RRSP or TFSA for a Bonus Year
Priya, 41, is a salaried engineer in Ontario earning $145,000. She has $60,000 of unused RRSP room and $25,000 of TFSA room. In 2025 she receives a one-time bonus of $50,000, pushing her into the top combined marginal rate of about 53.5%. She expects to retire at 60 and draw roughly $70,000/year in retirement, taxed at an estimated 30% marginal rate. She has no pension plan, a $30,000 emergency fund, and a mortgage at 5.2%. Her spouse earns $55,000 and they have two children, one starting university in two years.
1. Compare the after-tax outcome of contributing the bonus to an RRSP versus a TFSA, using her stated marginal rates.
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RRSP: a $50,000 contribution generates a deduction at 53.5%, worth $26,750 in tax refunded. If reinvested, the effective contribution is $76,750. On withdrawal at 30%, the $50,000 grows tax-deferred and is taxed on the way out; the refund reinvested in a TFSA grows tax-free.
TFSA: $50,000 contributed with after-tax dollars grows and is withdrawn tax-free, but there is no deduction - the $26,750 of tax is simply paid.
The comparison hinges on the rate spread: 53.5% in versus 30% out is a 23.5-point arbitrage in favor of the RRSP. On $50,000 that is roughly $11,750 of permanent tax savings, plus tax-free growth on the reinvested refund. The RRSP wins decisively on the bonus itself.
Caveats: the refund must actually be reinvested, not spent; RRSP withdrawals can affect OAS clawback and GIS later, though at $70,000 income OAS is only partially affected; and the RRSP is locked until conversion, while the TFSA offers flexibility for the university costs in two years.
2. Priya asks whether she should instead use the bonus to pay down the 5.2% mortgage. Advise her, integrating the tuition timing.
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Mortgage prepayment earns a guaranteed 5.2% after-tax return. The RRSP contribution at 53.5% is worth an immediate 23.5-point rate arbitrage plus deferral, which generally beats 5.2% for long-horizon money - but only if the refund is reinvested and the funds stay invested to retirement.
Given the tuition obligation in two years, the priority order should be: (1) confirm the emergency fund covers three to six months of expenses - $30,000 is thin against a $145,000 income, so top it up; (2) fund the near-term tuition from the TFSA, which is flexible and tax-free on withdrawal; (3) direct the bonus to the RRSP to capture the 53.5% deduction; (4) apply any remaining refund to the mortgage.
A split is defensible: contribute $40,000 to the RRSP and $10,000 to the mortgage, preserving liquidity. What she should not do is lock the entire bonus in the RRSP and then borrow for tuition at high rates, converting a tax win into a debt problem.