Should You Contribute To An RRSP or TFSA?

I know I’ve written about this before, but this is a topic that needs to be addressed regularly because the answer is always different depending on your age, income, and financial personality!

As of January 1, the TFSA contribution limit grew by $5,500 to a total of $36,500 for anyone over the age of 18 as of 2009. If you came of age after 2009, you have $5,000 to $5,500 less in contribution room for each year you missed. No worries though, you can contribute to a TFSA until you’re dying day, so you have a lot of time to catch up!

The RRSP limit is 18% of your gross income each year, to a maximum of $24,270 for 2014 (you would have to earn over $130,000 last year to get this). Since RRSP contribution is determined by your income, and the limit traditionally increases each year, how much contribution room you have is unique to you and your personal income history. You can begin contributing to an RRSP as soon as you get your first job, even if you are under the age of 18, but you have to stop contributions at age 71.

You can view your RRSP contribution room on your Notice of Assessment when you file your income taxes, or on the Canada Revenue Agency website. You can also check your TFSA contributions and room on the Canada Revenue Agency website, though these aren’t always up to date. It is worthwhile to keep your own records for each account to ensure accuracy.

What most people struggle with in their 20s, however, is not how much they’re allowed to contribute to each account, but which account they should contribute to in the first place.

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A ROUGH GUIDELINE of where to allocate your savings based on your income. These graphs are based on a savings rate of 15% for incomes under $50,000 or 30% for incomes greater than $50,000. As your income increases past $70,000, you will save less of a percentage in registered accounts and increasingly more in unregistered accounts.

Many Canadian personal finance websites and blogs will insist the rule is always to max out your TFSA first, before you start contributing to an RRSP. For many 20-somethings this is good advice, because their incomes are typically low and they want to have ready access to their savings. However, if your income is above $50,000, which account is best for you gets a little murkier. Below is some general guidelines for contributions to a TFSA, RRSP and unregistered accounts based on your income.

If your income is less than $50,000 per year, contribute only to a TFSA until it’s maxed out. 

There’s no point in contributing to an RRSP on a small income if you still have contribution room in your TFSA. It doesn’t do anything for your tax-wise, and you likely can’t afford to aggressively tackle RRSP contributions after you max out your TFSA. It’s in your best interest to treat your TFSA as a retirement savings vehicle rather than a revolving-door savings account, so even though you can save for items like a house downpayment or a wedding within the TFSA, there’s no point — you don’t need to avoid taxes on your procrastinated spending, you’re probably not being taxed much to begin with. This is one of the reasons I’ve opted to treat my TFSA as long-term, retirement savings rather than just general savings.

If you’re earning $50,000 or less per year, the annual TFSA contribution room essentially represents 14%+ of your net pay. I’m a big advocate of saving at least 30% to 35% of your income, but that’s hard to do if you have a lot financial obligations. Depending on how high your expenses are or if you have debt, maxing out your TFSA may be enough of a challenge itself. If you are lucky enough to have money left over for more savings after maxing out your TFSA, you can put it in an RRSP and claim the deduction in future years. Alternatively, you can save in unregistered accounts, particularly for future purchases that don’t contribute to your long-term wealth building, like a wedding or a car.

If your income is between $50,000 and $70,000 per year, contribute both to a TFSA and RRSP. 

With an annual income greater than $50,000, you can reduce your taxes by contributing to an RRSP, but the TFSA is still a great wealth-building tool. For this reason you should contribute to both of these accounts, with the intention of maxing out your TFSA and secondly building up your RRSP.

I started contributing to an RRSP when I was 25. My income was ~$50,000 and I found it was relatively painless to tackle both the RRSP and TFSA… mostly because my RSP contributions were mandatory through my employer (you can take a peek at my old paycheque here!). I continued to make small contributions to my personal RRSP throughout the 2 years I worked at my old job, but my primary focus was maxing out my TFSA (and paying off my $21,000 student debt, of course!).

How much you choose to contribute to each account is ultimately up to you, but your ultimate goal should be to max out both. If you succeed in saving 1/3 of your income at a $70,000/yr salary, this will be enough to max out both your TFSA and RRSP annually, with some leftover to catch up on missed years or begin building wealth in unregistered accounts.

If your income is greater than $70,000 per year, contribute to an RRSP before you contribute to your TFSA.

If your income is north of $70,000, savings should go towards your RRSP before your TFSA, but you definitely earn enough to tackle both. By contributing to your RRSP, you’ll reduce your income taxes and you can use that money you save to put into your TFSA. If you’re living well within your means, you probably even have money leftover after both the TFSA and RRSP to invest in unregistered accounts.

You can use the “TFSA vs. RRSP” tool on to determine how to best split your savings between a TFSA and RRSP if your income is >$70,000.

For ease of bookkeeping, you might wish to max out your TFSA first in the first 1-2 months of the new year, and then spend the rest of the year focusing on your RRSP. Or you can allocate a monthly contribution to both accounts, and an unregistered account. Regardless, you’ll be able to do both. If your income is over $135,000 your RRSP and TFSA contributions will be less than 1/4 of your net income, leaving you a lot of money leftover to invest in unregistered accounts.

Individual circumstances can determine which strategy is best for you.

As a student that funded my own education, I’ve enjoyed a tuition credit for my taxes almost every year. By the time I finished off all the the tuition credits I had amassed for my undergraduate degree, I went back to school for my MBA, which earned me a whole bunch more. Tax credits like these can change which account works best for you: if you have a lot of income tax advantages, you might not need more from contributions to an RRSP. Likewise, things like running your own business or having an unpredictable income can influence where you put your savings, since the TFSA is more liquid than the RRSP.

Your ultimate goal should be to max out both the TFSA and RRSP, and you should focus on ways to increase your income in order to do so.

Right now I’m contributing over $1,000/mo to each of my RRSP and TFSA. This will let me max out my TFSA this year, at which point I’ll redirect the funds to maxing out my RRSP. Because my income is >$70,000, the RRSP is a huge focus for me, but since I can max out my TFSA in less than 1 year I want to get that done as soon as possible. I will likely claim some of the income tax deductions for my RRSP contributions, but I think I’ll carry most over to future years, as I’m expecting my income to continue to increase.

How do you split your money between the TFSA and RRSP? What is your strategy for maxing out either or both?

Your TFSA is For Saving For Retirement

The Tax-Free Savings Account is the best saving and investment vehicle available to Canadians. To date, you can contribute up to $31,000 (with an additional $5,500 of room coming available for 2015), and all the interest, dividends, and capital gains you realize in the TFSA are totally tax-free. You can hold any investment vehicle within the TFSA, from a savings account to common stocks, and you can withdraw your funds without penalty at any time. The only thing you have to watch is over-contributing to the accounts, for which there are steep penalties.

Under the TFSA umbrella, I hold cash in a savings account, GICs, and a brokerage account in which I buy common stocks and ETFs. My balance between these vehicles essentially represents my risk profile, which means most of my money is in stocks rather than cash.

As I’m making my financial plan for next year and years going forward, I’m changing my investment strategy to match a changing perspective of my wealth-building plan. Since I’ve decided I’d rather get rich than simply stay afloat, the way I manage my accounts is paramount to my plan.

One of the first ways I’ve decided to maximize my net worth is to

stop using my TFSA as a catch-all account,

and start treating it like the tax-advantaged wealth-building tool it actually is.

In the past, I’ve never managed to max out my TFSA because I always needed the money for other things. I came close in 2013, but then used a ton of my savings for my MBA tuition, and then the contribution limit when up $5,500 and I fell even further behind.

I have the opportunity to regain all lost ground and max out my TFSA in 2015. 

It’s not an easy task, but since I’ve committed to increasing my net worth by $36,500 in 2015 – coincidentally, exactly the amount the TFSA contribution limit will be in 2015. Because I already have money in my TFSA, only part of my net worth goal will be going into this account, and the rest will be going into my RRSP. (Otherwise I would have loved to simply call 2015 “project max out the TFSA” but alas, it is not an empty account).

Once the TFSA is maxed out, I’m doubtful I’ll have any reason to take money out of it in the near future.

Goodbye, TFSA. You're not spending money any more.

Goodbye, TFSA. You’re not spending money any more.

Instead, I’ll simply focus on continuing to increase if/as new contribution room is added each calendar year, and redirect my cash-flow to my RRSP until that is maxed out too. I realized I don’t want to miss out on any gains by making withdrawals from my TFSA. Any at all. Because of the tax protection of this account, I want it to grow, and keep growing, without me sabotaging the compounding of my investments.

Previously I used my TFSA for any kind of savings: vacations, tuition, and my emergency fund. But every time I build those savings up, I took them out to spend on whatever I planned, and missed out on that money compounding further.

It has since occurred to me that I don’t really care if I’m taxed on the $15 my vacation savings earns in interest over the course of a year,

I would much rather simply pay that and keep my long-term savings in the TFSA.

I have unregistered savings accounts that I’m starting use for planned spending. For example, the joint savings account my fiancé and I set up to pay for vacations and our wedding next year. I also opened a margin account with my brokerage, so I can invest in stocks outside my RRSP and TFSA. This provides a lot of flexibility in how I manage my money, and lets me leverage all the available tax exemptions and deferrals while maximizing the bottom line of my net worth.

Thinking about my TFSA as retirement savings will take some getting used to. One of the reasons I always sung the praises of RRSPs is because there was such a tax penalty for taking money out of these accounts, I would never be inclined to make an early withdrawal. However, with the TFSA the government of Canada isn’t going to care if I liquidate my investments to go to Mexico, and as a result I have to be self-disciplined enough not to make early withdrawals. Like most things, I expect this to be easier said than done.

But the reasons to treat your TFSA as retirement savings are easy to see.

Unlike RRSPs, you’ll never pay taxes when you withdraw money from your TFSA, which means if you build up a mountain of cash over your working lifetime, you’re not going to lose as much of it to the tax man when you’re old and grey. One of the most annoying things about saving in an RRSP is knowing that some of what you’re saving is just to pay taxes. Think about that next time you pat yourself on the back for saving whatever percentage of your income! Kind of takes the wind out of your sails, but that annoyance is non-existent with the TFSA.

The second reason is if you change your thinking about what the money is used for, that will also deter you from making a withdrawal. In other words, you don’t necessarily need a real tax penalty to keep your fingers out of your bank account, knowing that money is for something other than spending will probably be enough to keep you from spending it. After all, if you have the discipline to save up for a vacation or another major purchase, you definitely have the discipline to not touch your money for a few years.

So now I’m counting the contents of my TFSA as retirement funds, and saving for things like vacations in unregistered accounts. I think I’ll be a lot richer because of it!

How We’re Saving $100,000 For A Down-Payment (P.S. I’m engaged!)

Greetings readers! I have some big news: My boyfriend proposed on September 21 and we’re engaged! He proposed after a 4km hike in the rocky mountains — and I used the car ride home to snapchat shots of the ring to all my cousins and call my parents.

me & my husband-to-be at my cousin's wedding this past July

me & my husband-to-be at my cousin’s wedding this past July

I’m still not used to saying “fiancé” but “my betrothed” confuses people and takes up too many characters on twitter.

We’re still deciding what kind of wedding we want — both of us have the same financial values, so it’s hard to think of spending tens of thousands of dollars on a single day. On the other hand, it’s hard for me to turn down the opportunity to throw a really big party ;) We haven’t set a date, but we’re thinking Fall 2015. Right now I’m in a rush to find a decent venue for that time. Many I’ve called area already booked for Sept/Oct next year, and I’m hesitant to go later because there will be snow on the ground.

I don’t know how much I’ll be blogging about wedding planning.

Firstly, because I know enough about the wedding industry to be an unwilling participant in much of the nonsense beyond a decent dinner and an open bar. I don’t care. I just don’t freaking care about bridesmaids and wedding colors and centrepieces and having a Say-Yes-To-The-Dress moment. This isn’t new: I’ve been singing this tune since 2011.

Secondly, because I’m so sick of reading “frugal wedding” posts (sorry recently married PF blog friends!) that I can’t justify contributing to the collection. There are hundreds, possibly thousands, of personal finance blogs that have done excellent posts on how to save money on your wedding. You don’t need me here, kids.

That said, I do have a lot to say about getting married, so I’ll be blogging about that soon.

We’ve been sharing finances since we moved in together, but now that we’ve committed to sharing a life together, we’re now sharing major financial goals. The first?

We’re saving six-figures for a down-payment on a home.

If you think that number is totally ridic, I don’t blame you. But I recently blogged about real estate prices where we live, and $100,000 is an appropriate sum to ensure we’re putting over 20% down. It’s important to pay for at least 20% of your home’s value in the down-payment to avoid insurance fees. By putting 20% down (or more, depending on the final purchase price), we’re ensuring a lower monthly payment, a more affordable mortgage, and starting with a strong equity stake in our first property.

How are we going to save such a large sum in 2-3 years?

The most obvious way is there’s two of us contributing, which means we each need to save $50,000. $50,000 is still a big number, but it’s not nearly as intimidating as $100K. Both my fiancé (god, still so weird to say that) and I are savers, so we’re not starting from scratch, and there are some tools to help us:

Each of us can withdraw up to $25,000 from our RRSPs under the first-time homebuyers plan to be used as a down-payment, giving us $50,000 together. I’ve set a personal goal to get my RRSPs to $100,000 by age 33, which means withdrawing $25,000 (that I have to pay back within 15 years) will not eviscerate my retirement accounts. Options like this are available all over the world, such as the Homestart first home buyers grant Perth, so it’s worthwhile to see what’s available where you live. It is very important to me NOT to have all my funds in one place, and that includes a home. Since I’ve already saved a significant amount of money in my RRSPs, my goal right now is rebalancing so I don’t have to sell more profitable investments, such as stocks, when I make the withdrawal under the first-time homebuyers plan. I’m hoping my RRSP withdrawal under the HBP will be primarily cash and a low-cost mutual fund, with the bulk of my retirement savings remaining in stocks and ETFs. I recently bought a 2-year GIC RRSP to plan for this.

This leaves only $25,000 each to save up outside of our RRSPs. Now, don’t get me wrong, $25,000 is not petty change, but with a 2 or 3 year timeframe it’s very manageable — mostly, again, because we’re not starting from zero. The TFSA contribution limit is currently at $31,000 with another $5,500 to be added for 2016. Since I withdrew a ton of money out of my TFSA over the past 1.5 years to go back to school for my MBA, I’m actually not sure if I’ll be able to max out my TFSA in the next 2-3 years since now I have to catch up and save up to the new contribution limits, but at least I can get over $25,000. Again, I am hesitant to sell profitable investments like stocks and ETFs or wipe out my Emergency Fund which I also keep in my TFSA, but it’s still the best account tax-wise for saving, so it’s better to put my down-payment fund money here than anywhere else.

When we buy a house and how much we put down will depend on a lot more than just saving up $100,000 — such as market fluctuations, interest rate changes, and even what city we live in (I think we’ll stay in Calgary, but I’d be open to moving to another major Canadian city if our jobs took us there). In the meantime, saving now means being prepared to take advantage of opportunities later.

What are your thoughts on our $100,000 down-payment? How much did you save for your first home? What are your strategies for putting money away?

Why You Shouldn’t Borrow To Invest In Your TFSA & RRSP

*Note: I’ve updated some of the wording in this post since it went live to replace the places where I said “borrowing on a margin” to say “borrowing to invest”. I was using the terms interchangeably when they’re not for these types of accounts: “Government regulations prevent you from trading with margin in registered accounts like RRSPs, TFSAs and LIRAs.” (because it’s dumb, as you will see in the post below). Sorry for the confusion! I had also typed ‘ever’ as ‘every’ so this definitely needed a proofread ;)

You can and should open brokerage accounts within both your TFSA and RRSP. I suggest the TFSA first, because if you’re a new grad just starting out, it’s unlikely your income is high enough to justify aggressively contributing to an RRSP — particularly if you paid for your education yourself and have tuition credits you can claim. For an understanding of how an RRSP and TFSA differ, here’s a quick cheat sheet:


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 The main difference between a TFSA and RRSP is how the funds in each account are taxed, particularly in a brokerage account. In a TFSA brokerage account, all dividends, interest and capital gains you earn on your investments is tax free. This is a huge advantage in this account because if you continue to reinvest dividends and interest, the compounding income will also be tax-free. In your RRSP, you’ll also benefit from compounding, however you will be taxed on all these gains when you withdraw the funds with the exception of borrowing under the first-time Home Buyer’s Plan or the Lifelong Learning Plan. To learn more about withdrawing from your RRSP, check out this post: Ways To Use Your RRSP For Things Other Than Retirement.

A seasoned investor might understand that using leverage like cash borrowed on a margin for trading is a quick way to grow you money. After all, if your investments increase in value, the more you’ve put in, the more you’ll get out. However, if your investments lose money,  twice because you still have to pay back what you borrowed. Taking this risk on accounts that have contribution limits is idiotic. If you lose even part of your investment, you never get that contribution room in your TFSA or RRSP back. Which is why I suggest…

Don’t borrow to invest in your registered accounts!

Borrowing to invest can turn very expensive, very fast. Depending on where you get the funds to invest, the total borrowing cost could vary from 3% on a line of credit to 18%+ if your funding it with a credit card (I don’t even want to go into how stupid that is).

This means that when you borrow to invest, you need the stock to earn at least 3% to 18% just to break even, and even more if you want to make a profit!

I don’t think it’s unreasonable to earn 3%+ on a stock, but shooting for 18%+ is a little more challenging.

and what if you lose?

This is where it gets nasty. For example, someone borrows $5,000 to invest in a hot stock in their TFSA. They borrow this at 6% so in a year’s time they will have to pay back $5,300. They dump all $5,000 plus an additional $5,000 of their own money for a total of $10,000 into one stock and watch it for 12 months. It falls, and then falls agin, finally plummeting down 20% to $8,000 by year end. Finally ready to call it quits, the investor withdraws their money and pays off the $5,300 they owe the brokerage, leaving only $2,700 for themselves. This means of the $5,000 of their own money they initially invested, they lost nearly 50%. Ouch!

They also lost the contribution room in their TFSA.

That’s $2,300 that could be safely earning interest in a savings account. If you’re thinking buying stocks in your TFSA at all is risky because a loss will always translate into a loss of contribution room, you’re right. And that’s why investing in stocks is riskier than keeping your money in a simple savings account. But what’s most important to note is this:

borrowing to invest unnecessarily magnifies risk. 

If the person had invested only $5,000 of their own money, they would have suffered a loss of only $1,000 instead of $2,300. If they had saved up the extra $5,000 they needed and gone all in for $10,000 just like in the example, they’d only be down $2,000 instead of $2,300. It’d still be a loss, but at least they’d have an extra few hundred dollars. They’d only realize a loss of 20% instead of 46%. That’s a HUGE difference!

The scenario plays out the same way in your RRSP. If you borrow and lose, the RRSP contribution room is gone forever. If you’re serious about building wealth, you know that investing in stocks in a registered account is risky enough and you don’t want to magnify that risk with borrowed money.

Is it ever ok to trade on a margin in your TFSA and RRSP?

Honestly, it’s up to you! I’m too risk-averse to gamble with fire in my registered accounts but some investors might really feel confident borrowing to invest in their TFSA or RRSP. As a seasoned investor with maxed out registered accounts that have already returned some extra money for you, you might feel comfortable taking the plunge and buying on a margin. Ultimately, it comes down to what kind of investor you are. But if you’re like me and still managing small investments (less than $50,000) and still learning the ropes of the stock market, buying on a margin is simply too much risk for too little reward.

What are your thoughts? Is borrowing on a margin in your registered accounts a great way to build up your long term savings or too scary to play with contribution room you can’t recover?

Tackling My TFSA

One of my goals for January was to figure out how much contribution room I have in my Tax-Free Savings Account. This shouldn’t be difficult, but despite my love of all things personal finance, I’m not quite as organized with my TFSA as I should be.

First of all, I have two of them: one is a simple savings account with ING, the other is a brokerage account with Questrade. This immediately creates two piles of paperwork I needed to go through. Secondly, I don’t contribute regularly or with any rhyme or reason. I transfer some money from every paycheque to my brokerage TFSA since I opened it in the summer, but my ING savings account one is kind of all over the place. I put money in it some months, and some months I don’t. Lastly, I’ve made withdrawals in the past. Because my emergency fund is my ING TFSA, I’ve pulled cash out to cover my butt when paycheques came up short.

My ING TFSA has been earning interest and my Questrade TFSA collects dividends and profits from stock sales, so their balances don’t reflect my actual contributions (in a good way!). So my only plan of attack was to sit down with the monthly statements from each account and go through every contribution and withdrawal.

Well, it actually wasn’t too bad. The stock account is fairly new and the ING one is a bit inactive so I figured everything out within an hour. I’m happy to report I have less contribution room than I expected — this means I’ve actually contributed more to my TFSA than I previously thought. Win! But I’m still not close to maxing it out.

Since it is now 2012, Canadians have $20,000 worth of contribution room in their Tax Free Savings Account — $5,000 for each year since 2009. For those of you new to TFSAs, they’re registered accounts in which any earnings are NOT taxed. This means any profit you make on money within a TFSA can’t be gouged as income. (For more information about the Tax Free Savings Account visit the Government of Canada TFSA website here). Maxing out my TFSA is a personal goal of mine, though I know I won’t be able to meet it for a couple of years, because not only do I have to catch up on old contribution room, every year you can contribute another $5,000.

But this year I am going to get $5,000 in there. I will! And I’ll worry about the extra contribution room later.

My plan is first to put $250/mo into my brokerage TFSA for a total of $3,000. Starting in March, I’m going to contribute $100 to my ING TFSA for a total of $1,000. This kills two birds with one stone: extra money into the TFSA and getting my emergency fund to 3 months worth of savings ($3,000). I’m not sure where the remaining $1,000 will come from. Probably a combination of things (ie. I add $50 every time I complete a goal on my Day Zero list). Sadly I have earmarked some of the money in my TFSA for a trip to Africa in July (hopefully), but I figure as long as the balance grows more than it decreases in 2012, I’m doing ok.

 Canadians, have you maxed out your TFSA? What is your strategy? Also, US & international readers, does your country have a similar type of account where earnings are not taxed? How does it work?