Whenever I’m asked whether someone should invest in a RRSP or TFSA, my answer is always the same. Folks in a high (or even medium) tax bracket should fill up their RRSPs first because of the immediate tax benefits.
Plus, I’m convinced putting savings away in an RRSP is easier than a TFSA.
Take workplace matches as an example. Almost every employer offers some sort of RRSP match scheme, either through a pension or something not quite as generous. This is by far the easiest way to maximize your RRSP dollars. It’s literally free money.
Many employers will match up to 5% of your salary. If you make $50,000 a year, that’s $2,500 each year for free. Not bad for filling out a few forms.
Another easy way to end up with more cash in your RRSP is to set up automatic deductions. Each paycheque, transfer $50 or $100 into your investments. It’ll really add up over the course of a year.
Finally, you should use what I like to call the RRSP compounding effect. Here’s how it works. Say you’re in the 25% tax bracket and contribute $10,000 annually to your RRSP. This will immediately reduce your taxable income by the same amount, which adds $2,500 to your tax refund.
The key is to then invest those free dollars immediately into next year’s RRSP. This immediately creates a $500 tax credit for next year. You’ve made money off free money.
Essentially, you’re getting a 25% immediate return for every dollar you tuck away into your RRSP, guaranteed. Good luck beating that with other guaranteed investments.
The Wealthsimple free RRSP calculator will help you understand how much you can contribute to your RRSP and how your savings could grow in the future.
