Which is it — TFSA or RRSP?
By Gordon Powers, Sympatico / MSN Finance
Now that the new TFSA has arrived, should you jump onboard? Or are you better off sticking with an RRSP?
If you don’t have any money or simply can’t save any, then I guess it doesn’t really matter. But if you can squirrel away even a couple of hundred bucks a month, you do have a decision to make.
Remember, RRSP contributions are made with pre-tax dollars, and while they provide tax relief, the money you withdraw is taxed as ordinary income. TFSA contributions, however, are made with after-tax dollars, while eventual withdrawals will be tax free.
So, which is it?
It all depends on whether your working income is higher than your expected retirement income. If your marginal tax rate is higher at the time of contribution, an RRSP will likely be the better choice; if the reverse is true, a TFSA will be preferable.
Not sure what the future holds? Then try the middle ground for now. Add some money to your RRSP and then use the tax refund to build TFSA savings. Here’s a calculator that can help you experiment with different scenarios. It makes a lot of assumptions, but the math is sound.
For lots of people, this won’t always be an either/or situation. Those who consistently save and invest throughout their working lives could well end up in a higher income bracket down the road. Who knows? If your circumstances change, you’ll be able to juggle between the two choices depending on how things work out.
But, for now, you’ve got to start somewhere.
Posted by: Money man | Jan 7, 2022 12:25:13 AM
After tax dollars?
You make a rsp contribution with after tax dollars, not pretax dollars. Where are you getting your information from. I work and I get paid. My pay deposit is after taxed dollars. I take a dollar amount from my bank account and transfer 'contribute' to my RSP-which is the after tax amount. Then as it grows in the RSP over the years , I STILL will get taxed when I take it out, or take it out as RIF payment either way... You lose out either way..
You make a contribution or transfer into TFSA, that is considered still after tax dollars as well...
Posted by: Darwin | Jan 7, 2022 5:01:02 AM
Money man what are you talking about? When you put money into an RRSP you deduct the amount deposited from your net income making it BEFORE tax dollars. That is why an RRSP reduces your tax payable. It is a tax deferal since you will be taxed (hopefully) in a lower bracket when you take it out
Posted by: help others | Jan 7, 2022 7:18:39 AM
I think that for the average Canadian, if they are into the next tax bracket(over 37,000) they should put as much as they need into their rrsp to get under. Any money left over I would advise to put into the TFSA. Remember they can be self directed accounts aswell. I was also told by my finacial adviser that if you withdrawl from the account that the money cannot be redeposited until the next year(only 5000 total deposits allowed/year). There wasn't a mention about the 10 % off the top with rrsps. that is still in effect correct? I'd go with a TFSA if I'm relying on credit for emergencies. especially in 2009
Posted by: moneyguru | Jan 7, 2022 8:16:11 AM
Moneyman and Darwin,
You're both right. Moneyman if you don't have a group RRSP plan through your employer, then you are using after-tax dollars to make your RRSP contribution. Darwin, on the other hand, if your employer has a group plan - then yes you are using pre-tax dollars to make your RRSP contribution (the $$ comes off and reduces your taxable income). . . hope that helps!
Posted by: contrarian | Jan 7, 2022 9:32:50 AM
moneyman and moneyguru,
"darwin" says "thin the herd". he's clearly right. group or individual plans are not the issue. "you deduct the amount deposited from your net income making it BEFORE tax dollars". end of story. "help others" has a good point about emergency funds. Better than RRSP.
Posted by: Dan | Jan 8, 2022 12:18:23 AM
I think it depends how much you expect your investment to grow as well. If you put 5000 a year into a TFSA, then that's 5000 a year you get taxed on, but after 40 years your investment of $200,000 has now become worth closer to 1.5 million at a rate of return of 9% per year. So that means that $1.3 million of that is not taxed, while the first $200,000 was taxed. In my view, if you're going to get a high rate of return, then stick it in a TFSA and all yoiur withdrawls from TFSA's willl be tax free during your retirement. If you put that 5000 a year into an RRSP, that's 5000 of your income each year you dont get taxed on, but then one day (when the tax rates will likely be higher) you have to pay tax on a total of $1.5 million.
But then again, there's the time value of money, which I didn't take into account. A proper model has to be made in excel to determine where you get the most bang from your buck.
Posted by: Arlcruise | Jan 8, 2022 12:26:34 AM
Contrarian and Darwin got it. Some are confused because they make an RRSP with funds after getting paid (hence think it's after tax dollars) forgetting/not understanding they get a refund of taxes paid previously. The taxs returned now makes your contributions... pretax.. voila
Posted by: nadeem | Jan 8, 2022 3:55:45 AM
hey dan you bring up a very good point about not being taxed with the tfsa upon retirement when the money is needed the most. at that point you wouldnt have to worry about taxes and why not pay taxes when you have the earning power to do so during your working years. i do understand that time value of money has to be taken into account because that is key, but either way good idea.
Posted by: nadeem | Jan 8, 2022 3:56:44 AM
hey dan you bring up a very good point about not being taxed with the tfsa upon retirement when the money is needed the most. at that point you wouldnt have to worry about taxes and why not pay taxes when you have the earning power to do so during your working years. i do understand that time value of money has to be taken into account because that is key, but either way good idea.
Posted by: nadeem | Jan 8, 2022 3:56:57 AM
hey dan you bring up a very good point about not being taxed with the tfsa upon retirement when the money is needed the most. at that point you wouldnt have to worry about taxes and why not pay taxes when you have the earning power to do so during your working years. i do understand that time value of money has to be taken into account because that is key, but either way good idea.
Posted by: Kelsey | Jan 8, 2022 6:44:27 AM
I would suggest saving in a TFSA not only to avoid tax on the interest (typically interest winds up being the largest part of your savings) but to also have the flexibility to avoid borrowing money from the banks. TFSA's are geared for achieving financial independance more than any other fiancial vehicle available to the average citizen. Last, stay away from market based funds and watch that you don't wind-up with your savings being not insured. The global financial system is unregulated and you can lose your savings in a flash if you invest in mutual funds. Our Government tied our country to an unregulated global financial system which puts us at extreme risk of losses as alot of Canadians have learned in th past 3 - 4 months. Remember that banks and other financial service companies are high risk too and are only interested in taking money out of your pockets.
Posted by: DWR | Jan 8, 2022 8:06:18 AM
Not a word has been mentioned of the rate of interest the money will earn, and what service charges will be charged for holding the account. There is no way I am paying them for the use of my money.
Posted by: themeaningoflife | Jan 8, 2022 9:38:32 AM
money isnt worth the paper its printed on, considering that money was created out of nothing using playful tricks in the balace books and the scourge of our lives 'the fractional reserve system' which basically means a bank needs only 10% in reserve to lend out the remaining 90% in paper money. In other words the bank needs only $100 in the vault to lend out $1000, where did that $900 come from..... nothing, it was created out of thin air, then lent to you at interest. RRSP, TFSA, its all a scam, bottom line is MONEY = SLAVERY... watch www.zeitgeistmovie.com
wake up sheeple
Posted by: RJD | Jan 8, 2022 10:12:16 AM
Regarding Dan's comments on TFSA, how is it possible to get a 9% return from a TFSA? Currently the bank I am with has the TFSA account at 3.75%.
Posted by: Financial Professional | Jan 8, 2022 10:22:35 AM
Money man: I'm sorry to say, but you are incorrect on your information. Yes, you will make your deposit with the money sitting in your bank account that you have already paid tax on. However, after you make your contribution (say $7,000) you take that contribution amount ($7,000) and subtract it from your taxable income (say $60,000) in that year, so your overall taxable income is lower ($60,000 less $7,000 = $53,000 taxable income in that year), so you will not have to pay tax on the contributed amount. Therefore, you do make your RRSP contributions with PRE-TAX dollars (as long as you complete your tax return on a yearly basis). You settle up the amount of taxes you owe when you complete your tax return every year so you will either have to pay (which means you paid less than you were required to throughout the year), or you will get a refund (which means you paid more than you needed to during the year).
moneyguru: It does not matter if you make your contribution with your own funds, or through a group plan from your employer. The math is the same either way. The only difference is that the employer is giving you some extra cash that you would not otherwise have if you do not have a group plan, and typically they are not taking tax off your pay (because they know you will be able to deduct that contribution amount from your overall taxable income on your tax return) so it "SEEMS" like it is different. At the end of the year you will settle up your tax owing for the previous year.
help others: The 10% off the top you are referring to is the withholding tax when you make RRSP or RRIF redemptions. Please understand that this is not a "TAX" as it is called. CRA simply wants to make sure that people are not put in a position where they cannot pay the taxes they owe at the end of the year. Example: If I earn $60,000 per year in a salaried position I am required to pay taxes on each pay cheque I receive. Why? Assume that when I complete my tax return at the end of the year it is determined that I will be required to pay $15,000 in taxes for the year. If there has been no tax taken off my pay cheque all year what do you think the liklihood is that I will have $15,000 sitting in a savings account somewhere to pay my tax liability in full when it is due in April? We know that most people spend every dollar they bring home every month and save very little. The reason we are required to pay each pay is to make sure our tax liability is paid in full. When you apply that same thinking to an RRSP or RRIF redemption it should now make sense. When I am in retirement I am typically not receiving a regular paycheque from an employer that has taxes removed at the source. A lot of my income will be receive with no taxes removed, so I will have a large tax balance owing at the end of the year. By taking a withholding tax off RRSP and RRIF redemptions it functions in the same way as deducting taxes off our pay during our working years. I will not end up with a large tax liability at the end of the year that I cannot pay. You are not being charged any EXTRA tax on your RRSP withdrawal, it is just making sure you will be able to pay what you will owe at the end of the year. It is not an exact calculation, and you will settle up your actual amount owing at the end of the year when you complete your tax return.
Kelsey: Please don't tell people that they "stay away from market based funds" as this is inappropriate advice. While it is true that "you can lose your savings in a flash if you invest in mutual funds" what you are missing out on is the ability to earn a higher than average rate of return on a long term investment by investing in equity based investments over investing in guaranteed term deposits. I won't get into the calculations here, but anyone who can access an online savings calculator can see the difference you will achieve in your savings by increasing your rate of return. Mutual funds are long term investments, so if you do not have that time frame, or if you are concerned about potential for losses then you should not likely invest in these products. However, if you have a long term time frame, and understand the risks involved then mutual funds and other equity based investments should be a solid part of an overall financial strategy. Not putting all your eggs in one basket, but diversifying your investments among different asset classes, different industries, and even between mutual funds and guaranteed products. The average Canadian needs the help of a financial advisor and should seek one out. Don't just settle for the advisor in your local bank, because they may not know what they are talking about. Spend some time and search for a qualified advisor (should have the Certified Financial Planner designation at a minimum) who understands your needs. Ask them lots of questions to make sure they are on the same page as you, and make sure to be open and honest with them about what your goals are. It is extremely difficult to help someone who is secretive and does not disclose all the pertinent information. Make the time you spend with the advisor helpful by not assuming you know more than them because you likely don't (no matter how much you think you know). Be prepared to spend 10 to 20 hours in your search by having meetings with multiple advisors, and once you select your advisor be prepared to spend an additional 2 to 10 hours sitting with them to discuss your needs. This might seem like a lot of time, but how much time did you spend planning your last vacation, or watching TV last month. I am sure that some of that time could be put to better use in planning your future retirement.
Judging by the comments on this board today, the people posting who think they are really smart about money don't understand the simple, yet complicated rules and require some form of guidance. Remember, EVEN FINANCIAL ADVISORS HAVE FINANCIAL ADVISORS! Do the right thing for yourself and get the help you require.
Posted by: trapper | Jan 8, 2022 10:24:27 AM
I think since people resent having to pay tax on RRSP when they withdraw, paying any service charges to a person /organization that provides the financial service, we all should put our money in safe's or matress. I think it is funny how financial services and other type of industries in Canada should leave and let the people or government take care of these plans. Than when 100,000 plus workers are out of work, maybe the government will bail them out like the auto industry. THe reality there are financial professionals who can make sense of the products avaiable. Some are self serving, some lack confidence or knowledge but there is a larger group of sound individuals that can help you. Whether an RRSP or TFSA, GIC vs mutuals/stocks and the fees incurred are up to you and your goals. Your other choice, close financial/investment companies and use your sock.
Posted by: sceptic | Jan 8, 2022 11:13:26 AM
What happened in history is no guarentee what will in the future.Look at nastaq for example.When the self proclaimed experts were puting your money in there 8 yrs ago it was at 5000.Now it is at 1600 for a loss of70% not counting the gains you would have made in 8 yrs (gic compounded at 4%/8yrs =aprox 50%).So if you had put in 10k back in 2000 in gic you would have 15k now.If it was put in nastaq mutuals you would have 3k now for a loss of 12 k in last 8 yrs.(read bottom of mutual fund contract it says no guarentee history will repeat itself.This same scenerio can happen with dow,tsx also.Mutual funds are now high risk investments compared to your chances of making more than your gic,Beware especially if your putting lump sums in,If you dollar cost average in on these your risks go down but they may turn out to be nothing but paper statements worth nothing but maybe starting your woodstove
Posted by: Kelsey | Jan 8, 2022 12:31:16 PM
Financial Professional...I guess your client's were spared losses and that you can guarantee that in the long term the global financial markets will become regulated and that no other crisis will hit us during this period. Thus the stock markets will continue to deliver great returns and not be sideswiped by the financial markets ever again. Good to hear.
Posted by: sharrilew | Jan 8, 2022 12:37:48 PM
I think it really depends on your situation. My father put money in to RRSP's, and urged me to also. When he retired, he had a good pension from his work. He had to start taking money out of his RRSP and therefore was taxed on it, causing him to owe revenue Canada every year. Then when he passed away, all of the RRSP money was taxed on his final return and the estate ended up owing over $25000.00 in taxes. I personally prefer a TFSA so that when I want my money I can have it, no questions asked, no taxes due. You save with an RRSP now, but you in the end pay it back when you start taking it out. If you have a spousal RRSP it may work out better, but my mom passed before him so that did not work. I would rather know now what I will have in the future especially the way taxes can increase, so the benefit now may not work in the future.
Posted by: Income Tax Professional | Jan 8, 2022 2:21:01 PM
I am an income tax professional and I agree with all of Financial Professional's rebutals to previous posters.
Now my own comments: Some people have more RRSP room than others. If you do not have much room left then it is a no brainer to put money into the TFSa. If you have lots of RRSP contribution room then deposit to both. Split your contributions between the RRSP and TFSA. Use your income tax refund to deposit into the TFSA. This way the government helps you invest.
Most seniors will have less tax to pay than a working person. Seniors will have a higher tax free amount with the basic deduction, age amount, pension amount and higher rent/property tax credits (Ontario only) and generally a lower income to pay tax on. I have many retired clients that pay zero or very little tax at year end. A senior may have to pay tax when they file their retrn but that is mainly because they do not have tax witheld at source like people with paycheques. Self employed people have to pay each year as well as they do not have tax witheld as well. The bottom line is that there is no cut and dry answer of RRSP or TFSA. It is up to each individual and there situation. One of the previous posters mentioned that once you withdraw from the TFSA you cannot redeposit into it but that is not correct, you can deposit back after you withdraw. The $5000 amount per year can be carried forward to a future year. You can also deposit into a spouses account. With RRSPs you are limited to your deduction limit. If you make other regular investments (outside of RRSPs and TFSA) in your spouses name, the taxable income from those investments will, by attrition, become taxable to the person who put the money in the investment vehicle. So really every couple will have $10.000. per year.
I am not a financial advisor but I will advise that you speak to one if you want to invest sustantially.
Every investor also has to remember that every time the markets have crashed, that they have grown again after some recovery time. Don't think that people in the 20s didn't go through what we are going through today. The only difference may be that the government didn't bail anyone out like they did now.
The one thing I have not heard anyone elude to is that this may be the beginning of the goverments attempt to end the RRSP deductions. They pay back millions every year in refunds and then have to wait decades to get thet money back again when withdrawn from the RRIF, IF there is any tax owing on the amount. The TFSA allows them to get their money now and not have to wait for the investment to be cashed in. Another way for the government to borrow from our children.