Should you contribute to an RRSP or TFSA for retirement?

The decision to contribute to an RRSP or TFSA can be viewed as an "and" decision rather than an "or" decision. You can contribute to both your TFSA and your RRSP but, in many cases, it may be more beneficial to contribute to one account over the other.

Let's take a closer look at some key factors to consider when deciding where to direct your contributions this year:

• Tax deduction. If you want or need a tax deduction in the current year, contributing to your RRSP may be the better choice because an RRSP contribution results in an income tax deduction, whereas contributing to a TFSA does not.
• Income now, and in retirement. If you’re in a higher marginal tax rate when you make your RRSP contribution, and a lower rate in retirement when you take a withdrawal, the RRSP can offer an additional benefit – the taxes saved upon contribution will be greater than the taxes paid upon withdrawal. In general, RRSP contributions are more beneficial to those with higher incomes, while TFSA contributions may be a better choice for those with lower incomes.
• Sources of retirement income. Since RRSP withdrawals are fully taxable, your RRSP/RRIF withdrawals could cause you to lose other income-tested benefits, like Old Age Security (OAS). However, TFSA income is entirely tax-free, is not considered income, and therefore does not jeopardize OAS or any other income-tested benefits.
• Family dynamics. If you have a spouse or common law partner, it could be advantageous to contribute to a spousal RRSP, particularly if your spouse or partner is expected to be in a lower tax bracket than you in retirement. A spousal RRSP strategy allows you to benefit from a tax deduction in the year your contribution is made, while the withdrawal is taxable to your spouse or partner, ideally at a lower rate.
• Career trajectory. If you're in a relatively low marginal tax bracket now and expect to be taxed at a higher rate in the future, TFSA contributions may be more beneficial in the short term. It can be advantageous to forego the deduction in your lower income years to benefit from a larger tax deduction in future years when your income, and corresponding marginal tax rate, is higher.

Before deciding where to direct your contributions, ask yourself the questions outlined above to make a more informed decision and decide which course of action makes the most sense for you. Ultimately, your decision depends on your goals, time horizon and your overall financial and tax situation, and should be discussed with your tax professional and financial advisor.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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