In the last article, we have looked individually at each of the six key factors for determining your optimum RRSP/TFSA contribution. In this article, we will put all these pieces together to create your optimal RRSP/TFSA strategy to determine the optimal contributions for you to make this year and in future years.

Putting all the 6 factors into a strategy in the optimal way is a combination of art and science. You need to look at each of the six factors and decide what makes sense. It would be nice if all six factors pointed to the same number, but that rarely happens.

The Steps to Determine your Optimal Strategy:

Step 1: Start with the annual contribution necessary to achieve your retirement goal.

Building up the nest egg you need to have the retirement you want is the real purpose of this long term investing, so you should start here.

Step 2: Adjust based on your tax bracket

A bit of planning can get you the maximum possible tax refund percentage. Hopefully, you can contribute the amount needed for your goal all within your current marginal tax bracket. If not, then we will have to consider what to do with the excess. We could contribute it as well, leave it for the following year, or contribute it to a different plan, such as your spouse’s RRSP or to a TFSA.

Step 3: RRSP or TFSA?

The deciding factors are your marginal tax bracket today when you contribute compared to your expected marginal tax bracket based after you retire and withdraw, including the effect of the clawback of government programs. The other issue is how you use your tax refund.

To determine whether RRSP or TFSA is better for you, you need to know what your expected income will be after you retire based on your retirement goal. In general, if your marginal tax bracket is higher today, then RRSP is better and if it will be higher after your retire (perhaps because of the clawbacks), then TFSA is better. If they will be the same, then TFSA is probably better, depending on how effectively you use your tax refund.

Step 4: Adjust based on your lifetime RRSP and TFSA contribution room

There are two possible issues here – running out of room and never using your room.

If you will run out of room, then how will you invest after you have hit the maximum?

If you will never run out of room, there are sometimes reasons to contribute more than is required for your retirement goal. The retirement goal is an estimate, so being ahead of your goal provides a buffer for future negative events. If you have cash available, you can take advantage of the RRSP and TFSA tax benefits.

Investing in an RRSP provides tax savings if you can get a larger tax refund today than the tax you will pay when you withdraw. Both RRSP and TFSA allow your investments to grow tax free.

Step 5: Adjust based on the tax refund you want

If you have a specific purpose for your tax refund, such as contributing to the RESP for your children or paying off a debt, then you may want to adjust your RRSP contribution in specific years. This may also affect your decision on spitting your contribution between RRSP and TFSA.

Step 6: Adjust based on cash or borrowed funds available

Note that the cash available includes your cash on hand, your expected tax refund, and the amount you can afford to borrow for your contributions. If you do not have the cash available to contribute the amount you want, there are a wide variety of strategies, such as the “RRSP top-up” and “2-year RRSP loan strategy” (both discussed in the last article) that can help you.

Step 7: Decide on your optimal RRSP/TFSA strategy

Once you have worked through the first 6 steps and weighed all the factors, you should be able to determine your optimal strategy. It should work for this year, and provide a plan for contributing in future years right through until you retire.

You should also consider how much of any RRSP contribution to contribute to a spousal RRSP. In general, it is a good idea to try to plan for you and your spouse to have similar taxable incomes after you retire. Some types of retirement income can be split, but not all types and the rules may change in the future. A spousal RRSP is a good tool for saving tax in the future through income splitting.

Your final decision should determine the specific RRSP, spousal RRSP, and/or TFSA contribution for both you and your spouse.

Stay tuned because the next article will feature a case study to make these concepts more concrete.

What is your optimal RRSP/TFSA contribution strategy?

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.

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This year, I made monthly contributions to my RSP. This will result in a substantial refund, which is going into my TFSA. This will max out my TFSA, but will still leave several 10s of thousands of contribution room in my RSP.

I have had no luck trying to predict what my future tax brackets will be, so will max out the TFSA in preference to the RSP.

Since my crystal ball is malfunctioning, I don’t borrow to invest, either. Who knows what my situation will be next year?

And the TFSA is in a Canadian growth ETF, for tax efficiency.

Hi Wendi1,

It sounds like what you need is a retirement plan. Are you guessing that TFSA is better for you than RRSP, or do you have some reason to think that?

If you knew what retirement income you are saving for, then you could easily figure out the tax bracket.

Often, just based on your income now and the general amount you are saving, you may be able to make an educated guess. If you give us information about your income and what types of amounts our are saving and the income you can expect from a pension, then I can give you a good idea of which is probably better.

If you do not know what your situation will be like next year, then you are probably right that you should not be borrowing.

For investing in a TFSA, tax efficiency is irrelevant. You don’t pay tax on it anyway. You should invest based on your desired risk/return, your retirement goal and reasonable diversification.


Thanks for the reply, Ed.

Perhaps I could have been more clear. Retirement is far enough into my future that I don’t know what the tax brackets will be, what the inflation rates will be, whether I will have a pension and what my requirements will be. I can make assumptions, but these are just guesses. And they remain just guesses, no matter how many customers are willing to make them.

The only difference between growth in an RSP and a TFSA is that you agree to pay the tax on RSP withdrawals in the future, rather than in the present. Unless you are pretty sure that your income tax will be less in retirement, you might as well pay the income tax now.

I have run the numbers often enough to know that small changes in any of these assumptions can make large changes in the outcome.

But I appreciate the offer.

@ wendi1,

It is easily to plan a retirement such that your income in the future will be lower than the current amount. My plans ensure this.

Retire early. or take sabbaticals near the end of your employment. With no income, the RRSP funds can be withdrawn with minimal tax paid. Easy, with a plan and reasonable assumptions.

That being said, we max both accounts. tax deferred or tax free, any advantage we can get is good.

Hi Wendi1,

I think this is an important point. The single most over-looked issue by personal finance buffs is there is a tendency to use general rules of thumb instead of actually planning.

When you have a plan, you do everything differently. In your case, you may be doing the right thing, or it could be very tax-inefficient. Only by working out a plan would you know for sure.

You may have a lot more uncertainties than most people, such as not even knowing about your job next year, but long term retirement planning can still be done. However, many uncertainties can easily be planned for. Tax brackets are generally increased by inflation, so you can essentially think in today’s dollars for planning purposes.

For just the RRSP/TFSA question, it sounds like your income is relatively high, so you likely would be able to withdraw a reasonable amount of RRSP in the future at lower tax brackets.

While I think TFSAs are very underutilized in general, in your case, just from the limited information you have given, my guess is that you are leaving some money on the table by doing too little RRSP.


Hi Sampson,

Creative planning. I like it.

I assume you are using that as a strategy to withdraw a lot of RRSP at low tax brackets and would not be spending much of it just before retiring?


In short:

Make all kinds of assumptions about what your rate of return will be over the next 20 years, what province you will be living in, what your income will be in retirement, what the tax regime will be both Federally and Provincially when you retire, whether pension splitting will still be permitted, how your health will be during retirement, how long you plan on living, etc.

It is largely a crap shoot.

The CD Howe Institute put together a pretty nice document a few years ago that outlined all of the assumptions you need to make for each Province in Canada, and essentially said that, for most incomes, it is virtually impossible to forecast with enough precision to make an “optimal” decision now.

CD How Report:
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Hmm..Sampson…retiring early or taking a sabbatical year(s) later in your working life (when your earnings are very likely at your lifetime high) as a tax planning tool seems to me a very counter-productive financial strategy. We used to have an old saying in the financial services industry (when tax rates were quite a bit higher than they are now) that “any (taxpayer) can save 50 cents tax by losing a dollar”.

Taking early retirement and/or sabbaticals because that is what you WANT to do is one thing…being age 60 and retiring 5 years early (and giving up 5 years of income) as a financial planning strategy because you are trying to minimize the tax rate on your RRSP or other retirement savings seems to me to be a classic case of cutting off your nose to spite your face!

Does anyone know if ishares pays as a dividend or like an income trust distribution? I’m looking at buying some for a non registered account but dont want to get killed on taxes. thanks

@tak, check out this page: Looks like FIE pays out dividends, capital gains and return of capital.

@ Daniel, Of course this is predicated by an ability to retire early. Those fortunate enough to have a heavy tax burden or fear of heavy taxation on RRSP savings are likely in a position to not worry about a year off.

Most people I know would love to retire even 1 year earlier if they could. Without a plan, this is impossible.

I don;t really understand the criticism of making assumptions. The alternative which detractors are indirectly hinting at is to not plan at all.

I’ve personally never understood the desire to have the optimum strategy anyway. Anyone saving 18% of their gross income and/or maximizing the TFSA annually for their thirties will be in a good position to have a decent retirement.

Plan for the worst and hope for the best.

@Sampson #12: “Anyone saving 18% of their gross income…”

Ummm…the current Canadian savings rate is ~4% of NET income.

It will be a person in a rare circumstance who saves 18% of gross.

Interesting article. I would agree with some of the comments that speak to maximizing both accounts. Using the business cliche “pay yourself first” both the RRSP and TFSA are excellent vehicles to put aside some money each month for yourself. The advantage of the TFSA of course is that it doesn’t come with an adversarial side effects (ie. withholding tax) should you wish to take out the money early. So while the article is geared towards a retirement strategy, the TFSA could also be used as a vacation fund, or rainy day fund – the idea being regular contributions to save up for some other significant life investment – be it a trip, home improvement, etc. While the TFSA is a nice vehicle for retirement planning, it can also be used to fund life’s other significant investments.

@ SST,

I realize average Canadians don’t maintain these savings rates. I’m not even trying to prescribe a method for anyone.

I’m almost certain most Canadians don’t plan for retirement either. If they did, they would be saving more than 4% gross. Regardless of what other Canadians do, all that’s important for me is what I do. We max both. We will take our retirement early. Maximizing RRSPs for us is very wise since our RRSP withdrawls should be taken virtually tax free.

My point is that if one saved at that rate, they wouldn’t even have to worry about the having the optimal strategy, they would be well on their way. I was simply surprised by vocal opposition against planning by some of the other posters.

@Sampson: Indeed, if you want to build a retirement portfolio, you definitely need a blueprint!

Median household income: $70,000
Taxes: $16,000
Disposable Income: $54,000
Average Expenditures: $53,000
18% Gross Savings: $12,600

A very rough calculation indicates a realistic average saving rate of 1.5% of gross household income (2.5% of net).

It’s not that most Canadians don’t plan and thus don’t save, it’s quite possible that they don’t save because they can’t save.

Cost of living is high and incomes are not.

As I stated, it’s a rare circumstance that sees maxed out savings.

I don’t agree that Canadians don’t save because cost of living is too high.

Spending is too high. That is the bottom line. Canadians do not prioritize savings and that is their own fault.

Even working near minimum wage, with realistic goals and spending habits, one can still save a reasonable amount to get them through retirement years if you consider CPP, OAS, and GIS moneys.

Re: your numbers, I know they are average, but even in the big cities, it is reasonable to spend $30k-$35k per year only, given the proper choices. That still leaves enough to maximize RRSPs and the 18%.

Uhhhh, Sampson,

You do realize that the highest minimum wage in Canada gives you $1909 gross per month (assuming 40 hours/week, 4.34 weeks/month). This is $22908/year before any taxes, deductions, etc.

The lowest minimum wage in Canada (Alberta) gives you $1631/month=$19572/year.

Alex, I was referring to median values that SST was using.

While I have some sympathy for minimum wage earners, they certainly can carry out similar lifestyles during retirement on Government benefits alone.

15% of you $20k per year isn’t very much either.

While I have some sympathy for minimum wage earners, they certainly can carry out similar lifestyles during retirement on Government benefits alone.

Yep, you’re right. It is just so easy to continue to be poor when you have been poor your whole life. In fact, we should probably encourage everyone to be poor so that they don’t have to worry about maintaining such a high standard of living during their retirement.

Of course, the fact that they can’t really afford to retire until they are close to death might make it a tough sell.

I have no idea what point your are trying to make Alex.

I don’t encourage anything. I know plenty of retirees who live very comfortable on government sources alone. GIC, OAS and CPP. Even if a person earned minimum wage their entire lives, we have moderate wealth distribution to allow them to carry on a reasonable life.

If you want to get into a discussion about the ability to earn more than minimum wage, this is a different matter. All my posts in this thread have related to planning for retirement and how savings made during working lives can result in better than barebones retirement.

Again not sure what you are trying to discuss. If you want to discuss low income vs. high income. I used to earn below minimum wage for many years as a graduate student. I still managed to sock away 15% of my gross income. Choices.

Good FP article on this topic:

“…the amount of income you need after retirement if you want to consume at the same rate as when you were working…is only 50% of your gross income and might even be less.”

“In general, a couple with two children and a home can calculate their target RRSP balance by taking the portion of their household income over $70,000 and multiplying it by 6. These calculations assume you will retire at 65 and achieve a net return on your savings of 5.75% per annum both before and after retirement.”

(currently reading a 2010 paper by the author to investigate his methods)

Thus, an average retired Canadian household (working income $70,000) would require only 47% of gross income, need not contribute any money to an RRSP, and only save 4% of gross for 35 years to attain the sane-level of consumption as their current lifestyle (coupled with government transfers).

That’s saving $2,800 a year for a total of $280,000.

$115 a month (per person).

Geez, maybe I am richer than I think!

Hi Ed,

Another excellent article – thank you!

I’m struggling to come up with a retirement plan and TFSA/RRSP strategy, so maybe you can shed some light for me and point me in the right direction.

Here is my situation:

My spouse is 65 and retired with a fully indexed defined benefit pension, plus CPP and OAS. After pension splitting, his net income after pension splitting is approx 54K and his marginal tax rate is approx. 30%. When he passes away, his pension stops; I will not receive a survivor pension, other than CPP/OAS. He has no RRSP contribution room due to a pension adjustment.

I am 20 years younger, and have been on CPP Disability since 2005. I also receive the Disability Tax Credit and have an RDSP. I hope to be able to work part-time again one day, but it’s hard to say if that will be possible. My net income after pension splitting is approx 35K with a 20% MTR (my income would be around 12K without pension splitting with my spouse). I will be eligible for CPP at retirement, estimated at around $350-545.00 per month, as well as full OAS. I have about 69K of available RRSP contribution room.

We have approx 50K available for contribution to our TFSAs and/or my RRSP, but no other savings.

So technically, I guess you could say I’m already retired (though not by choice). However, given that my husband is 20 years older and is likely to predecease me, I’m trying to plan for a “second” retirement when I’ll be on my own, esp given I will lose the significant income his pension is bringing in.

I’m guessing my tax bracket will either be lower or about the same as it is now. It seems a “waste” to let all my RRSP room lie unused if it could be leveraged, though it does seem that TFSAs may be the way to go for me.

Would really appreciate your feedback!

Hi girlgeek,

Thanks. Your situation is an interesting challenge. I enjoy working through situations with creative options.

First, I have a question that is a significant factor in determining your best strategy. Are you splitting less than half of your husband’s pension income or does he have other income?

If his only other income is CPP & OAS, they could be about $17,000, which would make his portion of his pension income $37,000. You added $23,000 to your income from pension splitting. Is his pension paying him $60,000 or $46,000?

The reason this is important is because, if you are not splitting the maximum, then you could split at least $8,000 more and still benefit from your lower tax rate. Then RRSP contributions you make would effectively save you 30% tax because it would allow you to split more pension income. Then RRSP would be your better choice. I would need to know the figures to estimate how much you should contribute to your RRSP.

If you are already splitting the maximum, then your tax bracket today and after you retire would be the same. Your income will be almost exactly the same. In that case, TFSA is probably better. Mathematically, they would work out the same, but RRSPs could potentially cause problems for you later if tax rates rise or more government programs are clawed back.

The interesting part could be your “2nd retirement”. I assume you would get your husband’s CPP survivor, which would give you $10-11,000 CPP income. In addition, you would have your OAS and income from your RDSP.

This might mean that you could qualify for a bit of Guaranteed Income Supplement (GIS). You qualify if your taxable income (excluding OAS) is less than $16,500 for a widow. You could plan your RDSP withdrawals to make that happen.

If this could be a possibility, then the TFSA is definitely your best option. Withdrawing from your RRSP or RRIF would result in a 50% claw back on any GIS.

There could be an advantage to saving your RRSP contribution room until then. If you are still 71 or younger at the time, you may be able to increase your GIS by contributing to an RRSP at that time.

In short, TFSA is most likely your bet option, unless you are not splitting the maximum pension now.


Thanks for sharing your creative options!

It occurred to me that it would have made more sense to wait until I’d received our 2012 T4s before posting here, as my husband’s pension was adjusted last year due to him turning 65…but since we’ve started, may as well continue!

Here is some clarification:

We are splitting half of my husband’s pension income, which in 2011 equated to about $22,410 each. He also received around 12K of Retirement Compensation Agreement funds, which are not eligible for splitting.

However, last year he turned 65, and since his pension had a bridging benefit (he retired early at 52), and he became eligible for full OAS, the pension has been reduced to $49,800 gross. His CPP is folded into the pension, and makes up about $6600 of that.

In 2011 he did have income in the form of cap gains, interest and dividends totalling around 13K, but this will not be the case going forward, so we can assume that the pension/RCA, CPP and OAS will be his only income for the foreseeable future.

So to clarify, from 2012 onwards our approx numbers are:

Pension/CPP: 50K
OAS: 6.5K
Pension amt avail to split: 40K
My CPP disability income: 12K

As for the RDSP, what kind of planning do you suggest ? I understand that mandatory minimum withdrawals start at age 60, and like an RRIF, the amount is calculated by a formula, so I think the only control I have over that is how much I contribute to it between now and then, which would impact the amount of the yearly minimum withdrawals. Luckily, RDSP payments are not included in income for GIS calculation purposes, and only the govt contributions and interest earned are taxable upon withdrawal, not my own contributions. So I guess it would be only my CPP (est 6.5K at retirement), survivor’s CPP and any other investment income would affect GIS.

There will be an inheritance from my parents in the future, but I’m not including that in my planning.

I hope that clarifies things enough for you to adjust any assumptions? I’m guessing TFSA is still the way to go, though I’m wondering if some combo of RRSP contributions, using the refund to pay down the mortgage, and melting down the RRSP before retirement is worth considering…but maybe that thought process belongs in another post ;-)

From what I gather in your article, TFSA contribution room does not really disappear. It accumulates until you max it. I hope I understood this correctly. My scenario description below will help to clarify this.

Let’s see: From 2009 on, I was contributing $5K every year until 2013, I did $5500 in 2014. In 2011, I withdrew $10K for personal reasons. Does this mean, I can put this withdrawn money back into TFSA? i.e., I should have 2009 to 2013 = 5K x 5 = $25K plus $5.5K in 2014 = a total of 30.5K contribution. (For simplicity, Investment appreciation over the years is not calculated here).

Right now, my TFSA is around $22K.(investments growth accounted for). For 2015, I can afford to add $5.5K plus the $10K (money withdrawn earlier) for a total of $15.5K in the beginning of 2015.

CRA will not penalize me for operating this TFSA like a bank account? Any light you can throw on this subject will be very helpful.

I thought once I withdraw money I cannot put it back. Am I right?

Second Qn: If I have US dividend paying stocks and US based ETF within TFSA, (in USFunds) during dividend distribution, why do they charge me withholding tax in USF? I thought it is supposed to be tax free?