Blend RRSPs and TFSAs, advisor suggests

TFSA's have been a great idea both for Canadians and for Canadian Banks financial stability. My overriding concern with RRSP's however has always been future governments actions be it rampant inflation or a change of heart by the government in the future prohibiting or limiting withdrawals. What recommendations are there for those who's generation falls after the baby boom but before generation "Y" ? The thoughts of the future healthcare & prescription costs for the obese baby boom retiree's frankly terrifies me.

How about placing your RRSP inside your TFSA?

In this way you get the tax deduction of the RRSP but it would grow tax free inside the TFSA and when the time comes to retire, everything inside can be taken out and not be counted as income, so you are able to get higher Old Age Security $$$.

Is this possible? Or, keep it straight inside the RRSP until retirement and then when you turn your RRSP into a RIF, can the RIF be put into a TFSA and the same result as in the first idea?

Anyone have any insights?

To "hoping": I think RRSP's are for higher income earners and are supposed to do better than TFSA's. So, if you have RRSP's, I don't think you'd want to put it into TFSA's. I think TFSA's are for the "middle" income group. Also, I just found out that RRSP's are in there permanently, until retirement, whereas TFSA's you can withdraw amounts without any penalty. However, you won't want to withdraw amounts out of your "retirement" before retiring, if you are rich (RRSP).

Hey Hope and Trixie, sorry but you are both a little mixed up about these products. First of all everyone gets confused about what an RRSP or TFSA actually is. They are not the product that you buy, they are more like a wrapper around the actual investment you pick. Either can be almost anything like a mutual fund, savings account, stock, bond, gic and more. Once you decide where you want to invest all you do is click the box to decide wether you want it to be an RRSP or TFSA. Your returns are based on the investment you pick to put inside. As they are totally different financial concepts you cannot mix them. You are correct that higher earners benefit more from RRSP's but they are still good for all earners and they don't have to be permanent. If you lose your job, for instance, you could take money out anytime for your income. Retirement is just what they were meant for but in certain circumstances can be used for other things. Hope this helps, I've been a financial advisor for 20 years and I know there's lots of myths about money out there.

I think it is BS. that the government charges you to take money out of your rrsp when and if you need it when it is your money to begin with not theirs, as soon as I can I'm taking mine out, because I had to put it there when my company filed bankrupcy, into something I can use my money and not loose any of it. I don't think it is right they get to tell you what you can and can not do with your money and penalize you for needing to take it out.

I use both. I try to maximize my RRSP contribution and my TFSA contribution each year (and as suggested in the article, use my tax refund to top up the TFSA). As Jason stated, they are completely different vehicles and provide a lot more flexibility on retirement, especially if you implement an income splitting arrangement with a spouse. If it all holds up when I retire, I figure I can draw down the RRSP to keep myself in a marginal tax bracket (and leverage off income splitting with my wife and her RRSPs to keep the bracket lower). I then plan to use the TFSA for any additional expenses I require, since I can draw as much or as little from them without being taxed, and without it affecting my tax bracket.

Ana - it's not BS that the government "charges" you to take your money out of your RRSP. At some point in time, you were able to defer paying income tax on the money that went into your RRSP and when you take the money out in retirement, you have to include it in your income. Think of it this way - you put $10,000 into an RRSP and you decrease your taxable income by $10,000, so you have to pay less tax today. When you take the $10,000 out in retirement, you are now required to include it in your income and pay the tax then. It's all about deferring the tax until you retire. So you're not paying a penalty for taking it out. I think that people need to be more informed about exactly how the RRSP's work. It's kind of like the HST in BC - people need more information about what it is, rather than jumping all over it because they don't understand it. And Jason - that's the best analogy I've heard about the two options - nice work.

Tim has the right idea. I might add that if you have equities in your RRSP and the market tanks,
you will not want to draw down funds at that time unless you are required to.( you are over 71 years old). Cashing in TFSA,s at this time would give you some "breathing room" until the market
recovers, and you feel comfortable drawing down money from your RRSP.

Trixie: where do you get this impression that RRSPs are for higher income earners? I started putting money into RRSPs (to the max) as soon as I earned enough money to pay tax (while I was a teenager). I never left any RRSP room unused. I am now wealthy and contribute nothing to RRSPs. Over then past 15 years, I can no longer contribute to RRSPs because my employer's pension plan is so good that it uses up contribution limit. I now only have the TFSA, which I max out at the first opportunity (to the day). I also use limited partnerships as a tax shelter (but this should be another topic), which have turned out quite lucrative. Regarding my RRSPs, when I was young and struggling financially, I was using them to defer tax from the minimum tax bracket, to when I retire. I am now well, well, well into the highest tax bracket, and will remain so after retirement. When I take them out, I will be paying marginal tax at the highest rate.

John, realistically, in my opinion, rrsp's are for people who have alot of money (usually higher income bracket) to put away for old age. For example, if you aren't in the higher income bracket and you have many other obligations, ie. bills, then you must pay your bills before putting away money for retirement. I guess if you are only taking care of yourself and don't have many financial obligations, then great, you can fill up your rrsp's.

Let's keep it simple. A middle-class family with 2 kids, Mom was making $70 000 and Dad $50 000, managed to save $1 million in their RRSP'S. They made certain the total investment into RRSP's was done evenly through spousal RRSP's so they each have $500K set aside. They decide that retiring on $50K per year would be enough. Since they are both taking out $25K per year from their RRSP's, they will be paying a much lower tax than when they were employed. The difference in tax bracket would be over 15% from then to now.
You must remember that any income your receive such as OAS and CPP counts as income. So in today's dollars, if you max on both of those, you will receive over $22 000 per year. So whatever RRSP you take-out on top of that will raise your income and possibly put you in a higher tax bracket.

My view is that RRSPs are great to contribute to as early (in age) as you can because the long term growth of compounding will certainly pay off. TFSA's represent a great savings vehicle as well but their accessibility may entice people to dip into them versus viewing them as a retirement savings vehicle. Here is a TFSA and RRSP strategy to consider for middle to high income earners. If you have RRSP funds invested and expect to have a pension as well then your RRSP will incur higher tax considerations than a TFSA. However the government treats the first $2000 per year of retirement income as tax free; therefore one could setup an early annuity that cashes in $2K in RRSP per year and places these funds into a TFSA which means that you could withdraw thousands from your RRSP completely tax free while retaining the growth also tax free.

I also have a question: can a TFSA own assets that appreciateand /or geenrate income such as rental real estate or even solar farms?

To "Just saying" 2009, the average Canadian family earned an income of $69,175 and paid 42% of its income in taxes. A family earning $120,000 would be 'above' average by about $50K or ($500,000 over 10 years).