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What's the best retirement strategy? Assuming I have $1000 and room in both my TFSA and RRSP contribution, where should the $1000 go?

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For pure retirement savings, with an expected tax bracket drop at retirement, then RRSP's make the most sense. So if you are in the 29% bracket (~40% when you take the provincial component) then you invest $1000, and save $400 in taxes. When you withdraw it later on, you might be in the 26% bracket (36% with provincial) so you would owe $360 in taxes.

However, if you are young, and expect to buy a house in the future, TFSAs make more sense. Presumably, you haven't reached your highest earning potential, so any tax savings will be at the lower rate. With a TFSA, you can get the benefit of all your money, and its earnings without penalty, as the tax has already been paid.

I personally am in the middle bracket, and am using a mixed approach. 50% to TFSA, and 50% to RRSP. I've put my high-risk in TFSA, and my low-risk in RRSPs. That way I get any windfalls tax free.

There is one thing that a TFSA is perfect for: Emergency Funds. I recommend that everyone have a $5000 CASH TFSA. It won't earn much, but it's not as tempting to borrow from as a regular savings account, but the funds are available in an emergency, usually within the same day.

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  • TFSA's are great for emergency funds because you can repay the money in SUBSEQUENT years (not the same tax year) without penalty. With an RRSP, you can not repay the money if you have to withdraw it. Having recently had an emergency, I was glad I had the money easily available in a TFSA.
    – ChrisInEdmonton
    Commented Aug 19, 2011 at 19:51
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I am not from Canada, so take any of this advice with a grain of salt, but assuming I understand the account types correctly you can see my post from the following thread regarding similar types of investment accounts. Just exchange the term RRSP with traditional IRA and TFSA with Roth IRA.

What are the differences between a "traditional" IRA and a Roth IRA?

My points of reference http://en.wikipedia.org/wiki/TFSA http://en.wikipedia.org/wiki/RRSP

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    +1. You're right: our RRSP is similar to the traditional IRA (up-front tax deduction, taxable withdrawals) and the TFSA is similar to a Roth IRA (no tax deduction, tax-free withdrawals.)
    – Chris W. Rea
    Commented Oct 12, 2009 at 15:24
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    I wouldn't be surprised if the Roth IRA, in fact, inspired the Canadian government to create the TFSA.
    – Chris W. Rea
    Commented Oct 12, 2009 at 15:25

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