Should Investors Put Their Bonus Into their Retirement Account?

With the holiday season now in the rear view mirror, many investors are now looking forward to 2018 with plans of improving finances and growing retirement savings accounts. Investing one’s annual bonus into the stock market is one fantastic way of providing a boost to savings over time and is often one of the pieces of advice financial advisors give clients as a way to become financially independent sooner and prepare for retirement, a costly endeavor.

That said, questions as to how to go about re-investing one’s annual bonus is often the concern. For Canadian investors, choosing between a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is the typical question investors have.

While tax-deferred retirement savings accounts do provide a short-term reduction in taxable income (and a larger refund cheque from Canada Revenue Agency), the ability to access said retirement funds in the case of an emergency can be a difficult and potentially expensive thing to do for investors.

A TFSA, on the other hand, provides a greater deal of liquidity in times of need, as fund are able to be withdrawn without penalties at any time.

For investors with an emergency fund already set up or without the need for any foreseeable funds in the near-term, an excellent strategy for Canadian investors is to invest one’s annual bonus in a tax-deferred account, and use the corresponding tax refund as an investment in one’s TFSA. Doing both simultaneously will allow for both long-term and short-term savings benefits for uncertain investors.

Invest wisely, my friends.