TFSA or RRSP: A case study

I’ve written about choosing between a TFSA or RRSPin the past but I thought I would share a real case study on someone I recently met.

Richard is 32 years of age. He is married to one four-year-old son.

He is putting away $300 per pay into 3 different accounts at the bank.

  • $100 per pay into RRSPs
  • $100 per pay into TFSAs
  • $100 per month into RESP

Is this the right mix?

When deciding which account to invest, the starting point is deciding what you are saving for. After a brief discussion, Richard concluded that the RRSP money was for retirement, the TFSA was like an emergency fund and the RESP was for his son’s education.

Optimize RRSPs first

In Richard’s case, he was making about $116,000 per year in the Northwest Territories. His marginal tax rate is about 38% so any money he puts towards RRSPs gives him a really great tax deduction. Given this high tax savings, any money going into RRSPs will give him the best immediate bang for his buck.

Related Article: The proper use of RRSPs: the one formula approach

From a pure numbers perspective, the RRSP gives a better initial ‘return’ than the TFSA and RESP. Does that mean he should redirect the entire $300 per pay to the RRSP and not contribute to the TFSA and the RESP? Not necessarily!

RESPs are still good

Numbers are important but there’s more to this decision than just numbers. Contributing to RESPs means Richard gets a government grant called the Canada Education Savings Grant (CESG), which is worth 20% of every dollar contributed.

Related article: The ins and outs of RESPs

Although that’s lower than the 38% he would get in tax savings for the RRSP, the purpose of the money is completely different. The RRSP is for his retirement where the RESP is for his son’s education. The decision is less about math and more about purpose and priorities.

What about the TFSA?

In Richard’s case, he has good cashflow but having an emergency fund is never a bad thing. Richard currently has $12,500 in the TFSA that he does not need or plan to touch anytime soon and was wondering if he should leave it in the TFSA or move it to the RRSPs?

The answer again depends on what the money is for. If Richard does not need the TFSA for spending or emergencies then switching it over to RRSPs gives him a pretty good bang for his buck. Let’s look at the math:

If Richard moves $10,000 of the $12,500 to RRSPs, he will get a $3800 tax refund in May after he files his 2012 tax return. He can then take the $3800 and add it to the $2500 left behind in the TFSA for a total of $6300. He was comfortable with having $6300 in the TFSA. Richard also decided that he would keep $50 per month going into he TFSA and redirect the other $50 to the RRSP.

Related article: TFSA or RRSP – Why not do both?

By moving some of the money to the RRSP, allowed him to take advantage of a bigger tax refund and based on the time of year, the TFSA would not be depleted for a long period of time.

This example represents a planning opportunity for those people who have money in their TFSAs and have not maximized their RRSP. Take a look at your marginal tax rate and if you don’t need the money to stay in TFSAs, you may benefit in moving some of the TFSA to the RRSP to get a tax deduction on the money.

What would you do if you were in this situation – TFSA or RRSP?


  1. Jane Savers @ The Money Puzzle

    Like Richard I contribute to both. I make less than 50k per year snd I maximize me tax return with RRSP contributions and I add to my TFSA because I am concerned with taxes in the future when I start drawing on the money.

    Right now RRSP is 60% and TFSA is 40% of my money available to save but I am still paying off debt so their is not much money to put aside.

    After I am debt free I will put the max in my TFSA and put the rest in my RRSPs. I have a lot of built up contribution space in my RRSP because I have been focusing on debt reduction over savings.

  2. Canadianbudgetbinder

    I’m about balance but I would likely have done something similar in fact I’ll have to look at this situation with my own finances soon. With my salary increase I’ve bumped up a tax bracket and have plenty of room in my RRSP. I’ve only been living and working in Canada about 5 years now. It makes sense to pull some of my TFSA to maximize the RRSP and then drop the refund back into the TFSA.The mortgage is essentially paid for now so I’m working on a plan to maximize both RRSP and TFSA but would also like to save for other investments.I’ve got about 30 years or so under my belt left to invest, hopefully I get some of it right. Balance and what makes sense in terms of the individuals goals. Great post Jim.

  3. Bet Crooks

    This seems like a good plan, as Richard is in a high tax bracket now and he is still very young. He may be in an even higher tax bracket later on during his working years.

    If someone is in a low tax bracket and likely to stay there I’d probably suggest maximizing the TFSA before the RRSP. But he seems to be in the opposite situation.

  4. kathy leblanc

    If you come into some extra money closer toretirement where should it go-can I make any money in a TFSA?

  5. Luke Peters

    Being a teacher in Alberta, my pension should be quite good (Granted, it’s 25 years til I retire at 55, but still). I’ll be in a position to receive clawbacks probably almost immediately, having withdrawn hardly anything from my RRSP in a calendar year. So is contributing to RRSP’s still worth it? I did for years, and then took out most of what I had to buy a house for the first time. Now I’m repaying that money, which I’m fine with, but I’m putting most of the extra money into RESPs for my kids and TFSA’s. Is this the better strategy, considering that I will be able to take it out without clawbacks?


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