSAs to save for retirement there is a psychological factor that comes into play. By their very nature, TFSAs were designed to be flexible and allow you to have access to your assets at any point in your life. For some people, this will create a temptation to spend that money that was originally put aside for retirement prematurely, creating a shortfall in retirement,” shared Lamarche.
A smart investment strategy would be to have both RRSPs and TFSAs used in conjunction with one another. This will provide you with tax efficient investing throughout your lifetime and better prepare you for any situation that might arise between now and when you retire.