RRSP versus TFSA: Which one should you contribute to in Canada?

This is the age-old debated question:

WHERE SHOULD YOU PUT YOUR MONEY?!!!!

Well, here’s a quick guide:

RRSP in 2020

• 18% of income
• Maximum of $27,230
• You can be any age to contribute as long as you earn an income (a salary from a slip like a T4)

TFSA in 2020

• $6000 a year
• You must be 18 years of age to contribute

Assuming a 6% return from investing $1000 from RRSP ($750) or $1000 into the TFSA, from the age of 25 to 70, it looks like the RRSP very clearly comes out ahead right?

I mean you end up with $14,779 in the RRSP and $11,084 in the TFSA or a difference of $3595.

Not only that, even if you pay taxes (25% on the RRSP) when you withdraw it as $750, it will last 19.7 times, and the TFSA withdrawn as $1000 it will last 11.08 times.

Amazing right? Not so fast.

If time is a factor…

Then be careful – if you need the money in the short-term for whatever reason, you should definitely put it in the TFSA.

You can use it as an emergency fund of sorts.

The RRSP means you have your money LOCKED IN until you are retired. I mean, it’s not technically “locked-in” as in you can’t withdraw it unless it is an actual locked-in RRSP plan (I have one of these), but you are absolutely ill-advised to withdraw money from this unless you are in dire, DIRE straits.

So: RRSP = Long-Term and TFSA = Short-Term

..or liquidity…

Remember that the RRSP can be used for two things – Education or in a Home-Buyer’s Plan (up to a certain amount), so there’s that consideration.

If you do withdraw the money for these two options, remember you need to repay the amounts back in 10 years, and you do lose out on that lovely compounding interest growth while the money is out of the RRSP.

A TFSA is freer in terms of withdrawing money any time you need it without restrictions or rules.