In the media, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) can be presented as an either/or choice, leading investors to favour one over the other. However, both account types offer distinct benefits that can help you manage taxes and boost after-tax dollars. Further, by utilizing both accounts, you gain an additional layer of flexibility to help maximize the benefits of each account.

 

Let your RRSP tax savings build your TFSA

 

Your RRSP offers some well-known tax advantages, including the ability to claim your RRSP contributions as deductions on your income tax returns, and potentially receive tax refunds.By choosing to put your savings into your RRSP first, and using your RRSP tax refunds to contribute to your TFSA, you can build more assets for your retirement. Plus, you can fund your TFSA without the need to find those extra dollars from your paycheque.

 

The flexibility of two accounts

 

When your tax rate is relatively high, and you require additional income, drawing savings from your TFSA can make a lot of sense.That’s because you can withdraw funds without paying taxes at your current high rate, and the amount you withdraw is added back to your available contribution room the following year. On the other hand, because RRSP/RRIF withdrawals are taxable, to maximize the benefits, withdrawals are ideally made when your income is relatively low and/or your tax-rate is lower than when you made your contributions. By building assets in both your TFSA and RRSP, you have the flexibility to draw income from the account that best suits your current tax or income scenario.

 

Benefits before and during retirement

 

For most people, their retirement income will be lower than throughout their career, providing a natural time to take advantage of lower tax rates to withdraw from their RRSP, and eventually their RRIF.

However, employment and retirement income, or income needs are not always consistent over a lifetime. Pre-retirement, people take time off to take care of family, for education, sabbaticals or other personal reasons. Post-retirement, income can also vary significantly for those who retire prior to pensions kicking in, take on a new career, or have income needs that vary due to lifestyle. Having assets in both your RRSP and TFSA through these periods not only helps provide income, it can also help you smooth your taxable income and maximize the tax benefits of these two accounts.

Everyone’s income and tax situation is different and there can be several moving parts beyond your TFSA and RRSP.