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What Should I Contribute to – an RRSP or TFSA?

Most Canadians have heard of investing- but there is still a lot of confusion on how to invest properly. One research study conducted by TD Bank Group shows “that 40% of people who don’t feel confident have never sought out resources to learn about personal finance or investing”. Thousands of Canadians do not know the difference between a  Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Sometimes, people have these accounts but don’t realize they need to then buy investment products within the account. The annual BMO RRSP Study shows that 62% of Canadians hold cash in their TFSAs, representing over 40 per cent of their account holdings. Holding cash is one strategy, especially as you get closer to retirement but for many people, too much cash in TFSAs and RRSPs is not effective.

To effectively manage your money and grow your wealth, it’s key to learn what these accounts are, and how to use them. This article will answer some of the most common questions about investing in your TFSA and RRSP.

One of the first things to consider is, should I use my TFSA or RRSP?

Both your TFSA and RRSP have great benefits because these accounts are meant for investing.

Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit (Investopedia).  It means you are putting your money to work for you.

However, each account has a different strategy depending on where you are in your life. If you are early in your career, and making under $50,000 using your TFSA may be more strategic. This is because the tax benefits for the RRSP are better suited for people making over $50,000.

RRSPs are tax-deferred accounts which means money you contribute into that account is exempt from CRA taxes the year you add money into the account. You pay the taxes when your income is smaller or non-existent in your retirement years.

Another way to determine which account is best is by understanding your goals and time horizons.

If your goals are 5-10 years out, a TFSA could be a better option. These goals could include travel, buying real estate, or paying for a wedding. The TFSA is more flexible than the RRSP on what you can use the money for and when you can take it out.

Alternatively, the RRSP was specifically designed for retirement. Though RRSPs were introduced in 1957 with the purpose of encouraging more people to save for old age and their long-term goals Canadians can also use funds from the account for the first time Home Buyers’ Plan or the Lifelong Learning Plan.

The Home Buyers’ Plan (HBP) is a program that allows you to withdraw from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability.

The Lifelong Learning Plan (LLP) allows you to withdraw amounts from your registered retirement savings plan (RRSPs) to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children.

Source: Canada.ca

In spite of all of there advantages, only 22% of tax filers contributed to an RRSP in 2018 (Source: Globe and Mail, Carrick, 2020.) This could be partially because people are using their TFSA instead of the RRSP or purchasing real estate as an alternative investing strategy.

In an ideal world, you would invest in both the TFSA and RRSP because they each have unique perks, however, for simplicity it’s logical for younger people to lean towards the TFSA over the RRSP.

TFSA	RRSP
Better for short to medium term goals Flexible withdrawals	Designed for retirement and longer term goals More effective for high income earners

Where can I open my TFSA or RRSP?

It’s common for people to open a TFSA or RRSP with their bank. But that’s not the only way to open these accounts. You could also use a robo-advisor, a discount brokerage or go through an investment firm.

Each of these routes has pros and cons.

• Working with a Bank

When you work with a bank, you get access to tellers, advisors, customer service representatives, sleek online platforms and resources. However, you also get sales reps who need to meet quotas, biased opinions, and limits on investment products. Traditionally, banks promote products with higher management fees.

• Working with a Robo-Advisor

Robo-advisors are on the rise with popular brands like Wealthsimple (who I personally use and really like), BMO SmartFolio, CI Direct Investing and others. Robo-advisors use an automatic and computerized approach to investing which makes the process very easy. There is less in-person contact and some platforms don’t have a lot of room for customization.

• Working with a Discount Brokerage

Investing with a discount brokerage like Questrade, Wealthsimple Trade, Scotia iTrade or others is a hands-on approach to investing. You need to create an investing strategy and implement it (mostly on your own). Since there is often less management, you can save on fees but there could also be more room for error.

• Working with an Investment Firm

Some people choose to invest through a firm like Investor’s Group, Edward Jones, Freedom 55 or others. These firms have financial professionals with different credentials who can help you such as:

• • Certified Financial Planners® (CFP) have fiduciary duty to look out for your best interests.
  • Chartered Professional Accountants (CPA) may specialize in taxes, auditing and other financial services.

When working with a financial advisor or professional, credentials can be confusing. Not every professional is obligated by law to look out for your best interests so do research and ask about the financial products they are selling you and how they get paid (could be commission or a flat fee).

My Favorite Books to Learn About Investing:

• Millionaire Teacher
• Unshakeable

How can I invest in my TFSA or RRSP?

Investing within your TFSA or RRSP requires buying securities and assets which could be one of the following:

• Index Funds
• Bonds
• ETF’s
• Mutual Funds
• Stocks

You create an asset allocation of what fits your goals, risk tolerance, and time horizon.

If you work with a firm, advisor, or robo advisor, they will be in charge of selecting the assets for you and keeping them balanced based on your goals.

If you choose the direct investing route, you will need to do research on Yahoo Finance, Moneysense, Market Watch, Motley Fool, Morningstar, The Wall Street Journal or other research sites to help you pick your assets.

When should I invest in my TFSA and RRSP?

Investing includes risks. It is possible to lose money, depending on how risky your investments are and when you sell your assets. If you have high-interest debt ie. credit cards, it’s common advice to pay that off before investing. If you don’t have an emergency fund (3-6 months of savings), build that before putting your money in the stock market.

After you have your emergency fund and a handle on credit card debt, you can start investing. It’s hard to “time the market” so jump in when you are ready and make regular and consistent contributions so you can take advantage of “dollar-cost averaging”.

Dollar-cost averaging is a strategy where investors buy investments on a consistent basis regardless of market fluctuations.

If you are struggling with having enough money to invest (or increasing how much you’re investing) and/or need help with paying down debt and building up your saving and emergency savings, I would love to help you. You can find out more about my Cash Flow Confidence program where I help you to do exactly this, so you have a lot more money available to invest because you’ve paid down your debt!

Should I use my TFSA or RRSP?