Should you invest in an RRSP or a non-registered account after maxing your TFSA?
Question: I’m a teacher with 11 years of service. My TFSA is topped up and I plan to keep contributing each year. I like the TFSA because its growth and withdrawals are tax-free, which gives me flexibility later on. I’m hesitant about RRSPs because I expect to have a healthy pension in retirement. What should I do next? Should I open a non-registered investment account or contribute to an RRSP? My goal is to harness compound growth so I’m financially secure later in life.
—Julia
Answer: This is a common and important question. Since your TFSA is maxed out and you intend to continue maximizing it, your choice now is between adding to an RRSP or investing in a non-registered account. Both have pros and cons: an RRSP offers an immediate tax deduction and tax-deferred growth, while a non-registered account provides no deduction but greater withdrawal flexibility and different tax treatment of returns.
In general, if you expect your retirement income to be in a similar or lower tax bracket than your working years, contributing to an RRSP tends to be more advantageous than building a non-registered portfolio. The RRSP deduction reduces your taxable income today, allowing you to invest more of your pre-tax dollars. The growth within the RRSP is tax-deferred until withdrawal, which helps compounding work more efficiently than in a fully taxable account.
Related topic: Are RRSPs ever a waste of time?
Most people earn more while working and see a lower taxable income in retirement, thanks to pensions, CPP, OAS and reduced earned income. For someone with a defined benefit pension, for example, a common formula might replace a significant portion of final salary after a long career. But even with a generous employer pension, combined retirement income from employer pension, CPP and OAS may still be lower than peak working income. If your working income is high relative to your expected retirement income, contributing to an RRSP now to capture a larger immediate tax break and defer taxes until retirement usually makes sense.
On the other hand, there are situations where a non-registered account or additional TFSA room could be better. If you expect your retirement income will be higher than your working income — for instance, if you plan to work part-time now and plan to have significant taxable income later — you may face a higher tax rate in retirement. In that case, paying tax now and using a TFSA or non-registered account might be preferable. Low-income seniors may also qualify for benefits such as the Guaranteed Income Supplement (GIS), and higher RRSP withdrawals in retirement could reduce eligibility for those means-tested benefits.
More to consider: Should I raid my RRSP to pay off debt?
Debt and cash flow are practical considerations that can change the recommendation. If you have high-interest debt or are struggling with monthly cash flow — for example, if you won’t be mortgage-free by retirement — it may make more sense to prioritize paying down debt over maximizing RRSP contributions. There’s no benefit to being constrained by debt during your working years in pursuit of tax savings if those payments leave you financially stressed. Balancing current lifestyle, debt reduction and retirement saving is crucial.
Given what you’ve described — a maxed TFSA, a likely lower retirement income due to a pension, and the desire to compound savings — contributing to your RRSP is likely the stronger option. RRSP contributions provide front-end tax relief and allow savings to grow tax-deferred, which often results in lower lifetime tax when your retirement income is lower than your peak working income. If you can’t fully fund both TFSA and RRSP, prioritizing the RRSP may be the most tax-efficient path for many people in your situation.
That said, personal circumstances vary. Consider factors such as expected retirement income, whether your spouse has a pension, potential eligibility for income-tested benefits, outstanding debt, and your need for liquidity. If you’re uncertain, speaking with a fee-only financial planner who can model scenarios for your specific situation will help you make the best choice for long-term compounding and tax efficiency.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.