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Should you invest in RRSP or TFSA?

Should you invest in RRSP or TFSA?

Both the TFSA and the RRSP are tax shelters, the main difference is in how they shelter taxation.

RRSP is an income tax deferral system. When you put money into an RRSP you get a break on your taxes for that amount. Think of it this way: the government wants to encourage savings, so they give you the RRSP to save money on. And because you're saving money now and not spending it, they're okay with not taxing you on that money now. They'll tax you when you take it out. This can be a big advantage if you are a high income earner expecting to have a drop in wages (due to retirement, for example). Put money in RRSP when your average tax rate is high, get a big break. Take it out and "earn" the money when your earnings are low, you effectively get a bit of a break on how much tax those dollars would cost to earn otherwise.

The TFSA is simpler than that,  you don't get a tax break for contributions, but you also don't get penalized for withdrawals. This can be a big deal if you invest $5k for example, and grow it through investments to $50k. Take that out of the tfsa and guess what, it's TAX free! It's a two-sided coin though- you also don't get to claim capital losses in the TFSA. TFSAs are still better for low to mid income earners because of the awesome flexibility. But if you earn a high income, or if you are very diligent with your money and you withdraw the money at the right time, RRSPs can be a better vehicle than TFSAs.

In my last post, I mentioned how low fees is really important to save on cost and earn more money. Therefore, I made a comparison of the best Canadian platform/brokerage available to invest in the market. 


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Readers of The Brown Investor who sign up for a Wealthsimple Trade account here receive a $10 cash bonus if they deposit and buy at least $100 worth of stocks within the first 45 days!

Quick note: This article is written just for educational purposes, don’t consider it as financial advice. Always do your own research and consult a professional advisor if needed.

Feel free to message me if you have any question or queries, I would be more than happy to answer :)

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