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February 10, 2022

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.



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...