RRSP OR TFSA - CANADA

[Dmy0013]

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[KMMK]

There are so many variables to look at. Do you have Canadian Money Saver magazine at your local library? I've seen several good articles in that magazine about RSPs vs. TFSAs.

I'm really curious why you don't like RSPs. Not much to dislike in my opinion. I have the ability to max both, so luckily don't have to worry much about it.

It would be helpful if you gave more info - what are you saving the money for? Time horizon? Approximate income? Do you expect to make more or less money in the future? How much money do you have to invest? Do you have a lot of money sitting around in taxable investments?

Without those kinds of details it's practically impossible to comment further.

[chris009]

With all taxes being equal and market returns being equal, RRSPs and TFSAs should end up at the same value at the end (to clarify, the same value when withdrawn).

The problem with the TFSA is that it's too new and growing at $5500/year (as of this year), which doesn't take long to use and max out.

The common answer for when to invest in your RRSPs is when you move up to the higher tax brackets. Obviously any tax bracket higher than what you expect to be at when you retire will work, but at the end of the day it's for you to figure out.

There's another argument, that isn't mentioned much, but has been talked at the Canadian Bogleheads forum. I can never find the thread, but the discussion is an argument to invest in an RRSP at a lower tax bracket, to help keep your income in a low tax bracket where you'll receive more government subsidies, like GST/HST refunds, child credits, etc. I honestly don't know the argued government benefits off the top of my head as I live in Alberta and just a childless guy. Ontario on the other hand, with more tax brackets and more complicated tax system, with credits, subsidies, health fees, etc can have a lot of hidden benefits.

Food for thought.

[Self-employed-swami]

http://www.cdhowe.org/pdf/ebrief_91.pdf

:)

Basically, the jist of this, is that RRSPs are better, when your retirement income will be lower than what you make, when you are working.

TFSA's are already taxed before input, whereas RRSPs are taxed when withdrawn.  As long as your marginal tax rate is lower when you retire, than it is when you are working, you'll come out ahead.

There is no downside to using TFSAs for short, medium, or long-term savings.

[Togoshiman]

OP, some discussion of this in this thread:
https://forum.mrmoneymustache.com/share-your-badassity/day-1-peach-fuzz/msg44243/#msg44243

My personal feeling is that Canadian Mustachians should be maxing out their tax-sheltered investments, full stop.  The tax and income issues are more for people who will never be able to max out their retirement accounts and are thus forced to choose which are "better" to invest in.  Mustachians, with their super-high savings and investing rates, won't have this dilemma!  Max both, but there is a lot of material out there to read if you are conflicted at the moment.

[Self-employed-swami]

If you are planning on making the same income when you retire, you might be better off to split part of your savings into TFSAs and part into RRSPs.  The RRSP withdrawals are treated like taxable income, whereas the TFSA withdrawals are already taxed, and don't count towards income.

So, even if you want to net the same amount of spendable $$$ upon retirement, less of it will be 'income'.

Now, how exactly to split those up, isn't something I can tell you, unfortunately.

[Posthumane]

One thing to keep in mind is that, unless you have significant income in retirement besides your RRSP savings, the amount you are withdrawing from your RRSP is going to be your income figure (= to your spending amount) and will be taxed using you AVERAGE tax rate for that amount (i.e. your personal exemption amount still applies). This will almost always be lower than your MARGINAL tax rate that you are saving when you pay into your RRSP. I'm not sure if this makes sense, so I'll give some numerical examples.

Let's say a person lives in Alberta and makes 80k/year taxable income. Their marginal tax rate is 32% and their average rate is 23.92% in 2013 (using http://lsminsurance.ca/calculators/canada/income-tax). So if they put $1k into their RRSP they save $320 in taxes. Now, if that person is making $80k and is a mustachian, they may be spending $40k on a fairly comfortable lifestyle. When they retire they may start to travel more, etc. so they keep their spending at $40k despite a paid off house and so on. If their only income is from an RRSP they will be withdrawing $50k/year with an average tax rate of 19.07% (still 32% marginal) and will therefore be paying $9536 in taxes for a net income of $40464. So, they were saving $320 in taxes for $1k contribution, and paying $191 in taxes for each $1k withdrew. That $320 could be put into a TFSA or RRSP if you have room in either.

This changes when you have things like a defined benefit pension, or your spending will be *significantly* higher in retirement (i.e. equal to or more than your taxable earnings before retirement). All that being said though, money in your RRSP is less liquid than a TFSA since you don't get RRSP contribution back if you withdraw from it whereas you do with a TFSA. So, since I'm young, I like to max out my TFSA investments and then move on to RRSP contributions later in the year.

[Gerard]

Answering a question you didn't ask: if your $75K income puts you in a higher marginal bracket than your spouse's $60K, you should consider contributing to her RRSP as well as (or instead of) your own. Google "income splitting" and "spousal RRSP".

[Togoshiman]

One thing to note with the tax payments on RRSPs on the back end with withrdawing, you do actually have a tax credit up front.  The issue is that many people spend this when it comes in as part of their tax returns in April and go buy a TV or something.  If you take that tax credit, the precise value of which you will be able to see on your returns, you should re-invest it in the same RRSP.  Doing this can go a long way to mitigating the tax pain at the end.

Couple of caveats - First, you won't 'feel' like you have any mitigation at all because it will be many years later.  Also, you will still be paying the same or even a higher rate of tax on your withdrawals.  The difference is that the net value of your RRSP will be significantly higher if you have re-invested the tax credit each year back into the RRSP.  So, you're still paying a tax, but on a higher amount, the consequence of which is that you are still further ahead.  If this doesn't quite make sense, see the latest issue of MoneySense which explains it quite well.

[katzenbaum]

Be careful about putting too much into RRSPs such that your income is too high in retirement, if you are concerned about OAS clawback.  TFSA does not affect eligibility for OAS.

[GuitarStv]

Personally, I like to max out both the RRSP and the TFSA limits that I've got.

If you have a huge amount of money coming from your pension or are expecting to be making more during retirement than your working years, then it's best to stay away from an RRSP.  For most people, this will not be the case.

If you're like most and making less in retirement than your working years, then it's a choice of:
- pay taxes now with nothing upon withdrawal (TFSA)
- get taxes back now, and pay reduced taxes later (RRSP)