Combining RRSPs and TFSAs to maximize retirement savings
By ATB Wealth 25 April 2023 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,” says Linda Lamarche, ATB Wealth Senior Financial Planning Specialist. “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 prematurely spend that money that was originally put aside for retirement, creating a shortfall in retirement,” says 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.
ATB Wealth® consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth (this includes all the above legal entities) does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. This information is subject to change and ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of the appropriate legal entity using ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. Professional legal and tax advice should always be obtained when dealing with legal and taxation issues as each individual’s situation is different.