RRSP vs. TFSA

The RRSP, naturally. Unless of course, the answer is the TFSA. This question is the toughest to provide a one-size-fits-all answer. Which type of account you should choose depends on three factors: How much you earn now; How much you'll likely earn in the future; and whether you'll need to access the money before you retire.

In a perfect world, you would max out both your RRSP and TFSA. RRSP contributions will lower your tax burden right now, which is great. At retirement age, on the other hand, you'll be able to withdraw from your TSFA without being taxed on your decades of gains, which is also pretty nice. But the world is not perfect — most of us don't make enough to put that kind of money aside every year. So you’re going to need to prioritize filling one up first. And in most cases, the RRSP wins.

Your objective when you invest money in one of these two types of accounts is twofold. First, to save money so you don't have to work until you drop dead. Second, to limit the amount of taxes you pay. For most of us, the way to do that is to reduce our taxable income as much as possible every year. Any dollar you put into an RRSP does just that. And since you’re free to contribute 18% of your earned income, up to a maximum of $26,230, you can reduce your income by a pretty decent chunk. Possibly even enough to bring you down to a lower tax bracket — which means you're not only reducing the amount of money you're taxed on, but the rate at which that money is taxed.

A TFSA’s annual maximum contribution, on the other hand, is only $6,000, and that money does not get subtracted from your income. TFSA contributions are what's called “after tax.” But that doesn't mean it's never the right answer.

Here are some rules of thumb that can help you make the choice.

• If you earn less than $50,000, a TFSA should be funded first, since you are in the lowest tax bracket and reducing your taxable income won't further lower your tax rate.

• If you make over $90,000, your tax rate goes up to 40%, so the RRSP will typically benefit you most by bringing down your taxable income.

• If you make between $50,000 and $90,000, it makes the most sense to fund them equally until you max out your TFSA.

• If you have a pension through your employer that offers matching funds, prioritize that above all else. Otherwise you're throwing away salary.

• If you think your income after retirement age will be greater than what you earn now, your money should go into your TFSA first. Because it's better to pay the lower income tax rate on that money now, than the higher rate you'll pay when you take it out.

• If you think you might need the money before retirement age, TFSAs are more flexible. Though RRSP's do allow for one time penalty-free withdrawals for first time home buyers.