It’s tax season and it’s crucial to understand which savings vehicle fits your portfolio better, to ensure you limit taxation and mitigate your income thresholds effectively.

Here’s a brief outline of which works best for those at different income levels:

  1. RRSP’s are tax sheltered, meaning any $ invested within your limit will be deducted from your annual income at taxation.
  2. TFSA contributions are not tax deductible on your tax return. But interest, dividends or capital gains earned in a TFSA investment are nontaxable either as gains OR if withdrawn. Meaning taking out a positive gain at a later date typically doesn’t count as “income” to the CRA.

Which option is best for you?

Generally speaking if you earn a lower income, and are therefore taxed at a lower marginal tax rate, you should maximize TFSA contributions. This is because you have no need to shelter”income” contributions in a tax deferred environment, and should take full advantage of interest earned in a TFSA investment. TFSA investments can make good short term or medium term investments because you will recover the contribution room the following year if money is withdrawn.

Vice versa, if you’re a high income earner, maximizing your RRSP contributions will lower your declared annual income and you will pay less income tax, as contributions will likely have an impact on your tax bracket. RRSP’s are a long term investment meant to save for retirement, and funds withdrawn are taxed as income as it was deferred in the first place.

A few things to keep in mind:

  1. No situation is cut and dry, and professional financial advise is important. 
  2. Whatever you decide, the game is saving for retirement. Many Canadians do not save enough. 
  3. TFSA contributions can be invested in later years, and at the moment you will not lose that contribution room. 

Overall, whats important to understand is knowing what your marginal tax rate is, and speaking with a financial advisor to get the full picture of your options.


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