RRSP, RESP or TFSA: Which is best?
While saving represents the most important part of financial planning, it may be difficult to decide where to invest these savings. Given the choice between a registered retirement savings plan (RRSP), a registered education savings plan (RESP) and a tax-free savings account (TFSA), which represents the best solution? Many factors can influence this decision, but the answer depends mainly on your priorities and your personal situation.
Younes Marach: Financial planner
RRSPs, RESPs and TFSAs all offer attractive tax benefits. To make an informed choice, here is a mathematical approach.
•1) Use a TFSA to establish a rainy-day fund
When you have savings to invest, your first priority should be to set aside funds to use in an emergency. Your emergency fund will serve as a financial cushion that will protect you from unforeseen events, such as a job loss. Most of the time, a TFSA is the best savings tool for this purpose, as the funds can be withdrawn tax-free and re-deposited later.
•2) Maximize RESP contributions, which trigger federal grants
If you have children, you may want to make RESP contributions once your emergency fund is in place. The government grants for this plan are very attractive, so it makes sense to make RESP contributions, particularly because children typically need the funds long before their parents retire.
•3) Repay non-deductible loans or contribute to an RRSP (or a TFSA)
Here you have two options. The best strategy can be found by comparing the rate of interest charged on your loan with the expected return of your RRSP investment. If the expected return on the RRSP is higher than the interest rate on the loan, you should make RRSP contributions before making loan repayments, and vice-versa. In some cases, the TFSA may be more advantageous than the RRSP, so it is important to make sure that the chosen investment vehicle is the one that best suits your situation. Once the debt is repaid, the funds previously set aside for debt reduction can be contributed to the RRSP in order to catch up on the allowed contribution room.
This strategy may be ideal in many cases. However, each situation is unique, so you should discuss your investment priorities with an expert. Your advisor will be able to help you better understand the issues and establish the best strategy for your particular needs.