Preet earns $80,000. Should he max out his TFSA or RRSP?

Q. Bruce, I am 30 years old and make $80,000 annually. Should I try to max out my TFSA first? Or my RRSP? And why? – Thanks, Preet

We have a winner!  The RRSP should come first in your case, provided I’m correct on a few important assumptions.

First, that your income will continue to grow.  You’re young and already earning a great income.  You may spend most of your career in the highest income tax bracket and so you’ll really benefit from the income tax deferral you get because of your RRSP contribution.  Your money grows and grows—even faster if you put that tax refund to work instead of spending it.  When you withdraw the money decades from now you will pay income tax, but at a lower rate because, presumably, you’ll have a lower income in retirement.

My second assumption is that your goal for the money is retirement savings.  If instead it is for a down payment on a house, or a car purchase, or something else in the short, the TFSA would be a better option.  The RRSP is a less flexible option than the TFSA, and for retirement savings that is a good thing.  You are less likely to pull the money out to pay for a kitchen renovation, for example, because you’ll have to pay withholding tax and you’ll lose the contribution room forever.  These consequences can help save you from yourself.

One final thought:  You can do a bit of both.  First, contribute as much as you can to your RRSP.  This will generate a bigger tax refund than you would have received otherwise.  Then you can take that refund and contribute it to your TFSA.

MORE ABOUT ASK BRUCE:

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• Should I over-contribute to my group RRSP?
• Is it safe to have $600,000 invested in GICs?
• Should my teens be investing with a discount brokerage?
• Should we funnel rental income into TFSAs?
• Can I use the Home Buyers’ Plan twice?
• When should you stop paying for life insurance?
• How a work pension affects retirement savings

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.