RRSP vs. TFSA: find the right balance.

Most Canadians can benefit from having a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) — both are great tax-sheltered savings vehicles.

The key difference is whether you pay taxes now or later.

RRSP contributions are tax deductible, so they generate a tax credit. But withdrawals are taxed as income.

TFSA contributions are made with after-tax dollars, so withdrawals are not subject to taxation. This makes TFSAs ideal for an emergency fund, as well as for saving for a vacation or other big-ticket item.

Your circumstances and goals will determine how you allocate your resources. As you formulate your strategy for your RRSP and TFSA, here are three scenarios to consider:

You believe your tax bracket in retirement will be lower than it is currently.

RRSP contributions give you a tax break now, and your withdrawals in retirement may be taxed at a lower rate.

You have a generous pension plan, or for other reasons expect to enjoy a comfortable retirement lifestyle.

TFSA contributions will provide tax-free income in retirement. By comparison, withdrawals from an RRSP (and from a Registered Retirement Income Fund) are taxable and, combined with other income sources, could push your taxable income high enough to trigger a clawback of your Old Age Security pension.

You're in a low tax bracket but expect to earn more in the future.

If you direct savings to a TFSA now, you can save your RRSP contribution room to use later, when you're in a higher tax bracket and your contributions may generate a larger tax refund.

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