RRSP versus TFSA Investment - Which way to go ?

So, we get a lot of questions every year asking where is the best place to put your Investment Income......

With the New TFSA, Tax Free Savings Account it only makes the question that much more difficult to answer.


The main thing is that you are putting some money aside early to have access to at a later time. Saving for that rainy day, a big Vacation, to help pay a Mortgage or to have Retirement Income when you are ready to Retire.

In Canada, you are able to put a certain amount into your RRSP each year based on your Income and get a Tax refund at the end of the year. When it comes time to Retire you are then Taxed on that money, as Income when you Retire. The Idea is that you will not have any other income when you are retired and you will be taxed a a lower Rate. So RRSP's would be the 1st place to put your money and here's why.

When you get your Refund you can use that to invest into your TFSA. Work to meet the $5,000 TFSA limit each year. That money you can withdraw later without paying any taxes on it. You can use this money to help pay for Big vacations and other things like that.

Now back to the RRSP. When you are younger you should max out your RRSP every year .... Take the refund and Max out your TFSA.  Try as hard as you can to reach  $150,000 - $200,000 in your RRSP before you buy your 1st home..... so that when it comes time to buy your house you can set up what is called an RRSP-Mortgage, where you effectively borrow the full amount of your RRSP  (from yourself) to pay off your house.

With an RRSP-Mortgage you pay back your RRSP to yourself without paying any interest to the Bank. Now many people have never heard of this since the Banks don't make any money from you, but it is the best way to go. We did this back in 2006 and have slowly been paying back our RRSP + 7.75 % Interest to ourselves. In the long run we will have saved thousands of dollars in Interest and grew our RRSP  at a rate of 7.75 % + GIC rates each year - without any Risk.