Money

Budgeting, saving and investing for a brighter financial future

Where to stash your cash: RRSP or TFSA?

By Brenda Spiering, Editor, BrighterLife.ca

Comments (91)

Confused about the best savings option for your needs? You’re not alone. Ever since the federal government introduced the Tax-Free Savings Account (TFSA) in 2008, there’s been debate about whether a TFSA or a Registered Retirement Savings Account (RRSP) is the best place to stash your cash.

Where to stash your cash: RRSP or TFSA?Both provide tax advantages — there’s no tax payable on investment growth on funds held inside either account. However, each has its own set of rules. Consider Scott and Jennifer, newly married and saving for a trip to Europe.

“We’re both good savers and have enough in our RRSPs to cover the cost of the vacation,” says Scott. “The catch is we’d be hit with taxes on the withdrawal. For us, it made more sense to open TFSAs that allow us to save money knowing we’ll be able to withdraw it when we need it without penalty.”

But Scott says opening TFSAs didn’t mean ignoring their RRSPs. “The tax refund we’ll get in the spring from contributing to our RRSPs is an added bonus. Plus, it will come at the perfect time — just before we plan to leave.”

Whether contributing to an RRSP or a TFSA, the main things to consider are when and how you want to use the funds. It’s also important to understand a few of the key differences between the two options:

RRSP

  • Your contribution limit is based on a percentage of your annual income
  • Contributions are tax-deductible
  • There is no tax payable on investment growth
  • Withdrawals are subject to income tax
  • Withdrawals may only be redeposited if you have sufficient additional contribution room (once withdrawn, you never get the contribution room back)

TFSA

  • You may contribute $5,500 a year in 2013 and 2014
  • Contributions are not tax-deductible
  • There is no tax payable on investment growth
  • Withdrawals are not subject to income tax
  • Any withdrawals may be redeposited in subsequent calendar years

When it comes to saving for retirement, RRSPs are pretty hard to beat. Your contributions reduce your annual income tax. And, assuming you’ll be in a lower tax bracket when you draw the money out, you’ll save substantially on the overall amount of tax you pay. They are usually not a good option for short-term savings, however, as money withdrawn from an RRSP will increase your annual income and may result in your having to pay more taxes.

TFSAs were designed to supplement RRSPs. If you’ve maxed out your RRSP, they provide you with another great way to shelter a portion of your investment earnings from income tax. Because withdrawals are not subject to tax, they are also a good option for saving for shorter-term goals such as the down payment on a home, a vacation or an emergency fund.

Simply put: If you have adequate savings, it’s usually advisable to contribute to both an RRSP and a TFSA. To help determine the best savings strategy for your needs, consider:

  • Your savings goals
  • When you expect to withdraw the funds
  • How likely you are to need to withdraw the funds sooner for other needs


For more retirement planning tips, read:

Income tax Get more smart tips for tax time.
Retirement savings Get more bright ideas on saving for retirement.

Learn more about the advantages of Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Plans (TFSAs).

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Adrianne on

Howdy! I could have sworn I’ve visited this web site before but after going through some of the posts I realized it’s new to me.
Anyhow, I’m definitely delighted I came across it and I’ll be bookmarking it and checking back often!

T. A. Croz on

Addendum to my previous comment. I refer to TFSA about the income generated as tax free!

T. A. Croz on

Hi to everyone! Don’t know much about your topics; but I thought RRSP can only be procured against employment income! And any savings or income therefrom are free of tax. Please enlighten me! Thanks much.

BM on

We have been retired for 5 years, and have tried maxing out our RRSP over the last 15 years…When I purchased my RRSP in the past, I was an average middle class income earner… so was able to write off about 33% of my contributions , since my tax bracket was reaching those levels. Since we both have Company pensions and are elgible to receive the Canada pension, We usually cash out between $3000-$5000 a year each from our RRSP, which puts us in about the…15% tax bracket overall. Three things to consider…1/ Pay down your high interest credit debt first 2/ If you can afford it… contribute to an RRSP , since it is a great excuse for saving money for the future. 3/ You will accumulate all your interest and/or capital gains tax free while within your RRSP until you retire.
The only thing I don’t like about RRSP’S… is that if you die before you collect all your RRSP, (and you don’t have a spouse to transfer it to) your rrsp is added to your income for that year and is taxed on the full amount, before being added to your tax free estate.

And of course, If you don’t have a pension plan, and are a high income earner, you win big from both ends, because you can get back (right away) about 50% of what you contribute up to 18% of your earnings, and when you retire you can decide how much you want to take out each year at a much, much, lower income tax rate.

A TFSA is a great way for protecting your interest,capital gains, etc., if you have extra cash to invest.

    Donna on

    Im confused about if you die before you use your RRSps. Can you not asign them to your child? You don’t have a spouse. You have say $500000 in RRSPs You pay tax on that amount or capital gains for that year

      Robert Botnick on

      Hi Donna, I am including a link to a news article regarding the death of an RRSP annuitant. Please click on this link: http://www.recorder.ca/2010/08/26/death-tax-has-kin-fuming-6 or do a google search for “Death Tax has Kin Fuming. The story depicts a mother who worked hard to save during her career and sadly passed away of cancer. She thought her daughter would benefit from this “Gift of Love”.
      The CRA will create room in the surviving spouses RRSP to accommodate the roll over of funds. You cannot leave your RRSP or RRIF to your children without it being taxed first. However you can list your child as beneficiery of your TFSA.
      If you are under age 71 you may withdraw small amounts from your RRSP and your bank will withhold the taxes on your behalf. When you turn 71 years of age you must roll your RRSP into an RRIF and at this point the CRA has established the minimum amount you must take out annually.
      Please seek out a financial advisor be fore you make a decision which may cost you dearly.

Justin on

I’m in one of the lower tax brackets so I’m dumping money in my TFSA since it acts as a good short term emergency fund if I ever need one. Once I reach a higher bracket I’ll be using my RRSP more. With that said, I have a TFSA trading account. I get way better returns than the 1.5% that CIBC is promising!

cdncentsiq on

I am not completely against using an RRSP for retirement savings. There are two scenarios that are quite advantageous (tax efficient). These are real situations I have used in the past with success.

The first scenario applies to married people. One spouse had an income of $112,000 annually; the other was a stay at home and raises the children spouse. The higher income spouse contributes $10,000 annually to a Spousal RRSP. The contributor’s marginal tax rate is 43.41% (Ontario). So the $10,000 contribution to the Spousal RRSP reduced taxes payable by $4,341 that implies the real cost of the contribution is ($10,000 minus $4,341) = $5,659 The stay at home spouse has not contributed to the Canada Pension Plan because they have not had a full time job. Even if that spouse goes to work after the children have grown up, they will only receive a partial pension. Currently you have to work for 40 years in Canada and contribute the annual maximum to receive full CPP benefits.
So here is the real benefit. The contributions were made over a 12 year period totaling $120,000. The tax savings to the contributing spouse were approximately $52,092. The real cost is ($120,000 minus $52,092) = $67,908. The annuitant (spouse who will receive $$$’s) pulls out $10,000 annually for retirement income. Their income from the RRSP or RRIF has very little to no tax.
Here’s the best part; for every $10,000 of retirement income received (no taxes due) it only cost them $5,659

The second scenario uses the same working spouse above. They contributed to a company group RRSP with employer matching. The top tax rate on income earned was 43.41% and the retirement tax rate was 20%. For every $1000 put in the RRSP they saved $434.10 in taxes, net cost ($1,000 – $434.10) = 565.90
In retirement for every $1,000 received a total of $200 was due in taxes, netting them $800
So as you can see, the net cost to contribute per $1,000 was $565 and in retirement every $1,000 was net $800. The real gain here is $235 per $1,000

Joe on

One thing I found, in the TFSA arena, is that the government can “change their mind” at any time regarding any investment in there. A stock can be good today and you are dreaming the highlife then CRA says “nope, no good” then you are forced to either sell it, transfer it out into a different account or you could keep it in there and pay a 1% penalty per month on the book value of that— plus CRA could tack on whatever they deem fit as additional penalties.
My 2cents worth.

NoOneOfConsequence on

If you are married – you can get a joint TFSA. So today, you could deposit 40,000 into that.Put 50% towards bank preferreds which payout 5.38% per annum currently, with no fees. Put the remainder into a drip fund purchasing either Telus, Fortis, BMO or Bank of Nova Scotia. The DRIP automatically purchases more shares with dividend payments. The greatest thing is that DRIPS get a 2% to 5% discount on share purchase AND there is no fee for reinvestment.
If you don’t know about DRIPS….you need to know. Google it up.
If you need money, you can just withdraw it from your TFSA.
You cannot withdraw money from an RRSP without the bank holding back your tax payment on it.
RRSPs are stupid for anyone making less than 80 grand a year.

    Grammargirl on

    to NoOneOfConsequence. Point # 1: There is no such thing as a “joint TFSA”. As a couple, yes, you could each contribute the max into separate TFSAs and it doesn’t matter whose money it is, since attrition does not apply. ( ie. Who has to claim the investment income) Point # 2: Yes, RRSP withdrawals are subject to withholding tax, but depending on your income level, you will either get it back when you file your taxes or owe more if you have other income. That is why you would only take from your RRSP in low-income years.

    Donna on

    I agree with you about the income level for people buying into RRSPs I was a lower income invester. where is the benifit or the saving’s other than what you put in or the only thing I can think of is if your investments skyrocket due to your choices. How is it safe. Ive watch my account go down more than it gained over 25 years and one time only had a winfall this season. Ive never seen before where paying the tax on it is ok cause you still made something. Im afraid that if I dont take it out it to pay debt it will disapear again. I’ve been retired with a small pension. I have money in my RRSPs but Im taxed the full amount tax bracket on whatever I take. Its not a winning situation. The reason for paying into it was for a tax break. They use that investment and gain interest on it and your broker takes money every time you take it out or do any trades so where is the tax break. The dollar drops lower than when you invested and now your a loser there too. So by the time dividends are aquired you end up paying it out before you get the money you expected to have after 25 years of paying into it. Living costs go up taxes stay at the same rates the dollar is down, Im confused who makes the benifit especially if your investments go up and down all the time there is no real assurance you will have an income to rely on at seventy five. That;s scary and to me seem incrdably stupid to have been invested
    just sticking it in a safe for all those years.

JC on

If you marginal tax rate is going to be lower in retirement, usually the RRSP will work out better than the TFSA, so contribute there first. If you think your tax rate will be higher in retirement, use the TFSA first. As mentioned earlier, if you’re in a fairly low income bracket, the advantages to an RRSP are minimal. You should be looking at using RRSP’s to reduce your income above $50k, but not below it.

TJ on

my wife has 150k in her rrsp
she is no longer working and has $0 …..2012 income
I was thinking of her withdrawing $10000 per year just under her personal exemption so it would be tax free on withdrawl
use the funds to pay down our mortgage
I know our financial planner will probally say this is not a good idea as she will loose her trailing commissions

paying down 5% mortgage debt seems to me to make more sense at this time more than saving for retirement 15 years away
any thoughts and comments please TJ

    abm on

    Thats a good Idea, only thing to make sure there is no penalty for accessing the RRSP before retirement. Some Locked In Retirement Accounts kind of plans provide better interest rate in RRSP, but the penalty could be considerably higher if you try to access it before retirement..

      Donna on

      What if your living on a small maintenence income. Your retired. Why do you still have to pay full tax bracket on what you take out of your RRSPs adding that to your maintenence income. the spouse ends up with the tax break and your not married anymore.
      He ‘s in the very high tax bracket to boot

Peter on

People are still dreaming from retirement ?
My wild guess goes like this. 20 years from now , by that time the baby boomers have retired and the bag of money rrsps etc from the government will be pretty empty. No one will fill up the retirement vehicles. The tail end of that boomer generations will see not much at best. Considering the financial melt down since 2006/7 and a non recovery of the economy, interest rates at an all time low around the world .. i am not so sure where the billions of dollars are supposed to come from for the generation that will retire in 20 years.
Besides that , the birth rates are declining and new immigrants to canada are becoming rare, compared to 15 years ago. It used to be that asian immigrants where coming to Canada , these days that rate is declining too.
Around the world, most of the financial instruments for retirement are going rather broke than getting profitable.
Everyone looks at the crisis in the Euro Zone. Well, we are not far behind and it will hit us too.

    Donna on

    It sounds like we would be better off to unload our funds now and pay the taxes losing probably half and hold on to the cash and live within those means. At least we know what we have to work with

brian on

I admit I don’t know a lot about the TFSA’s (except that you can’t keep gold or silver investment in them), …but the RRSP’s are great for the high income earners who are in the high tax brackets, since when they retire they are in a much lower tax bracket. Plus if you already have an company pension, it’s not such a big savings when you retire. It all depends on your individuial circumstances.

Oracle_Of_Ottawa on

Why does no one suggest putting the tax credit back into the RRSP??? If I invest $10,000 into my RRSP this year, and receive about $2500 back, and put that straight back into an RRSP… Have I not just used $10,000 dollars worth of net income to contribute $12,500 into my RRSP. According to my calculations I just made 25% immediately, and that’s not including the subsequent tax credit I will receive for depositing that $2500 tax credit back into my RRSP again. Nor does that include the additional purchasing power and subsequent additional capital growth, plus dividends or interest, etc. etc. Some might say that that $2500 dollars was my money that I had paid in taxes anyway, and your right. It was money that I had payed in taxes, that I never would have seen again had I not contributed to my RRSP.

    WebDeb on

    What many are forgetting is the TFSA is cumulative and annual contribution amount is to be indexed. To the end of 2012, all have contribution room of $20,000 ($5,000 in each of 2009, 2010, 2011, 2012 = $20,000) and there’s word it will be $5,500 for 2012.

    (A) Buy $20,000 worth of dividend-paying blue-chip Canadian stocks and put it in your TFSA. Whether it’s capital gains or dividends, none of it is taxable. (If you already have a Margin account with a discount brokerage, transfer the stocks directly to your TFSA. You will have to check with CRA as to whether that would trigger capital gains/losses.)

    (B) Add your RRSP tax refund to your TFSA as the contribution room expands annually. Invest all of it (see A above). By the time you are ready to retire you should have a sizeable chunk of change in your TFSA. If you need lump sums to, say, buy an RV, take the bulk of it out of your TFSA and a much smaller amount out of your RRSP (now becomes taxable income).

Jacob on

All you guys seem to have lot of cash. I have to take a RRSP loan each year to get a tax refund which pays off part of the loan. Where is the money to contribute towards TFSA.

UnclePaulie on

Also forgotten is that if you don’t have a work pension you can turn RSP to RIF at age 65 and take out $2000 a year under the pension tax credit tax free. So assuming you and your spouse live to 90 that is 25 years x $2000 X 2 = $100,000 THAT YOU AND YOUR SPOUSE COULD TAKE OUT OF AN RSP IN RETIREMENT TAX FREE.. Don’t get me wrong, on the whole I prefer TFSA. I turned $5k into $15k in my TFSA in the first year by investing in stocks and I get to keep ALL of that! I didn’t triple the government’s money for them like I would have in RSP. But who knows maybe the govt helps us out and increases the pension tax credit.

    otctrader on

    Way too much ‘technical’ info going on.
    If,if,if…but bottom line: if you invest and make money (%) like Unc p., then tax free wins hands down.
    From there it becomes complicated and each individual needs to be able to do a tax analysis on
    their results..
    If you can afford to lose money, invest in speculative stocks in the TFSA, and if you win it can actually
    make a difference to your bottom line.

    Robert Botnick on

    UnclePaulie, Depending on how much you have accumulated in the RRSP CRA has a formula for minimum annual withdrawl. Here is the formula. Example: If you have $250,000.00 in your RRSP and retire at age 60 you have to withdraw $250,000.00 divided by (90 minus your age) = $250,000 divided by (90 – 60)= $8333.33 When you add this RRSP income on top of your CPP, OAS and any other pension monies, you are going to pay tax.

alex on

TFSA is a bad joke.
you can not compare TFSA with RRSPs as in the above article that is misleading.
the example with savings to be used for a trip is again pretty shabby: TFSA is only providing tax “free” on the profit made, that is on that $3,000 you saved for a trip and you deposited with 2% for 1 year you made $60 profit, taxable at 50% at your top marginal rate, say 33% , that is $30 to be taxed at 1/3 is exactly $10.

is this the big deal that we are supposed to embark on just because the government and the banks and the pletora of so called financial advisers tells us to do ???

Since the rates of return are pretty slim lately (1-3% on low risk deposits), the TFSA are useless, unless the government is providing the savings bonds with 5, 7% to make us use them.
The other big issue with the TFSA is the ridiculous penalties you get hit with (1% per month !!!) – that is 12% per year !!! is you are puting back in the TFSA account the money you used for some emergency (say you took out $5000 in Jan and put it back in in December) in the same calendar year.

Don’t fall for it and for the expert advice in this article.

RRSP are at least some real cold cash back. Use RRSP for your emergency fund that normally comes with loss of income and reduced tax rate.
Example: you can use your RRSP if you are 45 and out of work and opther taxable income to get by.

    Brenda Spiering (@BrendaSpiering) on

    Thanks for your comments Alex. You raise some valid points about the need to read TFSA rules carefully so as not to be hit with over-contribution penalties and the fact that the current interest rates on all guaranteed investments are indeed very low. However, you can hold many of the same investments you hold in your RRSP in your TFSA, including mutual funds, stocks and bonds.

    For more information about TFSAs, I invite you to read:
    http://brighterlife.ca/2012/03/30/five-things-you-may-not-know-about-tfsas/

Tommy Two on

The amount of money you can put into a TFSA almost makes them irrelevant.
The maximum amount should be $30,000 annually

Stephen on

As an Advisor. I always work out a clients monthly expenses pre retirement and what they think their monthly expenses will be in retirement. That way we can work out what rate of return is required and how much needs to be put away on a monthly basis. By doing that if a client wishes to plan to spend all their money, we can work out how much they will need to withdraw from their savings annually after CPP and OAS included. By doing this we can work out what their tax rate is projected to be. If they are earning over $50,000 pre-retirement then usually RRSPs are beneficial. If someone is earning less than $50,000 a year, TFSAs are a must prior to thinking about RRSPs. However Group RRSPs through some company pension plans allow for matching contributions from employers. Everyone in their right mind should max that out no matter what their income is.

Myron Duff on

None of Robert Botnick’s examples take the basic exemption into account and his assumpions also include withdrawing the money in one year. If you take some of your retirement income(up to the personal exemption) from the RRSP and the rest from TFSA and other outside tax paid investments you will pay no tax.
Another thing not taken into account is the growth rate inside and outside the RRSP. Inside it grows tax sheltered and outside it is taxed annually giving a much lower rate of return.
Use of an RRSP does not eliminate tax it delays it until(with proper planning) you can take it out at a lower tax rate.

    cdncentsiq on

    Myron, I want to explain to you what really happens, not the propaganda you read in the papers or hear on ads from financial institutions. You are terribly misinformed in regards to the minimum annual withdrawl from your RRSP as established by the CRA and the tax rates on investments inside and outside of an RRSP.
    First off your comment; “If you take some of your retirement income(up to the personal exemption) from the RRSP.” If you accumulate an RRSP worth $250,000. and retire at age 65, you will have a minimum annual withdrawl of ($250,000 divided by 25) = $10,000 Add this income on top of CPP, OAS and anyother pension monies. YOU WILL PAY TAXES. THE CRA HAS MADE SURE OF THAT!!!!!
    Secondly you said, “Another thing not taken into account is the growth rate inside and outside the RRSP. Inside it grows tax sheltered and outside it is taxed annually giving a much lower rate of return. You couldn’t be more mistaken. EVERY DOLLAR YOU RECEIVE FROM YOUR RRSP IS TAXED AT PERSONAL INCOME TAX RATES. So if you had generated CAPITAL GAINS OR DIVIDENDS inside the RRSP they would be taxed fully at your MTR. If you had invested outside the RRSP you would get the tax exemptions offered by the CRA. Here is an example of how this works. If you generated $10,000 of capital gains through your investments inside the RRSP and eventually received those gains as income, and assuming an MTR of 32% you will pay Revenue Canada $3,200
    If you received the same $10,000 capital gains from a “cash account”, you are entitled to the 50% exemption on your capital gains. So you would pay taxes on $5000 at your MTR (32%) = $1600 Now lets take this one step further and use a TFSA scenario. If you earned $10,000 capital gains and withdrew the monies from your TFSA, NO TAXES DUE. YOU KEEP IT ALL!!! To recap: The RRSP will net you $6800, The Cash Account will net you $8400 and the TFSA will net you $10,000 Here is a link to the Ernst & Young tax calculator for 2012. I shows you the tax rates for all provinces and territories and tax rates for various types of income. Copy and paste it to your browser.
    http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2012-Personal-Tax

      Myron on

      That may be true in this example but you leave out the tax refund which may be at the max tax rate, If you then put that in a TFSA or RRSP it will grow tax free as well as the original investment. So your initial investment in the tax free accounts may be significantly more than trying to use after tax dollars only. That larger base compounding tax free will overwhelm the downside.

      You may end up paying more tax but you will also have a significantly larger sum of money to pay on. You emphasize the part about paying more tax in total but I will gladly pay more tax if I have more money. Too many people worry about paying tax. You don’t pay taxes unless you make money. And yes I know this is about minimizing the tax and tax efficiency.

      It needs to be put in a spreadsheet format with easy to change variables. I may do one if I have time and post a link in dropbox.

      Robert on

      Hello Myron, I would like to work on a spreadsheet with you, if that’s OK. Please email me cdncentsiq@gmail.com
      For this reply I want to include a previous post where I have added back the tax refund you would have received when you made the deposit into the RRSP.
      Robert Botnick on July 7, 2012 at 12:07 pm
      The very basis for contributing to an RRSP or TFSA depends on your Marginal Tax Rate pre-retirement and postretirement. If you are paying taxes at a rate of 30% in your working years and then paying taxes at a rate of 25% in retirement, then put your cash in a TFSA. The reason for this is that all the growth in the RRSP is going to be taxed as personal income. Example: (Assumed rate of return 7.2% annually) You deposit $5000 into the RRSP. 20 years later it has grown to $20,000 The taxes due postretirement 25% MTR = $5000 leaving you with $15,000 If you deposited the $5000 into the TFSA, you would have the entire $20,000 no taxes due. The last step of the equation is to add back the tax refund you received when you made the initial deposit to the RRSP which would have been ($5000. X 30%)=$1500. So to compare net to net you would have net $16,500 (RRSP) vs. $20,000 (TFSA).
      I received a reply to this post from RyanD on July 13, 2012
      “but using that formula of 5K turning into $20K wouldn’t the $1500 tax return invested turn into $6K?
      So you would have $26000 in RRSP minus the 25% equals $19,500?”
      What you are saying is deposit the $5000 to your RRSP and the tax refund of $1500 for a total of $6500. In 20 years you will have the sum of $26000 minus the taxes of 25% or $6500 leaving you $19,500 in your pocket. If you invested $4875 in a TFSA ($1625 less) in 20 years you would also have in hand $19,500.
      Both of the above scenarios are calculated with an annual return at 7.2% So a good plan might be to take the $1675 and throw it down on your mortgage which will save you over $13,000 in interest costs.
      If you invested $6500 in the TFSA, in 20 years you would have $26,000 in hand, that is $6,500 more than using an RRSP as a vehicle to save for your retirement.
      So here is the kicker! By investing for retirement using the RRSP and taking the $1500 tax credit today, you guarantee the Canada Revenue Agency a tax payment of minimum $5000.

Jay thessalon on

Some thoughts on the July 7 example, by Robert B.
Put $5,000 into the RRSP. Take the $1,500 tax credit (5000 x 30% MTR=$1,500) and put into TFSA. In 20 years you get $20,000 from RRSP less $5,000 taxes (at 25%MTR) which is $$15,000 in your pocket from the RRSP and the TFSA grows to $6,500 tax free so the toal RRSP after tax + TFSA is $15,000 + 6,500 = $21,500. If you put the $5,000 into a TFSA instead of an RRSP, you would have $20,000 after 20 years. So the RRSP + TFSA option puts the most money in your pocket. (The example assumes the rate of return is 7.18% compounded annually for 20 years which is a bit unrealistic but not relevant to the best option selection. You cannot use $6,500 to invest in the TFSA, as someone suggested previously, since you only have $5,000. The other $1,500 comes from the government by way of the tax credit. Alternatively you could put the RRSP tax credit on the mortgage and get a return based on the rate of your mortgage rate. As many suggested, talk to a finacial advisor to develop a plan most suitable to your situation. . That’s my 2 cents.

Walrus007 on

Well, the way my wife and I settled the argument is to max out our contributions in both RRSP’s and TFSA’s. We want to take advantage of the benefits they both offer. My wife is a federal government worker with a good pention plan so she is automatically maxed out on her RRSP’s each year. The TFSA is a gift that works great for he, she really had few options left to shelter money from the tax man. I am self employeed with very sporadic income, I can earn well into 6 figures for two or three years then zero the next. I max out my RRSP contribution in big years, make no contribution in average years, then take money out of my RRSP into income in very low income years. I effectively use the RRSP system to defer high tax rate earning into very low tax rate years. If you have a relatively steady earning stream year over year, sinking all you investment cash into RRSP’s can come back to haunt you, even more so if you have a sizable pension from work. If you need a big chunk at once for an r.v., cottage, help the kids, etc you can get killed in taxes. The government are not fools, they just figured out a way to keep retired people paying income taxes long after they quit working, and we line up like sheep to sign up! My parents have regretted RRSP contributions made late in their working years as a last minute scramble to bolster their retirement. My advice to those whom expect to be working to traditional retirement age is to use your TFSA contribution allowance first. If you need the money you can have it anytime without penalty. I have read that over the long run the net difference between the two systems is minimal for most people.

Shailatkay on

The figures do neither reflects alternate opportunity costs nor the ACTUAL rate of inflation. I wonder what goofballs calculate and state current inflation rates. The gas, utility, eggs,milk and bread etc have visibly gone up more than the CPI rate. Have invested in RRSPS over thirty years, I still have barely my principal to show for it. The mutual fund managers made money with no accountability for returns to the investor. How can licensed individuals be paid without any performance guarantees especially when they are entrusted with hard earned money. Sounds absurd to me.

Sue on

Wouldn’t paying off your mortgage be a better use of the funds ?

    Rhonda on

    My thoughts exactly…

PSA on

A points missing so far from the conversation: A TFSA lets you withdraw at any time without the amount being considered income. Many middle-class Canadians will not have a golden age; they will be living with limited means, and receive guaranteed supplements and rent subsidies, plus whatever provincial program is available at that time.

Those programs in turn are based on your level of income, creating the infamous “clawback” effect among other issues. Depending on how much you make ( and I won’t even mention the effect of the grossing up of dividends earned outside of savings plans), reducing your net income may be greatly beneficial to you by increasing, or at least not negating, benefits to which you are entitled.

A taxpayer living in a coop and entitled to rent subsidies, for instance, can easily end up paying three times the rent if they are lost.

A non-taxable income from a TFSA may make the difference between eating into your capital and having your RIF lasting for 10 years, or generating enough income from your investments to last until you are 95. As said above, before defining what strategy is best for you, INVEST in a meeting with a financial planner. That meeting will save you far more than it may cost.

Mark Morgan on

Very interesting discussion. I like the comment in the July 7 posting best, though: “I don’t make mistakes.”
I wish I could say the same, at least with a straight face! Still, it is an interesting and informative discussion and well worth anyone’s time to peruse and ponder. Thank you.

DingDong on

if you are even 1% aware of the history of fiat money then you laugh at these nonsensical “faith based” calculations and are buying precious metals

peter crawley on

Well not to disagree with any of the above:
but
If you deposit to an RRSP and then use the tax refund in the TFSA you have a portion of both working for you.
The best result is too accumulate $$ in the RRSP and then take time off, that is no income, and then withdraw
the money. If you withdraw an amount under the taxable limit you get it out tax free.

JL on

RRSP’s are probably the worst investment anyone can make and I agree with Robert on his points – the money in effect is not yours as the government because they gave you a benefit deems only certian investments worthy and on top of that they mandate the manner you have to take the funds out when you turn 71. Also if people watch trends around the world you will notice many countries Ireland, Greece, Hungary, etc. are nationalizing their citizens savings and mandating the only investment they can have in the pensions, RRSP’s is their worhtless bonds that are paying negative returns. Canada has in place these exact same laws passed druing Brian Mulrooney’s tenure.

Angelo Mantzios CFP, CLU, CHS on

Here’s one more thing to think about…

25% of Canadians die before 65. Which means (if you are single or widowed), all your RSPs are now “disposed of” which will boost the taxes that go to the government. So if you accumulate say, $500,000 in RSPs over your lifetime (at an average tax savings of 30% – $150,000 tax return over say 30 years), if you die single or widowed, then 100% of that goes into your estate (if no beneficiary is named) and the following happens:

#1 – $500,000 disposed of at 46.41% – $232,050 in taxes,
#2 – 1.5% probate fees – $7,500 (if no beneficiary is named),
#3 – executor fees of up to 5% (if applicable and/or not prenegotiated)

That being said, if your income is going to be drastically lower at retirement, perhaps the RSP program is viable.

At the end of the day, you need to get with an advisor (preferably one with their CFP, CLU & CHS designations) and see what works best for you and your family. At the very least, the advisor should know to tell you to name a beneficiary and have a proper will in place to minimize and reduce/eliminate taxation.

Angelo Mantzios
Sun Life Financial Advisor

Robert Botnick on

Hello Everyone, I have posted previously on this subject. The very basis for contributing to an RRSP or TFSA depends on your Marginal Tax Rate pre-retirement and postretirement. If you are paying taxes at a rate of 30% in your working years and then paying taxes at a rate of 25% in retirement, then put your cash in a TFSA. The reason for this is that all the growth in the RRSP is going to be taxed. Example: You deposit $5000 into the RRSP. 20 years later it has grown to $20,000 The taxes due at a 25% MTR = $5000 leaving you with $15,000 If you deposited the $5000 into the TFSA, you would have the entire $20,000 no taxes due. The last step of the equation is to add back the tax refund you received when you made the initial deposit to the RRSP which would have been $1500. So to compare net to net you would have net $16,500 (RRSP) vs. $20,000 (TFSA).
All I am trying to do is teach people what the government and the banks don’t want you to know!

    ryanD on

    but using that formula of 5K turning into $20K wouldn’t the $1500 tax return invested turn into $6K?
    So you would have $26000 in RRSP minus the 25% equals $19,500?

    Robert Botnick on

    In response to ryanD on July 13: Ryan step back and think about this. What you are saying is deposit the $5000 to your RRSP and the tax refund of $1500 for a total of $6500. In 20 years you will have the sum of $26000 minus the taxes of 25% or $6500 leaving you $19,500 in your pocket. If you invested $4875 in a TFSA ($1625 less) in 20 years you would also have in hand $19,500. If you invested $6500 in the TFSA, in 20 years you would have $26,000 in hand, that is $6,500 more than using an RRSP as a vehicle to save for your retirement.
    So here is the kicker! By investing using the RRSP and taking the $1500 tax credit now, you guarantee the Canada Revenue Agency a tax payment of $5000. I am here to tell you the truth, “WHAT THE BANKS AND OUR GOVERNMENT DON’T WANT YOU TO KNOW.”

      Kevin on

      Robert, you do make mistakes. You can’t invest $6500 in TFSA. In 2012 the amount was $5000/yr and in 2013 it is $5500. I do agree with you though that for anyone earning under $45K/yr it is TFSA all the way. Just do a Couch Potato Portfolio (index funds if below $50000 and ETFs if above) and make regular contributions. Once a year reallocate to your investment strategy.

      Transceiver on

      What mistake? Seeing as the current annual limit in 2013 for TFSA contribution is now 5500/yr then in 20yrs, as in Robert’s example, it wouldn’t be difficult to invest 6500.

      George on

      Robert you have great points but the interest rates to give you compound earning just aint there anymore.

    Travis on

    He is right and makes perfectly good sense. TSFA is the way to go.

lost one on

These two vehicles are at the end of the day, no different from each other for the investor. pay up front, or defer the payment. One could argue that if you have the money to invest in a TFSA or RRSP you would be better advised to take the tax credit, and defer the tax payable. Not risk freee, but a bird in the hand (the tax credit).

    cdncentsiq on

    Dear Lost One, Please read my response of July 7/2012. I have shown in plain english why most people will have LESS MONEY IN HAND at the end of the retirement savings process. I tell you the truth, “What the Banks and our Government DON’T want YOU to KNOW”

Michael Ivy on

I agree. Without getting into the discussion on marginal tax rates and such, I simply look at the two vehicles in the following manner: RRSP’s protect current income. TFSA’s protect future income. And I imagine that everybody probably uses the RSP to generate as much tax return to pay for the TFSA contribution. cheers mp

Teddi Knight (@BeFullyInformed) on

The problem for a lot of investors with the TFSA is that investments within the TSFA have the same regulations as an RRSP. One of the biggest problems with investing in RRSP’s is the inability to apply option trades properly to stocks in order to protect positions as well as profit from downturns in either the overall market, an ETF or a stock. The Government seems intent that people should just plunk their capital into an ETF or a handful of Canadian stocks and pray it all works out. The only protection allowed is buying puts, buying a hedge fund or selling covered calls. I had hoped when the TFSA came out that they would finally realize that put selling, option spreads which are simple to implement would finally be allowed. Instead the Government stuck the same rules for investors into the TFSA. It’s a shame. The ability to earn income and avoid taxes through proper stock, etf and option trading should be a no-brainer today. The US laws have allowed these types of trades within 401s and retirement accounts for years now. We need to catch up.
Teddi Knight http://www.fullyinformed.com

    enid on

    I have a TFSA with Scotia iTRADE and have option privileges.

Robert Botnick on

I’ll cut straight to the chase. Most Canadians will find that their marginal tax rate in their working years will be the same in retirement. If you currently have taxable income below $39,020 your MTR is 20.05% In retirement you will also be in the lowest MTR. So let’s say you deposit $3000 to your RRSP. The Canada Revenue Agency allows you a current tax saving of $601.50 Thirty years from now your investment has grown to $24,000 This represents 7.2% growth annually for the 30 years. Given the MTR of 20.05% you will pay $4812 in taxes. What this means is CRA earned 7.2% for 30 years on their $601.50 YOU ARE JUST GIVING BACK THE TAX REFUND YOU RECEIVE AT A LATER DATE. So my advice is forget all about RRSP’s unless you have a taxable income over $82,200 annually

    Bill on

    Your math is off as it doesn’t include provincial income taxes. It also doesn’t consider the fact that having $600 of capital returned to you today is exponentially more valuable than paying $600 “years” down the road when inflation has devalued the $600.

    It also doesn’t consider that in retirement a couple can “split” their retirement which they cannot do while working (unless they are self-employed).

      cdncentsiq on

      Hello Bill, I am a professional engaged in the financial,and insurance industries. I don’t make mistakes. The MTR is based on 15% Federal and 5.05% Ontario provincial tax rates. There is a saying that goes like this, ” A dollar today is worth more than a dollar tomorrow”. This implies that all future dollars will be subject to inflation, or the erosion of the purchasing power of todays dollar.This is exactly why you would have a negative return if you are investing in GIC’s, Term Deposits, Canada Savings Bonds etc… These investments have been paying less than the average inflation rate over the past 30 years. Lastly I want to comment on pension splitting.If both spouses have split retirement income from Pension Plans, RRIF’s, LIRA’s Annuities of $39,020 they will each pay 20.05% combined federal/provincial income tax. It doesn’t get any lower than this.

      pawpaww on

      ok so where do you invest in if GICs, bonds etc are all bad investments?

      Saint Jpseph on

      Hi pawpaww,

      I have been an individual investor for over 4 decades.

      My investment remains constant over that period.

      I invest for the long term in

      big-cap, blur-chip

      North American stocks.

      Current dividend yield is 2.29% per annum.

      That is on top of capital appreciation.

      Not bad for someone who says

      “He is not that smart”!

      Saint Jpseph on

      Hi Pawpaww,

      As an individual investor for over 4 decades,

      I suggest you look into

      investing for the long term in

      big cap, blue chip

      North American stocks.

      Saint Jpseph on

      Hi pawpaww,

      p.s. Invest within your Self Directed RRSP account!

      Best Wishes!

    kyle on

    Herpa Derp robert botnick.the blog told you to invest in both rrsp and tfsa Invest $5000 into rrsp then put the $1500 tax break into TFSA you get a return of $15000 after taxes plus an additional $6000 from the TFSA. I believe that would net you $21000 and $21000>$20000.

    Angelo on

    You can get 7.2% over 30 years. Those days are over my friend, you will be lucky just to maintain your principal.

      Rhonda on

      UnclePaulie…you made that kind of a return on TFSA? You must have it in a self directed account? Mine isn’t doing that well. I have my in funds decided upon with my CFP…unfortunately she put it into a “lock in” …that new care will have to wait if I don’t want to pay a penalty.
      SO…
      My question is …. is it better to simply invest using street knowledge of a company you use daily IE. Apple/Wal mart/McDonalds? than using a financial planner to invest into the TFSA? Can I use an online service to purchase stock within a TFSA?

    Russ Reid on

    Robert Botnick: I agree completely. The RRSP programme only delays taxation not eliminate it.

      WebDeb on

      A key factor that is being overlooked in this discussion is that, whether your money is parked in an RRSP or a TFSA, any growth in the stocks you hold is not subject to capital gains tax. (Outside of a registered account, 50 per cent of your capital gain is subject to your MTR.)
      As for the historically low returns on GICs, CSBs, etc. and the futility of investing in mutual funds with MERs that leave you with a negative return, we are left with no choice but to invest directly in solid Canadian companies or trusts that pay a healthy dividend. (Any of the Big Five banks, large conglomerates like BCE, utilities such as Fortis are some that come to mind.)
      My portfolio took a hit along with everyone else in the 2008 meltdown (thank you, greedy Wall Street robber barons). Although I was invested primarily in dividend-paying stocks, I realized about six months ago that, if I have any hope of retiring within the next decade, I had to do something drastic to grow my nest egg. But rather than buy the product, I bought the Goose that is now laying Golden Eggs.
      I had purchased 50 shares of Apple when they were at about $275 several years ago. (Having long been a Mac user/fan because I believe in the company and its product, I was kicking myself that I hadn’t bought them in 1995 when they were about $50.) I have liquidated much of my portfolio and now hold 550 shares of Apple at an average price of $492. The stock recently was above $700; many analysts are forecasting it to hit $850 and a few optimists speak of $1,000.
      I confess I took several deep breaths before putting so many of my eggs in that one basket, but I think what’s happening with Apple in this decade is a once-in-a-lifetime opportunity. My RRSP had dropped to just above $200,000 (from about $250,000) due to the financial crisis; thanks to Apple, it’s now closing in on $400,000.
      The kicker is that Apple began paying a dividend in its second quarter: almost $1,000 went into my account in August. Now, with 550 shares x $2.75 per, I’ll be reaping more than $1500 every three months!!

      Offgrid (@offgrid) on

      WebDeb … I hope you sold all your Apple shares when it hit $700 (550 shares * 700 = $385,000) …. Since your average Price was $492 (550 * 492 = $270,000) and the price recently dropped to $422 (550 * 422 = $232,100) …. You would be down almost $40,000 from your initial Investment in Oct 2012…. or $152,000 from the peak. So, down 15 % (in 4 months) …. If you had only bought a GIC earning 2.5 % I guess you still have the $1,500 Dividend. Only problem is Apple will continue to drop since they are no longer innovating. Google and others have taken over where Steve Jobs left off. Over the last 10 years I have only been buying 5 Year GIC’s and I have consistently made Money. I’d take 2.5 % over a loss of 15 % any year ! And I sleep well at night.

    mordieca on

    if this is so,then why are banker and investment profesionals who should know better and who we entrust with our monies are not telling us the truth. the information is food for thought. i always believe that if the government was not making a profit $$$ then there will be no RRSP.

    Raifon on

    Right on Robert good example and abbreviated in comment, well said !

    Ambrose Wells on

    To Robert:

    “I am a professional engaged in the financial, and insurance industries. I don’t make mistakes”

    You are human and humans have been known to make mistakes from time to time. I will just make a note to myself NOT to use your ‘professional’ services – there might not be enough space in the room for me with you and your ego.

    Instead of tearing every other comment or post apart, why don’t you offer something constructive?

      Robert Botnick on

      Good Evening everyone. I wish to address Ambrose Wells comment, “Instead of tearing every other comment or post apart, why don’t you offer something constructive?”
      I have spent my professional career gaining knowledge. When you gain knowledge, you ask better questions. Asking better questions, will lead to better answers. I have helped ordinary people to accomplish extraordinary financial results. I have accomplished this by showing people that the preconceived manipulation of finance and taxation only serves to secure profit for the banks and a steady stream of revenues for our government. You, your parents and grandparents have had the wool pulled over your eyes, and most of you don’t even realize its happening.
      There is a mortgage product that has been available in Canada since 1999. It allows homeowners to pay off their mortgage in half the time. This has saved some clients more than $180,000.00
      There is a whole life insurance strategy that allows you to have income in retirement that is not subject to taxes or clawbacks. An insurance company that I worked with paid a dividend of over 10% from 1980 to 2010
      I incorporated strategies.that saved people money. Investments that performed well despite what the stock market was doing ie….realestate funds and long term bond funds. Lastly I made sure that the strategies were as tax effiecient as legally allowed.
      So as you can now see Mr. Ambrose I don’t tear apart, I diagnose a readers comments and show a viable, intellectual outcome that you will only get from a well informed and knowledgeable Financial Advisor.

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