Canadians have the option of contributing to a registered retirement savings plan (RRSP) and tax-free savings account (TFSA) to build long-term savings and benefit from tax-sheltered growth. But how do you ensure you are using them to their full potential? The Financial Post asked financial advisers to share their best tips for getting the most out of the two accounts.

Stay fully invested  

Not everyone understands how a TFSA works or how to utilize it at its full power, said Matthew Kempton, a Halifax-based portfolio manager at Verecan Capital Management Inc. “Even if they have one open, in many cases, it’s still viewed like it’s purely a savings account, similar to a bank account, when, in reality, this is a place where you can invest (and grow your money) tax-free.” 

And the key to investing is to start investing as early as you can to take advantage of compounding interest over time.    

“The longer the runway you have, the more opportunity to be successful,” Kate Childerhose, an Edward Jones financial adviser based in London, Ont., said. Childerhose recommends Canadians as young as 18 to make monthly contributions, noting even small contributions can make a difference toward their long-term savings goal.

While investment returns are never guaranteed, Kempton provided a hypothetical example of someone who invests $100 a month in an index and earns an average rate of return of seven per cent over 40 years. This person could have $248,158 at the end of the period. On the other hand, someone who started investing 20 years later and contributed the same amount of money each month in the same index for only 20 years would end up with $50,752.

“What’s amazing is that they saved twice as much for twice as long but ended up with 388 per cent more money because of the longer period of compounding,” Kempton said.

Someone putting their money into a traditional savings account instead of a TFSA or

RRSP will still benefit from compound interest, but at a much lower rate of return compared to if they invested in the stock market, he added.

A person who saves $100 a month for 40 years in a savings account earning two per cent could end up with just $72,409, Kempton said. Whereas someone who started 20 years later and saved the same amount of money for 20 years at the same rate of return will have saved a total of $29,203.

Treat your RRSP and TFSA contributions as another bill to pay in order to build significant savings , Kempton advised. Both TFSAs and RRSPs are “wonderful places to invest.”

Check for employer contributions    

Don’t forget to take advantage of workplace benefits to help you save, said Childerhose.  

More than a quarter of Canadian employees don’t participate in employer-matching retirement savings plans, according to a 2023 Sunlife Financial Inc. study.  

Some employers offer group RRSPs, which are a convenient way to help you consistently save, since contributions are automatically deducted from your payroll, and can offer lower management fees .  

Kempton recommended revisiting your employment package regularly. “Make sure you’re taking a look at what you’re invested in, (how much) you’re contributing (and) is it consistent with the rest of your investment approach, or was it just what you picked on Day 1 of that job?” Kempton said. 

Some employers offer an RRSP matching program, where they contribute to your savings, too.  

Guillaume Dumais, a Quebec-based financial planning professional at Objective Financial Partners Inc., said if you’re aiming for a $10,000 contribution in your RRSP for the year and your employer is matching you dollar-for-dollar, you only need to contribute $5,000, while your employer puts in the rest.  

“When someone offers you something for free, you take it,” he said.   

Reinvest your tax refund 

Always reinvest your tax refund, said Ed Rempel, a fee-for-service financial planner and tax accountant based in Toronto.  

When you contribute to your RRSP and claim a deduction, you can get up to 50 per cent back as an income tax refund, depending on your marginal tax rate and any tax payments made during the year, such as through payroll deductions .  

“A lot of people get a refund and spend it,” Rempel said. “If you reinvest the refund, then the refund is also growing, and you could be ahead.” 

You can also use an RRSP top-up strategy, where you estimate how much you could receive as a tax refund ahead of time, borrow that amount from a line of credit to invest in your RRSP, and use your tax refund to repay the loan, Rempel said . This strategy boosts your savings and gives it more time to grow without impacting your day-to-day cash flow. 

“Say you’re going to contribute $10,000 to the RRSP and you get 40 per cent back — you get a $4,000 refund,” Rempel said. But if you want to contribute $16,500 to your RRSP, you could borrow the extra $6,500 from a line of credit, get $6,600 back as your tax refund and repay your loan.  

“You put in only $10,000 of your cash flow, but you just put $16,500 into your RRSP,” Rempel said. 

Split your income with your spouse 

It’s important to do your retirement planning as a household, not as an individual, said Dumais. 

Co-ordinate with your spouse or partner when making contributions to your RRSP or TFSA, especially if one of you earns significantly more income than the other, Dumais said.  

A spousal RRSP, for example, allows you to contribute funds to your spouse’s RRSP up to your personal contribution limit, without affecting your spouse’s contribution limit. This lets you lower your overall household tax bill, as the higher-income spouse benefits from a higher tax deduction, while the lower-income spouse gets taxed at a lower marginal tax rate than you would have when the funds are withdrawn during retirement.  

Rempel provided an example where one spouse has worked their entire career and the other doesn’t earn income at all, but the couple is collectively living on $100,000 in retirement.

If the working spouse contributed only to their own RRSP, their retirement income of $100,000 a year means the working spouse pays about $22,000 a year in income tax. However, if the working spouse contributed equally to both, then each spouse has a taxable income of $50,000 a year and would pay about $7,500 a year in tax, which amounts to a total $15,000 a year.

“That is a saving of $7,000 every year of their retirement,” Rempel said.

Move money from a TFSA to an RRSP 

Some income scenarios make it hard for people to know how much they need to save for taxes owed . Edward Jones’ Childerhose, for instance, said she sometimes works with clients who receive bonuses through work, which means they might not have a full picture of their income when tax season arrives. 

If you have additional tax owing and don’t have enough cash to offset the taxes owed, you could transfer money from your TFSA to an RRSP, Childerhose said.

“If a client does not have additional tax owing, then we may leave the funds in the TFSA, as it provides more flexibility if the client needs to withdraw funds in the future,” she said. 

Rempel said this strategy also works for higher-income earners who want to maximize their RRSP contributions when they’re in a higher tax bracket and benefit from a sizable tax deduction.

For example, someone who brings in $150,000 a year and is in a 43 per cent tax bracket could transfer $10,000 from their TFSA to their RRSP and get a $4,300 tax refund, Rempel said . 

Open up RRSP room through an FHSA 

Start with a first home savings account (FHSA) before putting money into your RRSP, said Rempel, as this can benefit even those who don’t intend to buy a home .  

You can make a tax-deductible contribution of up to $8,000 a year to your FHSA, up to a lifetime maximum of $40,000, for the purpose of purchasing your first home. But Rempel said lifelong renters who don’t intend to buy could make those contributions into their FHSA and then move the funds (including any investment earnings) into their RRSP without penalty.  

“It’s free $40,000 RRSP room,” Rempel said.   Since you can save within an FHSA for up to 15 years, Rempel added, “If you contribute $8,000 a year for five years to get $40,000 and leave it in there for the full 15 years, you could easily have over $100,000 to transfer to your RRSP – all in addition to your RRSP room.” 

The transferred funds do not count as a taxable withdrawal and will not impact your unused RRSP room, as long as it is a direct transfer. That said, you won’t get that FSHA room back once it’s been used. 

But regardless of whether you use the money to purchase a home or not, Rempel said it’s always worthwhile to open an FHSA.  

Postpone RRSP deductions 

While you should be contributing to your RRSP every year, you don’t have to deduct the contribution immediately, especially if your income might fluctuate.  

“One of the best things about the RRSP … is the fact that you can deposit into the account, but you don’t necessarily have to take the deduction,” said Dumais. 

Canadians expecting a raise or higher income in the next tax year could consider delaying claiming all or some of this year’s RRSP deduction and applying it to next year’s return when their tax bill is higher. This keeps their taxable income lower in the next year, instead of potentially crossing over to a higher tax bracket.  

Dumais provided the example of a salaried professional in Quebec who earns $55,867 one year and makes a contribution to their RRSP. At this income, the marginal tax rate would be 31.53 per cent. If the person expects income to increase to $60,000 next year, they would pay a marginal tax rate of 36.12 per cent that year. But if the choice is made to delay claiming this year’s RRSP until next year, the RRSP deduction could keep next year’s taxable income within the same 31.53 per cent bracket instead of 36.12 per cent.

Read more from our TFSA vs. RRSP series

• Email: slouis@postmedia.com Check back for the latest from the series and find them all here.

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    • TFSA vs. RRSP: Garry Marr: Borrowing to fund your TFSA or RRSP is tempting — but is it worth the risk?
    • TFSA vs. RRSP: How to invest in your TFSA versus your RRSP to boost returns and reduce risk
    • TFSA vs. RRSP: The ABCs of RRSPs and TFSAs: These are the basics that Canadians need to know
    • The ABCs of RRSPs and TFSAs: These are the basics that Canadians need to know
    • How to invest in your TFSA versus your RRSP to boost returns and reduce risk