Should You Choose Your TFSA or RRSP for Your 2022 Contribution?

If You Have To Choose Between Your TFSA And RRSP, Consider Taxation

Both the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are effective vehicles for tax sheltering. You should ideally contribute to both your TFSA and RRSP. However, we have other responsibilities and limited resources. As a result, Canadians must prioritize contributing to their tax-advantaged account first.

In any case, having a savings account as your main financial tool is not the best strategy. Because of low interest rates, savings accounts that pay interest aren't earning much nowadays. As a result, if you want to keep your cash for an extended time, consider investing in equities that will provide consistent returns regardless of what happens in the market.

Contribute to your TFSA

Every Canadian who qualifies for a TFSA should maximize their tax-free growth contributions, especially if they are in a low tax bracket. When you're in a higher tax bracket, think about using your RRSP room to save money.

Some people believe it is more beneficial to earn interest income in their TFSAs, since this is taxed at the marginal rate. It all comes down to your investment portfolio mix at the end of the day. Consider how much tax you're saving and how much money you're keeping in your pocket .

Right now, the best five-year GIC rate is 2.7 percent. For example, if you live in British Columbia and make more than $50,197 but less than or equal to $86,141 each year, a $6,000 GIC paying 2.7% interest accumulates interest of $162 each year and is taxed $45.68 this year on this income. The same sum earning a 7% dividend yield pays out $420 in dividends each year, with a tax liability of $6.85.  The stock's booked capital gains are taxed at your marginal tax rate, which has an effective tax rate of half that for interest income. The situation should be the same across Canada.

On the surface, it appears sensible to put GICs in the TFSA and stocks in the taxable account for people who own both GICs and stock for income.  However, keeping only solid equities in the TFSA (with no interest-earning investments) will result in a greater growth of your TFSA. As a result, if you are willing to take the chance, investing in high-quality stocks may be beneficial.

Contribute to your RRSP

If you're in a high tax bracket, you should contribute to your RRSP first because this can significantly lower your income taxes for the year. You may utilize the refunds to make investments and even put money into your TFSA.


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