Which to maximize CELIAPP, RESP, RRSP or CELI?
The most important decision when saving for retirement is to invest. Ideally, 15% of everything you earn or more.
This decision raises
two important questions:
- What to invest in (FHSA or RESP or TFSA or RRSP )
- What to invest in (Stocks/Bonds/Gold…)
FHSA
For those who do not
own a home, the FHSA is very advantageous. You receive a tax deduction when
contributing, no tax on investment returns, and no tax when purchasing a home.
- Tax-deductible contributions
- Maximum contribution $8,000 per year (lifetime max of $40,000)
- Investment returns not taxable
- Withdrawals for home purchase not taxable
RESP
If you have children,
the RESP is very advantageous. You receive a 20%–30% match. There is no tax on
investment returns, but withdrawals (other than contributions) are taxable in
your children’s head.
- Contributions not tax deductible
- Grants on up to $2,500 per year (lifetime grant max up to $36,000, or about 15 years)
- 20% Federal match + 10% match from Quebec or Saskatchewan
- Ability to use unused room from the previous year
- Investment returns not taxable the year we earn them
- Withdrawals taxable (except contributions) as income of your children
Drawback: If you
maximize this tool, it can become too large for its own good! The first
combined tax bracket (QC + Fed) is about 26%. Every dollar withdrawn above the
tax-free income level ($16k–$19k) offset the benefit of the grant.
If you maximized and tripled your investment, you could withdraw $36k
tax-free (original contributions). For the remaining balance, you will probably
need 3 years or more to minimize taxes. Don’t forget to consider summer income!
I don’t remember my parents asking me about my summer salary. With a maximized RESP, you need to be very transparent with young adults to avoid a tax surprise.
RRSP
The classic RRSP! Tax
deductible contributions, no tax on investment returns, but taxable
withdrawals.
- Tax-deductible contributions up to the lesser of ($35,000 per year in 2026 AND 18% of your income) + unused past room
- Investment returns not taxable
- Withdrawals taxable
- Minimum withdrawal required after age 71
- No more RRSP contributions after age 71
Mini tip: You can
claim up to $2,000 federally and a similar provincial tax credit starting at
age 65 if withdrawn from a RRIF.
Drawbacks:
- A minimum withdrawal is required after 71 (5% at 71; … 7% at 81; … 13% at 91; … 20% at 95+). If you liked the 4% rule, note that the government does not.
- At death with a spouse, the RRSP transfers tax-free. Without a spouse, the remaining RRSP is taxed! In simple terms, this can reduce the inheritance by 50%+.
TFSAs provide
tremendous flexibility. You contribute with after-tax income, but no tax later.
- Non-deductible contributions starting at age 18 (no maximum age!)
- Maximum contribution $7,000 per year (2026)
- Ability to use unused room from previous years (small twist)
- Investment returns not taxable
- Withdrawals not taxable
TFSA or RRSP
First let's agree that FHSA and RESP are often better. Between RRSP and TFSA, they are equivalent if the tax rate is the same at contribution and withdrawal. Ideally,
you maximize everything and don’t ask questions.
Otherwise, how can we
change strategically by using RRSP and TFSA? Knowing that taxes (QC +
Fed) range between 26% and 53%, the tax impact is significant. By comparison,
changing an allocation from 100% Stocks to 60% Stocks / 40% Bonds changes your
balance over 50 years by roughly 25%.
If you cannot maximize
everything, then:
- Contributing to a TFSA crystallizes your tax rate today. If you contribute $1,000 with a 36% marginal tax rate, you effectively paid $562 in tax (1,000/(1–36%) × 36%).
- Contributing to an RRSP crystallizes taxation at withdrawal. You receive a $562 tax refund (36%) the year you contribute, but if you pay 36% tax when withdrawing, the $562 plus growth will be taxed at 36% when you withdrew it.
- If you can withdraw an RRSP at a 0% tax rate, you saved 36%! Conversely, if you contribute to a TFSA in a 0% tax year, you effectively saved 36%!
- It becomes very confusing very quickly! Without knowing future markets, future income, and even the year of our death, it is impossible to make the perfect choice.
- In a year with low taxable income, the TFSA is clearly advantageous. You crystallize a low tax rate.
- If you have a high income (end of career), then the RRSP is clearly advantageous for contributions.
- If you have an RRSP Room, think of it to offset Large Termination package or Large Bonus.
- To manage required RRSP withdrawals, better strategies include:
- Delay the start of Quebec Pension Plan (QPP) and Old Age Security (OAS). These are taxable, so instead withdraw from your RRSP at a lower tax rate. Unlike the U.S., our QPP and CPP are considered solvent for the next 70+ years. There is no risk of collapse (unlike U.S. Social Security, which studies suggest may face funding issues within 5 years).
- If you wish to leave money behind, think about minimizing your RRSP once you are around age 80. At age 80, about 4% of Canadians that age pass away. That rises to 10%+ at age 90. At death without a spouse, the entire remaining RRSP is taxed. In any case, the 13%+ minimum withdrawal at age 90 is already substantial.
- Keep an eye on minimum withdrawals to avoid being forced to withdraw $100k+ at age 90. Taking 4% per year from your RRSP will quickly collide with the required minimum schedule. Be proactive, withdraw more than 4%, and consider investing in a TFSA. You can continue contributing to a TFSA after age 71.
- If you have a low income and an RRSP, you can withdraw from your RRSP in an emergency. In Canada, there is no withdrawal penalty. You simply lose the RRSP contribution room. Therefore, you can use your RRSP as an emergency account in case of income loss.
- If there is no income loss, withdrawing from an RRSP increases your taxes. Therefore, for unexpected expenses, withdrawing from a TFSA is better. TFSA withdrawals reduce room temporarily, but it is restored the following year
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