Contribution conundrum: How should you save for retirement?

Damien Burleigh, CFP®, CLU®
When it comes to saving for retirement, many investors wonder if they should contribute to an RRSP, TFSA, or perhaps some combination of both. Let's review some of the key details of RRSPs and TFSAs in general, and then take a closer look at some key factors to consider when making your own decision.
The Registered Retirement Savings Plan (RRSP) was established in 1957 and is a popular account type for Canadians saving toward retirement.
You can contribute up to 18% of your previous years' taxable income to your RRSP each year, subject to an annual maximum of $29,210 in 2022, rising to $30,780 in 2023. Unused contribution room can be carried forward to future years, and contributions can be made to an individual, group, or spousal RRSP. If you contribute more than $2,000 over the limit at any given time, a penalty of 1% per month is generally charged on the excess amount until withdrawn.
Contributions to an RRSP are tax-deductible, and deductions can be claimed in the current year or carried forward to be used in future years. Inside the RRSP, all investment returns – interest, dividends, and capital gains – are sheltered from taxation. Funds can be withdrawn from an RRSP at any time, however every dollar withdrawn is taxed as regular income and withdrawals do not regenerate contribution room. RRSPs mature in the year the account holder turns 71 and must be transferred to a RRIF, withdrawn as a taxable lump-sum, or used to purchase an annuity.
In 2009, the Canadian Government announced a new type of account that offers significant flexibility and tax advantages: the Tax-Free Savings Account (TFSA).
Canadian residents begin accruing TFSA contribution room at age 18 and can open and contribute to a TFSA account when they reach the age of majority in their province of residence. Canadians can contribute up to $6,000 per year (increasing to $6,500 in 2023) regardless of income, and unused contribution room carries forward indefinitely. When funds are withdrawn from a TFSA, contribution room equal to the amount withdrawn is made available again in the next calendar year. As of 2022, the total cumulative contribution amount for Canadians who were at least 18 years old in 2009 is $81,500.
While contributions to a TFSA are not tax deductible, investments inside the TFSA grow tax-free, and withdrawals from the TFSA are also tax-free. Many Canadians use TFSAs to save for retirement, although TFSAs can be used for any purpose, such as a down payment on a home, paying for education, or as an emergency fund.
First and foremost, the decision around RRSP and TFSA contributions can be viewed as an "and" decision rather than an "or" decision. That is, you can contribute to both your TFSA and your RRSP – it doesn’t have to be one or the other. However, in many cases, it may be more beneficial to contribute to one account over the other.
Let's take a closer look at some key factors to consider when deciding where to direct your contributions this year:
Bottom Line
Before deciding where to direct your contributions this year, ask yourself the questions outlined above to make a more informed decision and decide which course of action makes the most sense for you. Ultimately, your decision depends on your goals, time horizon, and your overall financial and tax situation, and should be discussed with your tax professional and your Edward Jones advisor.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.