Author Topic: RRSP or TFSA/non-registered saving plan  (Read 310 times)

creaney1122

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RRSP or TFSA/non-registered saving plan
« on: March 24, 2019, 06:39:22 AM »
Hey guys,

I start my first job next month out of university and I'm seeking advice about reaching financial independence as efficiently as possible. I'm struggling between which of the following investment routes to take:

1. max my contributions to an RRSP (I live in Canada)
2. use my TFSA and follow a non-registered investment plan (I'm a Canadian boy).

Here's my dilemma:

RRSP contributions will reduce my taxable income, enabling me to generate money faster, and allow me to borrow up to $35,000 (interest free) for a down payment on a home. However, this money will be largely inaccessible until I retire, where it will then be taxed at the marginal rate by whatever amount I withdraw annually. I know it's an incredibly efficient method, but I feel it places a barrier between using those funds for investments down the road (owning rental property, stocks, bonds, etc.).

TFSA contributions on the other hand are not tax deductible, meaning it will take longer to collect money. On the plus side, I can move this money as I please since it has already been taxed, meaning I can keep it invested in stocks and collect dividends as money in my pocket instead of money for retirement like the RRSP. I'd also like to generate income from rental property in the future, so this money would be available to help with purchasing property.

I'm an engineering student whose primary investment knowledge comes from a course on retirement and estate planning at my university. I'm new to the FIRE movement and to work-life in general, so I'd really appreciate hearing from those with experience on what road I should consider.

Thanks everybody!

RetiredAt63

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Re: RRSP or TFSA/non-registered saving plan
« Reply #1 on: March 24, 2019, 06:47:18 AM »
In The Wealthy Barber Returns, Chilton has a chapter on just this dilemma.  He says "yes" do it.  Basically at this point you can't know what your income tax situation will be when you retire, so the choice is a toss-up.  He also points out that the outcome is equal if you end up in the same tax bracket (I am in the same tax bracket in retirement) but the equality assumes you invest your RRSP saving instead of spending it.

Of course it is easier to access the moeny in  your TFSA for other things - like a house down payment.  You can also start taking money out of an RRSP (or roll it into a RRIF where you have to take some out each year) well before 71 if you want to.

You might want to ask this question over in Investor Alley, that is where  the more knowledgeable investors hang out.

Lews Therin

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Re: RRSP or TFSA/non-registered saving plan
« Reply #2 on: March 24, 2019, 08:32:18 AM »
Creaney: whats stopping you from filling both? And at what level is your income? At 80k its a no brainer to do rrsp first  at 30k, tfsa/non registered is better.

daverobev

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Re: RRSP or TFSA/non-registered saving plan
« Reply #3 on: March 24, 2019, 12:57:02 PM »
I *think* you're misunderstanding how an RRSP works.

You can take money out any time you like, but it gets added to your income for that year. You can buy whatever you like inside an RRSP, as well - bond and stock ETFs, for example. I believe you can also buy property, although not mortgaged.

If you retire early - before CPP/OAS age - you have a few years of low income before that kicks in that is the perfect time to take money out of an RRSP.

andreamac

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Re: RRSP or TFSA/non-registered saving plan
« Reply #4 on: March 25, 2019, 06:03:10 AM »
I *think* you're misunderstanding how an RRSP works.

You can take money out any time you like, but it gets added to your income for that year. You can buy whatever you like inside an RRSP, as well - bond and stock ETFs, for example. I believe you can also buy property, although not mortgaged.

If you retire early - before CPP/OAS age - you have a few years of low income before that kicks in that is the perfect time to take money out of an RRSP.

Yes this is true! You are just taxed on it. I would recommend maxing tfsa first then rrsp. Since you are starting your career, you want to save the rrsp room for when you are making more money. But if you can do max out both that would be the ideal solution!