It’s the mutual fund investor’s annual dilemma: Contribute to your Registered Retirement Savings Plan (RRSP) or your Tax-Free Savings Account (TFSA)?

It’s rarely as simple as picking one or the other. To get the most long-term benefit from both plans, we need to take a closer look at your income and your tax bracket — both current and expected at retirement.

One essential difference

Both plans provide valuable growth and tax-minimizing opportunities. But there’s a key difference: When you withdraw money from your TFSA, there’s no tax owing.

Withdrawals from your RRSP, on the other hand, are taxed at your marginal rate when withdrawn. The idea is that you’ll take it out during retirement when you are presumably in a lower tax bracket.

If this is likely to be your situation, then you may want to focus on your RRSP. You’ll get a tax deduction (and maybe a refund), earn tax-deferred growth, and if all goes according to plan, you’ll be taxed at a lower rate in retirement than you would currently pay.

Thinking ahead

But what if you have other significant assets or a generous pension or both? Deferring all that tax could leave you with a potentially significant bill down the road. In this situation, you may want to focus on your TFSA.

Regardless of your decision — RRSP, TFSA, or both — mutual funds give us the flexibility to cherry-pick the ideal funds for your objectives and time frame.