If you are one of the lucky people out there who have cash to save, the biggest question you probably have now is…where is the best place to save it?
As much as possible, this money should go into a tax-sheltered account, so you save taxes on investment earnings. For millennials, this often means making the decision between using a TFSA or an RRSP to invest. In today’s episode, I’ll outline when it makes sense to use each account, based on your situation.

There are three things to take into consideration when it comes to the question of RRSP versus TFSA:

What you are saving for;
Your own behavioral patterns with money; and
Current and future tax implications.

Firstly, to answer the question of the best place to save – RRSP or TFSA – you have to determine what you’re saving for.
Some goals should never be saved for in an RRSP. This includes vacations, emergency funds, weddings, cars, or other short-term goals. These should be saved for in a TFSA or a high interest savings account. I’ve included a link to a blog that outline various savings goals and which accounts can be used to save for them.

If you are saving for retirement, your first home, or qualifying education, you’ll have to make a decision: RRSP or TFSA.
Though I don’t have time to go into it here, I’ll put a link to a blog post in the YouTube description below where I conclude that, based on the given assumptions, using the TFSA for a house down payment is better than the RRSP. And when it comes to saving for education, I’d go TFSA, too, especially if the higher education results in a higher future income. Also, I’ll include information on qualifying educational institutions in the description below.

So we’re now left with the decision of where to put your retirement savings.

This will mainly come down to taxes. But, first, let’s talk about your second consideration in the question of RRSP vs TFSA: behaviour. You can make the best decisions based on the most tax efficient option, but if bad behavioural decisions get in the way, your tax efficiency won’t matter!

What on earth am I getting at?

If you’re the type of person that would be tempted to withdraw money earmarked for retirement because you need a vacation, then you might want to use the RRSP, since it’s much more penalizing to withdraw money, so this may give you pause before you do it.

The main benefit of the RRSP is the tax deduction, which gives you more disposable income. However, the only way you benefit from this is to use that extra disposable income to save more TODAY in the RRSP.

If you spend the money you’ve saved on taxes today, you may as well just go with the TFSA, because you’ll be taxed on the RRSP down the road anyway. In other words, the benefits of the RRSP tax deduction only matter if you use that windfall to save, not spend the money right now.

Now finally, tax implications. If you’re a weirdo like me, who doesn’t tend to have splurging temptations, where you put your money will come down to tax efficiency.

In general, if you make more money now then you will in retirement, you should save in an RRSP.

This is because you get a bigger tax break on the contributions now, compared to the amount of tax you’ll owe upon withdrawal. This is often the case because when you retire, you often need less income to cover your needs as children are out of the house, the mortgage is paid off, you have fewer expenses, and you’re able to split retirement income for tax purposes.

If you expect your income to rise in the future, and be even higher in retirement than it is now, the TFSA should be used first.

It might even make sense to contribute to a TFSA now, even if income is expected to be lower in retirement, if you expect your income to jump significantly in the future.

Here’s an example. Say your income is $50,000 now, but you are pretty sure it will be $100,000 in 5 years. A $10,000 RRSP contribution now will get you a $2,611 refund with a $50,000 income, but if your income was $100,000, you’d get a $4,309 tax refund on the same $10,000 contribution.

Whether you contribute to an RRSP or TFSA depends on what you’re saving for (short-term savings should stay in a TFSA), it depends on your behavioural disposition to saving and spending, and depends on your current and expected future tax situations.

And, of course, to make sure you’re picking the right account for your long-term saving, a financial planner can help.

Let me know if you have any more questions in the comments!

Here are some extra references:

You’ve Started Saving Money, Now What?

List of designated institutions

TFSA or RRSP: Where Should your Down Payment Fund and Retirement Savings Go?