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February 10, 2022

Blend RRSPs and TFSAs, advisor suggests

Getting some money into RRSPs early, particularly if you’re in a higher tax bracket, is a great way to establish a solid financial foundation.

But that doesn’t necessarily mean that an immediate deposit to an RRSP is the only route to a more secure retirement, says Doug Carroll, vice-president, tax and estate planning, at Invesco Trimark.

If you can resist the allure of the RRSP’s early tax refund, you may be better off with TFSA initially, he maintains.

TFSA room may be carried forward indefinitely, but the annual dollar amount remains fixed. If you didn’t use the $5,000 of room from 2009, that particular entitlement remains as $5,000, whether used the next year (2010) or in any year in future.

Consider also the novel feature of the TFSA that allows each dollar withdrawn in a particular year to give rise to a re-contribution credit the following January 1.

With this in mind, what if someone decided to forgo the RRSP contribution in the first 60 days and instead place those funds into a TFSA?

Assuming a fixed interest investment option, the TFSA would be at a higher value by year-end, at which time a withdrawal would be made to contribute to the RRSP.

The credit to the TFSA room the following year would be larger than if the TFSA had been untouched, and the RRSP contribution would lead to a larger refund, albeit one year delayed, he explains.

Alternatively, if you want to keep closer to the traditional route, go ahead and make the RRSP contribution as usual and direct the tax refund into the TFSA, but remember to withdraw before year-end to make that RRSP contribution.

There may be a cost of not receiving the refund in the first year, but in his calculations, it’s negligible. After that first year, you are back on track with rolling annual RRSP contributions, though routed through the TFSA.

It's up to you to decide whether any initial cost is worth the additional TFSA room gained, Carroll says, admitting that he’s still testing this strategy.

How are you mixing TFSAs and RRSPs? Or do you bother with either?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...