Author Topic: TFSA/RRSP  (Read 10016 times)

milkman

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TFSA/RRSP
« on: February 16, 2012, 08:20:11 AM »
Hi im wondering whats a better investing option if i can only do one. TFSA or RRSP

vwDavid

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Re: TFSA/RRSP
« Reply #1 on: February 16, 2012, 09:09:23 AM »
I am beginning to think for most people 35 and under with a bent for MMM lifestyle that TFSA will do better. I'm starting to think as soon as my earned income is low enough I will pull $ out of the RRSP pay the tax and xfer it to the TFSA to keep it topped up.

But, I'd like to hear from the crowd to.

FrugalToque

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Re: TFSA/RRSP
« Reply #2 on: February 16, 2012, 10:34:27 AM »
I have a really hard time imagining a scenario where a TFSA beats an RRSP.

If you have $200 per paycheque to save, and you're earning enough to be in the 50% tax bracket, you can do one of two things:
a)  Put $200 in a TFSA
b)   Put $400 in an RRSP

The money will grow.  Let's say you wait one doubling-time until you retire.
a)  There's $400 in your TFSA
b)  There's $800 in your RRSP

So now you withdraw your money.  Your RRSP will now be taxed, but the taxation level won't be at the 50% level it was when you deposited it.  It'll be at some much lower level, assuming you're living a reasonably Mustachian life.
a) You get $400
b) You get - I dunno - $700?  More than $400

The only way the TFSA wins is if you already have some kind of guaranteed pension plan that puts your retirement income in the top tax bracket anyway.  Then your RRSP gets taxed right back down to the level of the TFSA.

The advantage to the TFSA, however, assuming you filled up your RRSP, is that it's a lot easier to withdraw from.  So if you wanted to have that "emergency fund" thing that the Dave Ramsey types are so fond of, you could use the TFSA for that purpose - AND you get to invest it and watch it grow.

If someone has another angle, I'd love to hear it.  As far as I know, it's:
a) fill up your RRSP
b) then use the TFSA

milkman

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Re: TFSA/RRSP
« Reply #3 on: February 16, 2012, 11:27:52 AM »
Ok thanks for the input.  what i was thinking was that with the tfsa u pay tax on your contributions, with the rrsp u will be taxed on your growth too.

jd

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Re: TFSA/RRSP
« Reply #4 on: February 16, 2012, 11:29:12 AM »
It really depends on your current tax bracket and the tax bracket you expect to be in when you withdraw the money.

RRSPs are a tax-deferral mechanism; if you're in a high tax bracket now (i.e. working), and expect to be in a lower one later (retired with a mustachian spending level), then they are probably better.  If you expect to be in a similar tax bracket when you withdraw the money, then TFSA is probably the way to go.

There are some other trade-offs.  For example, dividends from US-based companies are exempt from withholding tax in your RRSP.  In your TFSA, 15% will be withheld.

Personally, I'm currently contributing to my RRSP to reduce my tax while I still have some employment income.  (I'm also contributing to my TFSA.)  When I stop working, I plan to start withdrawing from my RRSP each year to top up my other (taxable) investment income and to contribute to my TFSA.  By living a mustachian lifestyle, I should be able to withdraw a decent amount from my RRSP each year without having to pay much net tax.  (Yes, there will be some withholding tax on the RRSP withdrawals, but I should get that back when I file my taxes.)

lazydragon

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Re: TFSA/RRSP
« Reply #5 on: February 16, 2012, 11:32:07 AM »
I have a really hard time imagining a scenario where a TFSA beats an RRSP.
[snip!]
If someone has another angle, I'd love to hear it.  As far as I know, it's:
a) fill up your RRSP
b) then use the TFSA
From what I've read/heard you only want to save into your TFSA over your RRSP when your current tax rate is *LESS* than what you expect to have when you are utilizing your RRSP.  This isn't 'normal' as usually people are saving during their highest income years (i.e. working years), but sometimes people save outside of those.  Scenarios that come to my mind are students living on meagre means, but expecting to be withdrawing more income during their retirement.  Also maybe if you're planning ahead on withdrawing the cash for a big purchase sometime during your working years?  I was going to say for purchasing a house, but first home buyer's plans usually solve that.

The emergency fund 'convenience' thing is also helpful.  If you stagger your investments and end up with some (yearly) 'liquid' investments that are non-registered, it's useful during the year to store them in a TFSA (thus interest earned through the year isn't taxed), then at the end of year dump them into your RRSP before the deadline (and put the tax refund back into your TFSA).  I tend to do this cycle as I dollar-cost average with regular (non-registered) investments through the year into my TFSA, then dump it into less liquid stuff in my RRSP before February if I have no immediate purchase that I need to fund.  I don't know how much it saves me over the year, but I figure every little bit helps.

vwDavid

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Re: TFSA/RRSP
« Reply #6 on: February 16, 2012, 03:45:26 PM »
Here is a numerical simple example with all things equalized. It looks like would be correct that with lower tax rate during RRSP withdrawl that RRSP would win.

I guess I am just blinded to the fact that dividends receive a tax break and putting them in an RRSP seems to make that aspect a wash.

vwDavid

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Re: TFSA/RRSP
« Reply #7 on: February 16, 2012, 03:50:47 PM »
I want to go back to my initial preference for TFSA, or rather dividend bearing investments outside RRSP. That is if during our mustachian retirement my wife and I want to enter into hobby or part time employment this could easily pop us up over $8000 per year which is the minimum tax exemption I believe.

If the majority of our mustachian retirement income is from preferentially taxed dividends then our overall tax burden may be lower than if a significant portion of our passive income was through the RRSP stream which would ratchet up our earnings income and tax owing.

This is correct no?

vwDavid

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Re: TFSA/RRSP
« Reply #8 on: February 16, 2012, 04:13:17 PM »
OK, I found another blog with good info

http://howtoinvestonline.blogspot.com/2011/04/how-your-province-income-level-and.html

Scroll down and click on the middle income tax comparison. Its a neat comparison of how much tax you might pay with your income from a variety of different sources.

Interestinly, if you have 60K of dividend income in the province of BC you pay not much more tax than if you have equal RRSP income, TFSA income, capitol gains income, and dividend income.

So keep it simple, keep it mustachian and just put everything into dividends?? what do you guys think?

vwDavid

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Re: TFSA/RRSP
« Reply #9 on: February 16, 2012, 04:20:50 PM »
Boy, some really good info at that blog

http://howtoinvestonline.blogspot.com/2011/10/rrsp-vs-tfsa-critical-differences-and.html

Quote
Bottom Line

    Highest income earners of $120,000+. Focus on the RRSP first due to the likelihood of a drop in your tax rate. If the RRSP contribution room isn't sufficient for savings goals, put any extra in the TFSA. After retirement the TFSA makes a fine parking spot for surplus funds.
   
Income earners below $37,000. Focus exclusively on the TFSA. If you are frugal enough to save more than the $5000 contribution limit, then look to the RRSP.
 
  In between $37k and $120k. Save through both TFSA and RRSP to gain the advantages of each and the flexibility of having both.

jd

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Re: TFSA/RRSP
« Reply #10 on: February 17, 2012, 09:17:44 AM »
@vwDavid,
You're correct in that getting all your taxable income from eligible dividends is the most tax-efficient way to earn money--in many provinces, you can collect over $50k in dividends (assuming no other income) and pay no income tax.  There is a chart here:  http://taxtips.ca/dtc/taxcomparison.htm 
Of course, the taxes on the dividend income would be somewhat higher during the years that you are building your portfolio--depending on your marginal tax rate and how long you figure you need to work, there could be some benefit to using an RRSP to spread that employment income over more years.

Other factors that may be worth considering are the income-tested benefits that could be negatively affected by the dividend gross-up calculation (and RRSP withdrawals).  CCTB, OAS, and I believe GST rebates would be some examples, although this is probably minor if your investment income is reasonably low (or coming from a TFSA).

If you decide to do some part-time work, your RRSP withdrawals could be smaller or non-existent during those years.  Depending on how much you make part-time, you may even consider making some RRSP contributions to reduce your taxable income, and withdraw the money during years that you don't work.  Or just pay a little tax--your overall tax rate will likely still be below 5-10%.

To figure out the 'optimal' solution for your situation and assumptions, you may want to build yourself a spreadsheet.  I modified the one posted on the blog to suit my needs and have found it useful for trying out various scenarios:  http://www.mrmoneymustache.com/2011/06/14/a-retirement-calculator-for-canadians-and-you-too/

Retire-Canada

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Re: TFSA/RRSP
« Reply #11 on: February 11, 2015, 04:54:57 PM »
Older thread, but still valid and it comes up high when you search on RRSP vs. TFSA.

I assumed RRSPs would be better for me and just dumped my money into them maxing my contribution each year. As I started thinking about FI and reading MMM I was saving so much I filled up my TFSA pretty fast.

The trouble with the RRSP is that it's only tax deferred which means you'll pay taxes on it eventually and it will be counted as income for OAS testing and other benefits. The general wisdom is you'll put money in at a high marginal tax rate and pull it out at a lower one. But you really need to question that assumption. For me by 67 I'll be getting ~$15K CPP + OAS. At 71 I have to convert my RRSP to a RIFF and take out ~7% the first year. 7% of 750K = 52.5K, of $1M = $70K, of 1.5M = $105K! Add in my CPP + OAS + any other income and I could be paying a much higher marginal rate than when I contributed.

Since there is no penalty to pull $$ out of your RRSP I'll be funding my FI from my RRSP aiming to keep my income under $45K to pay a lower marginal tax rate. I'll keep projecting what my RRSP will be at 71 and ensure 7% isn't going to be too deadly for my tax situation.

You get TFSA space every year no matter how old you are so any money I don't spend will go into my TFSA - probably the max each year.

I'll live off my RRSP and keep the TFSA as a tax free source of funds for emergencies.

If you are young and making more than $45K/yr I'd go RRSP first and then TFSA. However, as you get older work out what your RRSP will look like at 71 and either start pulling money out or stop putting money in once you hit the sweet spot for your income goals at 71.

-- Vik

Heckler

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Re: TFSA/RRSP
« Reply #12 on: February 11, 2015, 05:41:57 PM »
MMM says maximize both!


Money sense has a few good articles that I'm following since my mortgage says I can't maximize either ( till next year!)

http://www.moneysense.ca/invest/rrsp/rrsp-vs-tfsa-which-is-right-for-you

Prairie Stash

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Re: TFSA/RRSP
« Reply #13 on: February 11, 2015, 06:49:13 PM »
nice link.

One extra catch is retirement age. I plan on taking 10K/year out of my RRSP for early retirement, spouse also for our first 20K in household spending. Say I retire at 50, 15 years later I'll have pulled out $300,000 to supplement my spending. I'll probably take out more from the RRSP personally, however low spenders who retire early can still use an RRSP.

Tax free on deposit and tax free on withdrawal; in smaller amounts.

lostamonkey

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Re: TFSA/RRSP
« Reply #14 on: February 11, 2015, 09:22:04 PM »
If you have a decent salary and mustachian spending, then you will probably maximize both.

If you have to choose one, it depends on: current income,  future income, retirement income, and flexibility required.

If you are saving for retirement, and are in your peak earning years, then RRSPs are a no-brainer.

If you are young, and expect to make a lot more in the future, then go with a TFSA.


Retire-Canada

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Re: TFSA/RRSP
« Reply #15 on: February 12, 2015, 11:26:26 AM »

If you are saving for retirement, and are in your peak earning years, then RRSPs are a no-brainer.


I'd agree right up until the point where you RRSP gets so big that it will result in a forced income that is higher than you expected.

http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?id=588275

If you put enough $$ in your RRSP when you are younger and get some solid returns on your investments they can grow to a huge amount by 71 when you have to pull $$ out at set minimum rates.

-- Vik

Cookie78

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Re: TFSA/RRSP
« Reply #16 on: February 12, 2015, 11:46:21 AM »
I'm debating this right now too. Ultimately I will max both for the next few years, but this month (before the deadline) I'm unsure whether to put my money in RRSP or TFSA. I only worked 8.3 months last year so my income was a lot lower than usual for 2014. The next few years it will be a lot higher and I'll be able to take more advantage of the tax breaks. With deductions from rental properties and such I may be very near the next tax bracket already. So its best to contribute to my TFSA and keep the potential deductions for later, yes?

Retire-Canada

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Re: TFSA/RRSP
« Reply #17 on: February 12, 2015, 11:53:48 AM »
I'm debating this right now too. Ultimately I will max both for the next few years, but this month (before the deadline) I'm unsure whether to put my money in RRSP or TFSA. I only worked 8.3 months last year so my income was a lot lower than usual for 2014. The next few years it will be a lot higher and I'll be able to take more advantage of the tax breaks. With deductions from rental properties and such I may be very near the next tax bracket already. So its best to contribute to my TFSA and keep the potential deductions for later, yes?

That sounds reasonable. If you aren't maxing both always go with the TFSA unless you are pretty sure you'll be at a lower tax bracket when you retire.

If you have maxed the TFSA than it can be worth saving the RRSP room if you'll be making a bunch more in the next few years.

-- Vik

Prairie Stash

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Re: TFSA/RRSP
« Reply #18 on: February 12, 2015, 07:43:48 PM »
I'm debating this right now too. Ultimately I will max both for the next few years, but this month (before the deadline) I'm unsure whether to put my money in RRSP or TFSA. I only worked 8.3 months last year so my income was a lot lower than usual for 2014. The next few years it will be a lot higher and I'll be able to take more advantage of the tax breaks. With deductions from rental properties and such I may be very near the next tax bracket already. So its best to contribute to my TFSA and keep the potential deductions for later, yes?
Do your taxes before Feb. 28. Then decide if you could use more deductions.

Also any contributions to RRSP can be used as a deduction for 2014 or 2015 until March 2. What about contributing early to your RRSP for 2015?

Cookie78

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Re: TFSA/RRSP
« Reply #19 on: February 12, 2015, 08:06:25 PM »
I'm debating this right now too. Ultimately I will max both for the next few years, but this month (before the deadline) I'm unsure whether to put my money in RRSP or TFSA. I only worked 8.3 months last year so my income was a lot lower than usual for 2014. The next few years it will be a lot higher and I'll be able to take more advantage of the tax breaks. With deductions from rental properties and such I may be very near the next tax bracket already. So its best to contribute to my TFSA and keep the potential deductions for later, yes?
Do your taxes before Feb. 28. Then decide if you could use more deductions.

Also any contributions to RRSP can be used as a deduction for 2014 or 2015 until March 2. What about contributing early to your RRSP for 2015?

I'd love to, but I haven't received any of my T4s or the other info I need to do them yet. Good points though. :)

Cookie78

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Re: TFSA/RRSP
« Reply #20 on: February 13, 2015, 12:03:38 PM »

Maybe you have a way to do a 'dry run'?

Yeah, I should be able to find most of the info. The big one is the interest on one of my mortgages, but I might be able to find that online. I'll see what I can do this weekend.

Either way I get the deduction now when I might need it, or later when I will certainly need it. Would be good to get the taxes done  and out of the way though. :)