I'm 22 years old, and currently dumping all my money into my general savings account. I'd like to take this further but I'm not sure where to go with this. What type of savings account should I get TFSA or RRSP and if either or, what should I look for in that account? What are the pro's / con's of each and what are some other important thing I would need to know?



It's not so much pros and cons as much as it is what are your savings goals? While it's best to start early to save money for retirement, you may have numerous short- to medium-term savings goals (school, down payment, etc).

Here's a template you can consider. I would suggest that you open up an RRSP mutual fund or brokerage account and invest a certain amount that you feel free locking up for the next few decades and investing it in some sort of growth product (perhaps look at portfolios using the Couch Potato strategy). Then, also open up a TFSA mutual fund or brokerage account and use it to invest for medium-term goals (i.e. 5-10 years). Invest in products that will allow for some growth but with low chance of losing principle in that time frame.

What I wouldn't do is open up a TFSA savings account and use it for day-to-day savings. The tax you save is negligible and you would need to keep track of deposits and withdrawals to ensure that you don't overcontribute for the tax year. Similarly, an RRSP savings account or GIC is far too conservative at your age, IMHO. Think of RRSP and TFSA as investment vehicles rather than accounts per se. Either type allows for you to invest in a vast array of products, including mutual funds, equities, some derivatives, gold, bonds, GICs, etc.

To conclude, my view is to use RRSP to invest for conventional retirement goals, and use the TFSA to invest for medium-term and early retirement goals.

|improve this answer|||||
  • Sorry, I guess I should have specified. At this point my only real long term goal (Which is within 5 years) is to buy my first house. All of my colleges at work recommended that I open an RRSP for this. But I wasn't sure. Thanks for your input. – user2987 Mar 14 '11 at 14:29
  • @level42: "All your colleagues" might be referring to the Home Buyer's Plan. A lot of talk goes around about this; basically you are allowed to borrow money from your RRSP to use as a down payment on your first home, but must pay it back within 15 years. There are pros and cons to this and you should consider whether it is possible to save up a sizeable down payment while building RRSP savings as well. IMHO, 15 years is too long to interrupt RRSP growth potential, especially early in life. – fideli Mar 14 '11 at 17:02

If your annual income is less than $45000 or so (and you expect this to change for the better in the future), it's not worthwhile to put that in an RRSP -- save your contribution room for the future years where you will gain more of a tax deduction.

There's no real downside in investing in a TFSA (what you withdraw this year can be put back in next year), so any surplus funds that you do not anticipate needing this year can be put in a TFSA to earn a bit more than the equivalent investment outside of a shelter.

|improve this answer|||||
  • 1
    I disagree about the fact that it would not be worthwhile to put that money in an RRSP. There's no reason why someone can't carry forward the contribution amount for future tax years when they're in a higher tax bracket. Might as well start saving early if the person has the means to start an RRSP. – fideli Mar 12 '11 at 21:26

Though I did answer the linked question, I thought to quote parts of this article.
Source: The RRSP advantage, by David Hodges, February 6th 2015

[John] Storjohann ['the 58-year-old Calgary project manager'] is keenly aware of the two main advantages of RRSPs: the tax refund when you make a contribution, and the tax-deferred growth until you make withdrawals in retirement. These make RRSPs ideal for those who expect to be in a lower tax bracket when they stop working—which will be the case for most Canadians. For those in the highest tax bracket today, the RRSP is a no-brainer. That’s why Storjohann’s always surprised when he meets people pulling in good incomes who think TFSAs stack up better than RRSPs. “People just don’t understand how these accounts work.”

This is the most common objection to RRSPs: people simply hate the idea of paying taxes on the withdrawals. Money taken out of a TFSA, by contrast, is tax-free, which sounds far more appealing. But that logic ignores the fact that you receive a tax refund when you put money in an RRSP, while TFSA contributions are made with after-tax dollars. So for the Fosters and other Canadians weighing this decision, it comes down to whether it’s better to pay tax now or later. And that’s not an easy question to answer.

Both Hamilton and Kirzner say that anyone earning more than $50,000 is usually better off prioritizing RRSPs over TFSAs. While both accounts allow your investments to grow tax-free, the tax refund makes the RRSP more attractive for high-income earners. ...

That, in a nutshell, is what makes RRSPs better than TFSAs for higher earners: Not only are you taxed on your money years later, but because you’re in a lower bracket when you retire, you’ll pay less tax too.

Better behaviour

When your income is between $35,000 and $50,000, the long-term tax differences between RRSPs and TFSAs become negligible, says Malcolm Hamilton. In that salary range, “just being able to put money aside in either an RRSP or a TFSA is great.”

But RRSPs can still be a better choice for reasons that don’t involve tax deferral or refunds. In his new book, Wealthing Like Rabbits, author Robert Brown makes the case for favouring RRSPs over TFSAs most of the time because the former usually means less temptation to access your retirement savings early.

Footnote: This 2012 CBC.ca article intelligibly explains RRSPs, free of jargon.

|improve this answer|||||

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy