Juggling TFSA and RRSP assets
By Gordon Powers, Sympatico / MSN Finance
Much of the discussion on the new Tax Free Savings Account has centred on whether you’re better off going this route rather than investing in an RRSP. The truth is, you probably want to do both.
Here’s the simple equation. If your marginal tax rate is higher at the time of contribution than when you retire, an RRSP will be the better choice; if the reverse is true, a TFSA will be preferable. Here's the math.
Equally important, however, is how to spread your assets among various TFSA, RRSP and non-registered accounts, says Jamie Golombek, who heads up the tax and estate planning arm of CIBC Private Wealth Management in Toronto.
Normally, interest income ends up in the RRSP because it attracts the biggest tax bite. Stocks, particularly the dividend-paying kind, are generally held outside RRSPs since they attract the least amount of tax. Now, however, it may make sense to put at least the first $5,000 of any interest-earning investments in the new TFSA.
And what about dividend-paying stocks? Well, if they’re from a Canadian company, they’re better held outside an RRSP since the dividend tax credit means you get to keep more of your income. In fact, the marginal tax rate on eligible Canadian dividends is now lower than the rate on capital gains in most provinces at most income levels.
But since foreign dividends are not eligible for this particular type of tax relief, any U.S. dividend-paying stocks should end up in your RRSP, Golombek advises.
Posted by: Mal Robb | Feb 11, 2022 8:21:03 AM
Why would you hold dividend paying stock in your rrsp when you take them out of you rrsp then they are taxed as regular income compared to tfsa you pay no tax
Posted by: Nightrider | Feb 11, 2022 12:04:36 PM
Here is a twist. It may work for the high marginal tax bracket people.
Contribute to the max in your RRSP; It is $21000 this year. The refund you get - goes in TFSA. Assuming of course you have no big credit card debts or other major interest chomping debts. The refund must go to pay off these debts of course.
But a high margin tax payer is normally finance savvy and interest sensitive. So, he can get a double benefit - one with RRSP and pay tax later - and no tax under TFSA.
Posted by: SRH | Feb 11, 2022 3:32:44 PM
Personally, I think that it is a matter of preference when it comes to tax deferral. For instance, if you are looking for a larger refund of want to minimize your taxes payable today..contributing to your RRSP allows for a tax deduction whereas the TFSA does not count as a deduction and thus you do not have the tax deferral one may be looking. On the other hand, if you have plenty of disposable income today and can afford to forgo a large tax refund or can pay taxes today then of course the TFSA is the way to go to earn investment income tax free. With that said, those lucky enough to be able to do both could find a healthy mix between contributing enough to an RRSP so that taxes payable will be nil and then max out the $5,000 TFSA contribution annually. So not only will tax margins inpact ones decision, the timeliness of tax deferral will also.
Posted by: george | Feb 15, 2022 7:50:59 PM
TFSA should NOT be locked in except maybe for a 30 day max. lock in T bill. Use Presiudent's Choice Bank, Ing, Cdn Tire Bank, or you local Credit Union USE ONLY THOSE WHO DON'T CHARGE FEES.
IF YOU ARE PAYING FEES YOU LOSE I sell Mutual Funds
Posted by: A C | Feb 17, 2022 1:51:20 PM
Note to Nightrider. The max contribution is not $21 000 unless you made almost $120 000 in the previous year. Imply put, max contribution is 18% of previous years income to a maximum of $21 000 plus a one time $2000 overcontribution. How many Canadians do you think made that much when the average household income is less than half of that?
Regardless I think RRSP's suck! Keep it non registered. Preferential tax treatment will be your new best friend, espescially now, get ready for huge gains in the coming years!
Posted by: Showtime | Nov 27, 2021 1:06:20 AM
What if borrowed money was introduced to the equation. I plan on using borrowed money to invest in something that will bear dividends eg REITS, dividend stocks, funds/trusts, etc. Would it be better to hold this in a tfsa or a regular non-tax sheltered (cash) acct? TFSA is tax-free. But w/ regular acct, there is the dividend tax credit and deduction for borrowing money to invest (cra line 221). Using average/typical numbers, which method is better financially? If it helps w/ the calculation, my gross/pre-tax employment income is about $76k/year.
Related questions: Is the dividend tax credit applicable to all the investments I mentioned, including REITs? I'm unclear on which divdends are eligible and ineligible.) When claiming/deducting borrowing interest to invest, what % of the amount is covered/credited?