Cheers

I would council any young person that contribute to the TFSA first unless your income is around $35k or higher. At lower incomes it will be more likely for the general public that your withdrawal rate at retirement will be at least as high as during your contribution periods. Thus, chalk one up for the TFSA. At higher marginal tax rates you want to lean towards the RRSP.

The younger you are, the more benefit you will accrue from either investment vehicle. Lucky are those which can maximize both investment portfolios.

Rat – you should absolutely invest in RRSP’s if your employer is matching up to 3% of your contributions.

Even if you didn’t get the match and were close to retirement you could take a long term approach and think about when you are forced to start withdrawing from the RRSP – and that is when you convert it to a RRIF at age 71. Do you project that any additional money for investing (after the TFSA is maxed out) in an RRSP could outperform non-registered investing taking into account your MTR at contribution vs. withdrawal? You also have to factor in whether you will “gross up” your RRSP contribution or at least reinvest into the RRSP any tax refunds associated with it.

I don’t really understand this point.

Say I hold $100,000 worth of RioCan – withdrawl taxes aside, when I’m ready to start ‘using’ my RRSP savings, I can simply make an ‘in-kind’ withdrawl and move that holding into a non-registered account. Of course I’ll pay taxes on the withdrawl – the I’ll get the same income generated from those investments going forward.

I think the RRSP debate stems more from how much original capital was used to generate the $100,000.

To get $100,000 into a TFSA or non-registered account, I’ll have had to use $166,667 pre-tax dollars. To get $100,000 into an RRSP, I’ll invest $100,000 pre-tax dollars (assuming reinvesting the refund).

Whether this is worthwhile or not has ALL to do with your marginal tax rate now and whether it will be the same or lower when you draw the RRSP funds.

No, I didn’t. I counted it once; you count it twice. In all your statements you add the $3500 to your RESP while simultaneously subtracting it from your RRSP contribution. You repeatedly claim to have your cake and eat it too. It is a glaring error that calls into question any other comments you make.

DAvid

I did a calculation over 10 years using an initial lump sum assuming 8% annual compounded growth using the above mentioned tax rates. I also assumed 100% reinvestment of the RRSP refund into the RRSP and didn’t account for the delay in getting the refund which would be fairly minor. The TFSA ended with 17.64% less after tax dollars than the RRSP after tax dollars. So instead of being a 15% advantage for the RRSP as you might guess, it turns out to be 2.64% more. This effect would become more pronounced the longer your investment horizon is. This may be part of what RRSP fan was trying to get across and I didn’t see it, I’m not sure.

If you make the mistake of investing in the TFSA instead of the RRSP thinking your retirement income will be high and thus put you in a tax bracket equivalent to or higher than what you had during your earning years you can help mitigate the above losses by taking your TFSA money and dumping it into an RRSP at the end of your career. This will allow you to take advantage of a tax refund from the government that will be taxed at a rate less than the marginal tax rate you’ve been paying throughout your working career. I did this for the above example and the final after tax dollars worked out to be 8.99% less than the RRSP only approach. This is much better than a 17.64% difference for sure but still less because although you get to take advantage of the tax refund from the government you miss out on the compound growth of the 15% untaxed dollars over the 10 years.

Of course all of this only matters if you have to choose between RRSP and TFSA. If you have enough money to invest, you obviously want to contribute to both of them!

So the lesson here is to figure out as early as possible if you are going to have a high income in retirement or not and if you will be able to live with withdrawing only a small amount from your RRSP each year to keep your marginal tax rate low enough for the RRSP to actually pay off over the TFSA only or the TFSA + RRSP hybrid (lump sum contribution to RRSP just before retirement) approach.

I am going to try to explain in the most logical manner possible as to why I personally have some issues with RRSPs. As I mentioned, If anybody can prove to me otherwise, I am TOTALLY receptive to changing my investment policy to incorporate more RRSP contributions. As of right now, I am contributing with my employer, who matches up to 3% of my bi-weekly pay.
Here are my two main concerns:

1. I consider myself a strictly income-oriented investor and income generation is key to my investment strategy. I seem to be convinced that when you invest in RRSPs in comparison to a non-registered account (which, in my case, primarily involves investment vehicles that generate income), when it comes to retirement,(whatever that age may be) with your registered account, you would be drawing down upon your principal as any withdrawals get treated as income, whereas in a non-registered account that encompasses many dividend generating investments, one could essentially live off of the income being generated and have less of a risk of biting into one’s principal investment.
2. In my case, if I am in a situations where I know I will possibly have enough income generation via non-registered route to retire in a few years from now, is it even worth investing in RRSPs? The only thing I could think of is if I get to the point where I know how much in taxes I will need to fork over to CRA, I could offset some of that with RRSP purchases. In other words, I suppose I would be getting RRSPs at a much reduced rate if you consider the fact that the taxes would have to have been paid out regardless. Know what I mean?

So there you go, those are my key concerns and any suggestions/comments would be beneficial. In the meantime, I am going to pay tribute to this thread by publishing a dedicated post to my own personal RRSPs on my blog. 50+ comments is great!

Cheers

Withdrawing within 3 calendar years from the last spousal RRSP will have that income attributed back to contributor. Also be careful contributing to a spousal if you want to withdraw from it as it also taints the original RRSP if the spouse contributed directly and is subjected to the same attribution rules…

Cheers

FACT:
The TFSA and the RRSP will give you an almost identical return no matter what you are invested in (GICs, savings account, bonds, stocks) as long as your tax bracket is the same at the time you contribute the money as when you withdraw the money and assuming that you 100% reinvest any tax refunds you get back from the government for RRSP contributions IMMEDIATELY back into your RRSP. Because you have to wait for your tax refund, the RRSP will perform slightly worse over time.

What RRSP fan is saying about tax free compounding is entirely untrue. This only applies when comparing tax sheltered investments vs non-sheltered investments. The TFSA is a tax sheltered investment in that ALL of the GAINS made in that account ARE NOT TAXED. So again, let me reiterate that as long as your marginal tax rate is the same at the time of contribution and the time of withdrawal the RRSP and the TFSA are nearly identical with the RRSP being every so slightly worse.

That said, you can then start to get creative with your retirement planning and tax strategies … most of which are honestly a bit over my head because I haven’t researched them enough. You have to accurately predict your retirement income from all sources. If you start a business that will provide you with residual income or you get royalties even after you retire then the TFSA would be the clear winner because it will be hard to keep your income down in retirement. The income from CPP, OAS, GIS (probably will not apply to you), dividends, capital gains, part time jobs, etc all need to be considered.

If you know of a sure fire way to make sure that you can take money out of your RRSP tax free or at a very very low tax rate then, yes, this is the best method. It is harder than it sounds though. If you can engineer several 0 income years somehow and still live you could actually withdraw the basic personal amount (somewhere around $10,000) entirely tax free and in that case you would be ahead by 30% or 40% or whatever refund the government gave you when you contributed. You would need to do this before the age of 60 when CPP kicks in though because that counts as income. If your spouse earns 0 income and you can set up a spousal RRSP then this would be a great way to do it. I don’t know if there are additional restrictions with spousal RRSPs but I would contribute to that, get the tax refund, withdraw the funds immediately (aka before retirement) and put it in a TFSA for additional tax free growth. Does anyone know if that is possible?

Sorry for going long. But to sum up, I think the best strategy is to max your TFSA now and let your RRSP contribution room grow. When you are very close to retirement and likely making the most money you will ever make, the tax laws for your retirement will be more clear, and you will be able to get a better picture of your retirement income from ALL sources THEN AND ONLY THEN dump money into your RRSP if it makes sense. You will get the greatest tax benefit from doing this and will be able to figure out your complete retirement plan by that time. Of course, if you max your TFSA and you still have money left over, then put it in the RRSP as it is better than non-sheltered investments. If any year you are going to have 0 income then take the money out of the TFSA and throw it into the RRSP in that year and then immediately withdraw it from the RRSP again to get both the tax refund and pay no tax on the money. It is better off sitting in the TFSA until you have a SPECIFIC reason to put it into the RRSP.

Am I right?

You forget about the $3,500 I saved in income taxes by making the $10,000 contribution. This would have permanently belonged to the CRA if I hadn’t conrtibuted. Agree w/you that RRIF draw downs are considered regular income. However, seniors have the regular basic deductions, pension splitting, age credits currently available to minimize the tax hit. As I said before, I will cross that bridge once I get to it. For now, I continue to max out any and all avenues of tax deferred and tax free savings.

That isn’t really analyzing the individual situation – more of a blanket statement which is undoubtedly true for some and not true for others.

Without knowing your situation it would be hard for me to try to make suggestions for improvement. It does sound like you are saving so that’s the main thing.

I see your point, although don’t assume my “put enough $$ into my RSP to avoid paying any further income tax in 2010″ doesn’t mean a few thousand/year doesn’t go in there!

I agree, the TFSA in the short-term doesn’t cut it. You can’t retire living off a few K/year. Time is everything…those starting out in the workforce now, will love the TFSA in 30 years. Those who want to and can retire soon, well, it doesn’t quite work for them; as their retirement horizon is soon or now.

However, my goal, like others in this forum I’m sure, is to provide working income replacement; whether it be from rental properties, RRSP withdrawals, dividend payments, general interest, other. Simply, I’d rather get taxed at less than 20-30% using dividend income if possible.

I wish you luck in your retirement plans at 47. Seems like a great goal!

I think our different approaches really highlight how specific retirement funds planning is. – No right or wrong, no “RRSP is better than TFSA” or vice versa.

For us, the TFSA simply can’t cut it – we’re hoping to retire (or semi-retire) young (47) – and $5000 per year just isn’t going to give us enough funds to do it. RRSPs work well for us since we’ll have so many years before we are ‘forced’ to begin withdrawls – this means we’ll be able to structure our income/RRSP withdrawls to minimize taxes paid. So for money going into the RRSP now, we’ll get 35%-40% in refunds – and when it comes out – hopefully we’ll be able to get taxed at 20-30% only.

Interesting math. By my calculation, after you have completed these transactions, your chequing account is smaller by $10,000. Therefore you are $10,000 out of pocket.

6) In the case of the RESP, it will hopefully be taxed in the hands of my non-earning children at a much lower tax rate. If not, I can transfer this to a spousal or personal RRSP with a smaller tax hit”

7) In the case of my RRSP, it will grow on a tax deferred basis till it rolls over to an RRIF and then be taxed at a much lower rate when I am earning almost 0 employment income.

Every dollar you withdraw from your RRIF is taxed as “employment” income. Unless you plan on living a much different lifestyle than now, I suggest your income will be similar (inflation adjusted) as now. Also, unless you stop your other streams of income, they too will be seen as taxable. If on the other hand, your income came from a TFSA rather than the RRIF, it is ‘invisible’ income, and has no effect on any other income streams.

Plus 20-30 years from now, the basic exemptions and spousal pension splitting rules will probably be more favourable (I hope), if the current trends towards senior’s taxation and age credits continue.

We all wish we could have a crystal ball and know the future. While I agree that various forms of income splitting are likely to be included in our tax scheme, basic demographics indicates that seniors, especially “zoomers” will be paying a portion of taxes equal to their proportional representation in society. If you expect that a large seniors population, consuming expensive government services will be covered by taxing a much smaller working population, I expect you will be much disappointed. The future our current governments are creating is one with greater disparity in the earnings of the middle class, with a clear move of taxation to the consumer. These folks will have much less income to be taxed, thus less income to government, thus a greater need to (fairly) tax retirement income.

Finally, I expect your accountant is one who holds the opinion that you manage your money for today, as you can’t know what changes tomorrow will bring. Others try to project to the future and adjust for those changes as they come. If you only look to today, you may not recognize the liabilities tomorrow may bring.

DAvid

So, I’m going to put enough $$ into my RSP to avoid paying any further income tax in 2010 (i.e., just enough to get money back in the spring of 2010). This way, I pay myself first, let my money grow via indexing and have that nest-egg continue in my RSP. I don’t see the value in having massive amounts of money in an RSP, since you are only deferring the tax and the more money you have invested in an RSP, the more tax you have deferred (and will eventually pay).

So, this year (2010) unlike last year, I will start a new brokerage TFSA. This will allow me to start holding some stocks in there; certainly all will be dividend-payers. It will also be a great spot to put the other stocks I’m starting to DRIP, many years down the road, once TFSA contribution room rises. In the short-run, I don’t see the TFSA being a retirement tool. Better served as a security blanket for emergency funds or a short-term growth. However, 20+ years down the road, it’s a different story. Given I have about 20+ years of work left, I certainly see the TFSA as a great home for dividend income growth.

@Chet – I couldn’t agree more…everyone needs to look at their own goals and decide what is best for them. Personally, I feel that passive, dividend income is the way to go. Slowly, I would like to build my portfolio to replace my working income. If I could ever replace 100% of it, GREAT! But if not, even a large portion of that income replacement via dividends will allow me to sleep at night and provide me with the freedom I so desire.

Good post and great discussion!

Max BOTH out.

The only real ‘free’ money is the government grants awarded to RESP investors. I think the downside (kids not going to school) is rather limited. How many people these days don’t do some post-high school education? If you yourself have gone to University, I think the likelihood of your children going is extremely high.

BUT… if you are at the same rate (due to CPP, alternate income like rentals, investment incomes from non-registered sources etc) then the RRSP withdrawals could conceivably be taxed at as high of a rate as your current refund. If this is the case, then there is no ‘pre-tax’ dollars benefit when comparing to the TFSA.

This ultimately depends on how well you plan your retirement draw down. RRSP meltdowns using tax-deductible loans can make RRSP’s favorable as can sabbatical years to reduce income. These factors push in favor of RRSPs.

But, high retirement income and GIS clawbacks can push in favor of TFSAs. Both MDJ and Canadian Capitalist both have great articles comparing the two. There are so many factors involved that it seems sort of difficult to generalizations of one being better than the other.

For those approaching the “golden years” and especially those thinking about approaching them, one of the considerations you may want to think about is the OAS clawback and/or the old age tax credit. Clearly does not apply to the TFSA and also does not impact other social benefits. My preference is to max out the TFSA and siphon any RRSP income into it depending on the level of my marginal tax rate (assuming in the future will not get lower). Each individual needs to assess the merits based on his own circumstances.

Cheers

Although dollar for dollar once you make withdrawls the TFSA wins but you didn’t get a refund to begin with.

I think a big factor is what happens with the RSP refund. Most people I know use it for a vacation, big screen TV etc.

In that case TFSA wins.

Personaly I max out both. But since I have a DB pension, and factoring no debt when I retire, plus no more putting away for the RSP, and TFSA, I will have more free cash flow with the pension alone.

Thus I am not even sure what exactly to do with the TFSA. I like saving but I also agree with balance. The Brinks truck doesn’t follow thw hearse, and if I end up in a care home then the gov’t reaps the rewards of my saving.

I am the typical ant saving for the future and many of my friends are grasshoppers living it up to the max.

Nice cars, big houses, trips to Mexico, you name it. They don’t seem concerned about tomorrow.

Sometimes I wonder if they are making the right choice.