It’s the perennial question: RSP or TFSA?

The answer depends on your age and stage of life. Here’s what you need to consider before you deposit your dough in one or the other.

If you think you’ll need the money in the next couple of years (for a vacation, emergency or renovation), a TFSA may be the better option because of its greater withdrawal flexibility.

An RRSP is the better choice if you are saving for the long-term, or are in a higher tax bracket now but expect to be in a lower one in retirement.

You’ll get a nice tax refund for contributing at a higher tax rate today while paying at a lower tax rate when you withdraw funds during retirement.

If you don’t think your tax rate will change in retirement, a TFSA may be the better choice. The rationale is that the tax refund you would get from an RRSP contribution today would be identical to the tax you would have to pay on withdrawal in retirement. Noting this equivalence, a TFSA may be more attractive given the fewer rules regarding withdrawals.

Your contribution limits

As of Jan. 1, the annual TFSA contribution limit increased to $6,000. If you’ve never contributed to a TFSA before (and were at least 18 in 2009) the maximum contribution room is $63,500. You won’t get a tax deduction for putting money into a TFSA, but once it is in, it grows tax-free and you can withdraw the money without paying any tax.

For an RRSP, you can still make contributions towards your 2018 tax year until March 1, 2019, equal to 18% of your 2017 salary up to a maximum of $26,230. You may have additional room if you haven’t maxed-out previous years’ contributions as well. When you make an RRSP contribution, you will get a tax deduction for the amount. While the money is in the RRSP it grows tax-free, but when you withdraw it, it becomes taxable as regular income.

TIP: You can verify how much TFSA and RRSP room you have by looking at your most recent Notice of Assessment (NOA) from Canada Revenue Agency (CRA).