Invest in RRSP, TFSA or RESP?

Here’s the logic to consider when deciding whether it’s better to pay off debt, invest (RRSP, TFSA, RESP, TFSA), or pay off your mortgage. The answer depends primarily on your interest rate, taxable income, and financial goals.

1. High-interest debt

• Top priority: credit cards, personal lines of credit, or any loan with >8–10% interest.

• Why? Paying these down gives you a guaranteed return higher than almost any investment.

2. RRSP (Registered Retirement Savings Plan)

• Best if your taxable income is higher (often above $60,000–$80,000).

• You get an immediate tax deduction, lowering your tax bill.

• Advantage: ideal if your tax rate at retirement will be lower than it is now.

• Disadvantage: less flexible (withdrawals are taxed).

3. TFSA (Tax-Free Savings Account)

• Great for medium- or long-term savings, especially if you’re in a low-to-mid tax bracket now.

• Growth is tax-free, and withdrawals are flexible with no tax consequences.

• Strategy: excellent vehicle once RRSP is maximized, or if your current tax rate is relatively low.

4. RESP (Registered Education Savings Plan)

• If you have children, this is very effective: the federal government provides a 20% grant, and in Quebec, a 10% grant.
  • The federal grant (CESG) can be up to $7,200 lifetime per child.
  • The Quebec provincial grant (QESI) can be up to $3,600 lifetime per child.

• Priority after high-interest debt and before TFSA/RRSP if you want to benefit from the free grant money.

5. FHSA (First Home Savings Account)

• Best if you plan to buy a house within the next 15 years.

• Combines the advantages of an RRSP (deduction on contributions) and a TFSA (tax-free withdrawal if used for a home purchase).

• Very high priority if homeownership is in your near- to mid-term goals.

6. Mortgage repayment

• Paying down your mortgage is safe, especially if the interest rate is high (>5%).

• Guaranteed return = the interest rate you’re paying.

• Less of a priority if your mortgage rate is low (e.g., <3%), since investing may generate higher long-term returns.

General priority order

1. Pay off high-interest debt.

2. Contribute to RESP (if you have kids, to capture the grant).

3. Contribute to FHSA (if buying a home).

4. Contribute to RRSP (if high income).

5. Contribute to TFSA (if lower income or need flexibility).

6. Pay down mortgage (especially if rates are high or for peace of mind).

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