In normal times, investments made in one’s Registered Retirement Savings Account (RRSP) are typically the correct choice for most Canadians. After all, receiving a refund on one’s taxes they could use to put toward debt repayment, or even into a Tax-Free Savings Account (TFSA), all while saving for retirement, make these vehicles excellent wealth accumulation tools.
That said, this past year has generally become known as the “year of the pandemic.” With so many Canadians seeing hourly output reduced as a result of working from home, or experiencing the loss of a job (even for part of the year), this could impact how one decides where to put their hard-earned money this year.
In general, in years where one earns less for any reason, it may make more sense to beef up one’s TFSA over RRSP. At a lower marginal tax rate, the benefit one receives from investing in an RRSP is reduced. Furthermore, the liquidity a TFSA provides in allowing for withdrawals at any time may be preferable in times of economic uncertainty such as these.
I’d highly recommend before investors consider which vehicle to use, to calculate what their marginal tax rate should be for 2020. Set a hurdle rate, that is, the marginal tax rate at which investing in an RRSP makes sense. If one’s marginal tax rate was 35% in 2019, for example, and could be reduced down to 20% this year or lower, it may not make sense to do the typical RRSP contribution – maybe a TFSA contribution makes more sense.
Invest wisely, my friends.
