TFSA or RRSP or Unregistered Investing

Not everyone can max out their registered accounts every year but with record high savings rates during COVID Canadas average savings rate is between 5-15%, so which accounts should you prioritize?


If any of the following apply you may want to prioritize your TFSA

  • You are nervous about using TFSA vs RRSP, just go with TFSA for now and re-evaluate later
  • You are in a low income tax bracket relative to retirement (i.e. student or just entering the workforce)
  • You may need access to the money for a purchase 2+ years from now (i.e. future student loan repayment, necessary car purchase, etc)

If any of the following apply you may want to prioritize your RRSP

  • You have RRSP matching from your employer
  • You are buying a house soon (READ THIS)
  • You are in a higher tax bracket than retirement

If any of the following apply you may want to prioritize unregistered investing

  • You have filled up your TFSA and RRSP
  • You are investing with borrowed money (i.e HELOC or margin)
  • You are making frequent trades (day trading)
  • You are making risky or speculative investments (i.e. Gamestop, crypto, /r/wallstreetbets)

Now that you know generally what may cause you to prioritize one account over another we are going to go into the "why".

Unregistered or registered

Increased savings due to COVID and cheap services like Questrade/Wealthsimple Trade has gotten alot of people into self directed investing (which is great!). I won't tell you that putting your entire life savings into flipping GME or AMC is a bad idea but please do not do it in your registered accounts!

  1. The CRA can arbitratily decide that frequent trading within your TFSA is considered "business activity" and decide that you must pay tax on your capital gains
  2. If you have $5,000 in contribution room for your TFSA/RRSP and you invest in something that tanks to $1,000 you have lost that $4,000 and cannot claim a capital loss (which would reduce your tax bill)
  3. If your investments go down in a TFSA you lose that contribution room forever, if your $5,000 of GME turns into $1,000 you don't get that $4,000 in room back and you have squandered the tax-free opportunity the government gave you
  4. While you can day trade in a RRSP it means 100% of your withdrawals are taxed as income, capital gains have a more favorable inclusion rate so you would pay half of the taxes in an unregistered account (maybe less cause you can claim a capital loss) compared to an RRSP

Suffice to say, unregistered accounts are the best place for active short term investing and high frequency trading while your registered accounts should be reserved for long term (2+ year) low frequency trading.


Now that we have covered when to use a registered account, when should you use  one over the other?

There is an amazing write up by Frances Woolley here which I would recommend reading but in essence the TFSA and RRSP offer idential returns if your tax rate is the same at time of deposit as time of withdrawal, this means that the factors that make one better then the other are:

  1. You have RRSP matching from your employer. At the very least you should be contributing to the maximum matching amount, not taking advantage of this is literally turning down free money from your employer
  2. The median after tax retirement income is ~$35,000/year which has a marginal rate of ~20%, so if your in a higher tax bracket than that right now you should consider RRSP (unless you plan on making more significantly more then $35,000 in retirement)
  3. You plan on buying a house soon. Even if you arent in a very high tax bracket you may want to contribute to your RRSP, defer the tax deduction, and use the HBP toward your downpayment. This allows you to take advantage of your liquidity when you have it. More here
  4. If you may need your money soon (for a non house purchase) you should prioritize your TFSA, withdrawals are not taxed and you get the room back in the following January unlike RRSP where its taxed as income and the room is gone

The most important thing to remember is that contributing to either account puts you in a better place and you should not let analysis paralysis get the better of you. Do your best to use the factors described above to identify what is best for your situation and pull the trigger, very rarely do people regret saving money.

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