Should I use money from my TFSA to contribute to my RRSP? It depends …

Everyone loves a nice juicy tax refund, bumped up by having made an RRSP contribution.

But should you dip into a rainy-day fund to make that contribution? Probably not.

This week, In Your Corner asks the question: Should I use money from my Tax Free Savings Account to make a contribution to my Registered Retirement Savings Plan?

Cheryl Ng, an investment and strategic planning director at accounting firm Fuller Landau, says while it might be tempting to take money from the TFSA, it’s not necessarily a good idea.

“If you’re using them both for long-term savings, then I think it does make sense to put money into your RRSP, because there’s the added benefit of the tax deduction, and getting that extra money, and you can sort of recycle that money,” said Ng, noting that people with high net worths will often use the TFSA as a long-term savings method — kind of like a supplementary RRSP.

If, however, you use your TFSA as the federal government originally intended — as a vehicle for short-term savings towards a specific goal like a vacation, car, or rainy day fund — it’s probably not a great idea to dip into it to contribute to an RRSP.

“It depends what you’re using the money in the TFSA for in the first place,” said Ng. “For me, it’s our rainy day fund. So I probably wouldn’t do this. I probably wouldn’t make an RRSP from my TFSA, because if my roof collapses, I need the money.”

If you do dip into your TFSA in order to make an RRSP contribution, you could pay some of it back when you get your tax refund. But that tax refund will be smaller if you’re in a lower income bracket, Ng warns.

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If two people each contribute $1,000 to their RRSP, and one’s in the 40 per cent tax bracket, and the other’s a lower-income person in the 20 per cent tax bracket, that $1,000 contribution would mean a $400 boost to the tax refund for the first person, but only $200 to the second person.

There’s another issue with using the TFSA to make an RRSP contribution, Ng points out: The annual cap on TFSA contributions is $6,500. If you’ve already hit that cap, but use your TFSA to contribute to your RRSP, you can’t just throw the resulting tax refund back into your TFSA to cover what you’d withdrawn.

“You’d have to wait until next year to put it back in,” said Ng.

A TFSA’s flexibility is its biggest advantage over an RRSP, says Ng — you don’t have to pay taxes if you withdraw money from it, unlike an RRSP.

But, says Ng’s colleague David D’Cruz, that can also be a disadvantage for people who aren’t disciplined about sticking to their savings goals. The hassle — and cost — of taking money out of an RRSP can actually be a benefit to some people.

“Having an RRSP is almost liked a forced savings. Because there are consequences if you take it out. … If you know, intrinsically that you’re a bad saver, putting it into an RRSP as opposed to a TFSA has a huge impact to you,” said D’Cruz.