We are all becoming more and more aware of the importance of saving for retirement. Unfortunately, many people have no idea how to go about it. Some people say it’s best to try to max out your RRSP (Registered Retirement Savings Plan) contribution space each year. I disagree. Instead, I recommend contributing enough to take advantage of a lower tax bracket, and then contributing to a TFSA (Tax Free Savings Account) or a non-registered investment account (IA) to supplement additional retirement savings.
I say this because the main advantage of contributing to an RRSP is the tax deduction and the tax-deferred growth. If contributing $4000.00 in a given year brings you to a lower tax bracket, there is no need to contribute anymore than that since you have already maximized the tax benefits.
On the other hand, that doesn’t mean that you shouldn’t be building up your retirement savings in other ways such as by contributing to your TFSA (up to $5000 of additional contribution space is added each year) and/or contributing to a non-registered investment account.
Once you’ve determined how much you need to contribute to your RRSP, if you still have funds remaining that can be used for retirement savings, I would suggest building up your TFSA, because you don’t have to calculate your capital gains or losses, and more importantly, you don’t have to pay tax on your earnings. It is also much easier to withdraw from a TFSA if the need arises.
Before deciding on how much to contribute to your RRSP, I would highly recommend checking out http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html on the Canada Revenue Agency website to see exactly how much you should contribute to maximize your tax benefit. After that, if you still have room in your budget, consider putting some money into a TFSA and then an IA and set yourself up for success.