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TFSAs, Self Control and Your Future Self

I have never once considered dipping into my RRSPs. Not once. Not even when we hit some financial bumps in the road. In many ways, I don’t even consider it mine yet. It belongs to my future self, the woman with more wrinkles and a paid off house. It’s not for me to take.

As soon as the TFSA was introduced, we thought it made the most sense max out our TFSA with our ‘retirement savings’ money before making any contributions to our RRSP. For our situation it makes sense. Brian is still a student and we both work in non-profit which although personally satisfying, isn’t exactly lucrative.

We may not be making much now, but in the future our financial choices will allow us a great deal of freedom in retirement. I’d rather pay the taxes now and get to keep all the money from our TFSA that we’ve saved over the years. I want the freedom to take out $10,000 one year for a dream vacation and not take an extra tax hit as a result.

In truth, I’ve found the TFSA to take considerably more self control then I had hoped. It feels as though it belongs to my present self, the one that would really like a kitchen renovation and a second car not to even mention a laptop and a dream guitar for Brian.

Presently our TFSA is our emergency fund which we drained last year buying a car. Having the TFSA at ING keeps it one step removed from being able to access it quickly. I like having the security of an emergency fund. Once the emergency fund is fully funded and the money going into the TFSA are for future use only, will we have the self control to keep it in there long term?

This concern is coming from someone who prides herself on self control. I can make short term sacrifices for long term results. I can eat 1800 calories a day to maintain my weight. I can exercise regularly even when I don’t feel like it. I save up for things before I buy them.

For each of these issues of self control, there is present negative impact if I stray off plan. If I dipped into my RRSPs I’d take a tax hit. If I ate more or exercised less I’d be buying new pants fast. If I spent too much on credit, my monthly cash flow would decrease.

Taking money out of my TFSA has no immediate negative impact.

  • There are no fees to pay.
  • No one would know
  • I wouldn’t go into debt
  • It doesn’t change my credit score
  • I could buy stuff I want

However, it would rob me of my future financial dreams. Only time and as much self control as we can muster will tell if we’ll be able to continue saving our retirement funds in a TFSA instead of an RRSP.

I wonder though, if I, who usually does well when it comes to issues of self control struggle with saving the money in my TFSA for my future self, how are those with even less self control managing to keep it in there for the long term?

Do you feel any differently about your TFSA earmarked for retirement than you do about your RRSPs?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

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About the author: Kathryn has been a staff writer for MDJ since January 2009. During the day she works in an office. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Kathryn, along with her husband and two children live in Ontario.

{ 65 comments… add one }
  • dusen October 1, 2009, 9:26 am

    I feel the same way as you Kathryn, though I’m not too worried about it yet given my wife and I only have 10K total room so far. I’m just keeping it in our PC Interest Plus account for now as our “emergency fund”. A few years in, when we have 30-40k worth of room I will likely look to putting it in ETFs/equities and then I think I’ll be less likely to touch it.

  • Four Pillars October 1, 2009, 10:06 am

    Good point about TFSA withdrawals being easier than RRSP withdrawals.

    We use our TFSA as an emergency fund only – given the large amount of RRSP room I have, it doesn’t make any sense for me to put any retirement money into a TFSA.

    If I do then maybe I’ll create separate accounts ie one for retirement, one for EF, one for car/trip etc.

  • DavidV October 1, 2009, 10:57 am

    My TFSA is set up for repairs for my house if needed. I haven’t touched it yet. Next year I’ll put more money in, and continue to just keep it there I guess. it’s invested in index funds, so it’s invested the same as my RSP.

  • mojo30 October 1, 2009, 11:15 am

    I’m a big fan of the TFSA and not of the RRSP. RRSP’s dont make any sense unless you are making a lot of money and paying a lot of taxes, the average income earner doesent benefit from the RRSP. I have never liked the government control of the RRSP and so I dont invest in it, other then what my employer contributes on my behalf.

    The TFSA is an awsome savings/investment vehicle and everyone should consider one.

  • Sampson October 1, 2009, 11:36 am

    Interesting post Kathryn.

    Ideally, we would all be maxing out both but that’s obviously not always possible. But for those using the account as ‘retirement savings’, you have to show ALOT of self control – otherwise you might be better off in an RRSP – even if you theoretically will not come out ahead (RRSP vs. TFSA debate).

    In our home, we view our TFSAs as retirement funds only, haven’t ever been tempted to touch them.

  • canucktuary October 1, 2009, 11:54 am

    Anyone know what the TFSA contribution limit will be next year? I remember hearing that the $5,000 was going to be indexed.

  • DAvid October 1, 2009, 12:07 pm

    canucktuary asks: “Anyone know what the TFSA contribution limit will be next year? I remember hearing that the $5,000 was going to be indexed.”

    In $500 increments. You’ll have to wait until the CPI increases by about 10%.

    DAvid

  • Eric October 1, 2009, 12:08 pm

    Canucktuary,
    The TFSA contribution limit is indexed, but only in $500 increments. So it will likely be a few years yet before an increase to $5500.

  • Eric October 1, 2009, 12:10 pm

    …meant to include this link as a reference:

    http://www.fin.gc.ca/tfsa-celi/index-eng.asp

  • DAvid October 1, 2009, 12:10 pm

    I believe the Government’s purpose behind the TFSA was to increase spending, not retirement savings, thus the TFSA is built and promoted in a manner which most will see as easy-to-access cash. I’ll bet if they’d named it the TFRSP, many would look at it in a different manner, even if that was the only change!

    DAvid

  • Alexandra October 1, 2009, 1:06 pm

    I treat the TFSA much the same as my RRSPs in that I really don’t want to have to touch it. But if I had a monetary emergency I couldn’t handle with my savings, I would definitely dip into the TFSA before I touched the RRSPs because there doesn’t seem to be any penalty for doing so.

    But they are both earmarked for the future – and are part of my retirement strategy. Only a severe emergency will change this.

  • Elbyron October 1, 2009, 1:24 pm

    It’s not that hard for me to keep my hands off the TFSA money. But then I’ve never had difficulties keeping my spending habits under control… I usually end up with lots more then I spend and it just all goes into various forms of savings. If I ever ended up with a need for a large amount of money (emergency, or just a big vacation), then I wouldn’t feel bad about “borrowing” from my future self, as long as I setup a temporary increase in my contributions to restore the amount taken out – kind of a self-financing plan.

  • Krista October 1, 2009, 2:15 pm

    If your TFSA is truly earmarked for retirment, then you probably shouldn’t have it just sitting in ING anyway. You should have it in a portfolio that you can expect some growth from.

    While selling non-registered stocks is easier than registered ones, it would still make it trickier to access – and would make it feel more retirementy.

  • Canada Deals October 1, 2009, 2:22 pm

    Hi Kathryn, I love the opening paragraph of this post! I think your writing style is awesome and I like how you make boring stuff seem really interesting. I only recently discovered this blog but I’ve found the topics to be so useful that I plan on coming back here everyday. I hope you don’t get sick of me lol. Thanks for the informative read and for getting me thinking about my future self.

  • Canada Deals October 1, 2009, 2:28 pm

    Argh! I like this blog but that’s twice now that I’ve taken the time to add a comment and something has gone technically wrong. #fail

  • Mitch October 1, 2009, 4:55 pm

    My wife and I also view our rrsp’s and tfsa’s as not yet being ours. If we do need the money I think it will hurt to pull it out of the tfsa. It would take an absolute catastophie to touch our rrsp money.
    For the time being I’ve locked my wife’s tfsa for 5 yrs at a better rate with the intention of never touching it. My tfsa is in a Canadian Tire account and can be accessed if needed. We’ll likely do the same again this year and in five years we’ll have a 5yr ladder with my wife’s tfsa.
    So far my wife and I haven’t needed it but with renovations on the horizon that may change.

  • Kathryn October 1, 2009, 6:03 pm

    Interesting to read how everyone else is dealing with their TFSAs. I like the idea of having separate accounts, one for the emergency fund and the other for retirement. That would help keep it separate in my mind too.

  • Adam October 1, 2009, 7:02 pm

    My TFSA is used for my property tax account. I pay myself monthly property taxes and try to make a few bucks off of it before I pay out the property tax in July. Used to pay the bank monthly and they would pay it on my behalf in July, until I found out they give me not a shred of interest on my property tax account.

    Otherwise, I view my available room in my RRSP as being of more value as I am earning returns on my pretax dollars, which will be taxed at a future date, but I still believe gives me a better return then what I make on my TFSA after tax dollars.

  • Adam October 1, 2009, 7:06 pm

    Meant to add,

    Given the compounding advantages in your RRSP using pretax dollars.

  • kayo October 1, 2009, 10:40 pm

    I’ve been using TFSA as my saving vehicle for big purchases in the future, possibly in 2 to 3 years. Although the cap of TFSA will only allow me to save up to a certain amount, but since there’s a dedicated purpose for it, I don’t even think about withdrawing from there. I guess that is somewhat similar to your mindset with your RRSP investments.

  • chuck October 1, 2009, 11:50 pm

    My long term plan for the first 2-3 years of owning TFSAs is to first set them up as the emergency fund, then once we’ve hit that target, then the additional TFSA monies would go into a brokerage account.

  • smartcanadian October 2, 2009, 1:59 am

    The funds in a TFSA account is more accessible but it is still a question which of the two would yield more in the long term.

  • The Rat October 2, 2009, 1:34 pm

    Personally, I can’t stand RRSPs and if you have only $5,000 in the run of a year to invest I feel the decision is a no brainer. The TFSA is a 100% tax haven and you can draw on the income the investments generate at any time tax free. The same applies to capital gains taxes – no problemo.

    On the other hand, just because your RRSPs are ‘tax sheltered’ forever until you start withdrawing your money, there are some serious things to consider when that time does come. For example, there are penalties if you take out RRSPs before a certain age, there are penalties if you withdraw too much in relation to your CPP…there is a gammit of crap if you ask me as to how many restrictions there really are and I firmly believe that one’s actual RRSP values seen on their statements when they come in are nowhere near what their actual values because they aren’t as liquid as many seem to believe because of these restrictions.

    Personally, the only registered account that i think is truly worth venturing into is the TFSA. I’m with mojo30 100% on this one. The only RRSP contributions I make are through my employer as they match contributions.

  • FT FrugalTrader October 2, 2009, 1:56 pm

    The Rat, just to clarify with readers, any RRSP withdrawals are treated as income and is not age dependent.

  • Adam October 2, 2009, 2:07 pm

    There is no penalty for early withdrawal of your RRSP Rat, it’s just tagged onto your income and taxed.

    The real benefit of an RRSP, that people seem to forget, is that you can take advantage of compounding returns on your pre-tax dollars. Why would anyone pass up that opportunity? Sure you’ll be taxed in the future, but why not earn compounding returns on your pre-tax money until retirement comes? That’s a no brainer for me. TFSA’s don’t provide that benefit.

    If we’re talking long term savings here, I am firmly in the RRSP before TFSA camp.

  • Four Pillars October 2, 2009, 2:16 pm

    Rat – there’s nothing wrong with saving in a TFSA rather than an RRSP (since any saving is good) but your facts are not very accurate:

    Age – Like FT said – no age restrictions. The US retirement accounts (401k) have age restrictions so maybe you are thinking of them?

    CPP – there is no connection between CPP earnings and income, RRSP or otherwise. GIS does have income limitations so perhaps you are talking about GIS?

    My general rule is that the higher your income is and the less pension money you will get in retirement then the more potential benefit you will get from the RRSP compared to the TFSA. For someone making say $60k+ then I think maxing the RRSP should be done before the TFSA (assuming the TFSA is also being used for retirement).
    For someone with a middling salary say $40k-$60k, the benefits are more limited although I still think RRSP is better.

    For lower income people then in most scenarios the TFSA does as well or better than the RRSP.

    I don’t know the actual salary numbers for deciding which account to use first – I’m just guessing to show what I mean.

  • Highlander October 2, 2009, 2:45 pm

    Im looking towards using the TFSA as an RRSP transfer station during retirement.

    My current retirement plan involves dividend income, supplemented by withdrawing from my RRSP. Given $20K in dividend income and $40K withdrawl from RRSP the total income tax is <15%. Any excess from that $60K that isn't needed can be transferred into the TFSA. I'd willingly pay 15% tax to transfer RRSP balances to the TFSA… It beats the heck out of the 46%ish I'm paying if I don't use RRSPs now.

    And if you use the TFSA as a place you withdraw your living expenses from, that creates new room the next year to transfer more RRSP balance into. And any unused balances within the TFSA continue to grow tax free just like within the RRSP.

  • Adam October 2, 2009, 2:50 pm

    Let’s hope the rules for the TFSA don’t change between now and the time I retire in 30 years…

  • The Rat October 2, 2009, 4:32 pm

    Age has a lot to do with. And by age, I wasn’t implying that you are restricted to a certain age before you start withdrawing, what I mean is that depending on your age and your financial situation, RRSPs may not be the best approach.

    The thought process I am trying to convey is that suppose you get into a situation where you find that you are able to retire at a much younger age and will not need to rely on the time required for compounding nor a stream of retirement RRSP income, you cannot just take it all and cash out without facing huge penalties – by penalties this is precisely the treatment of income we are all talking about here. If you are working and you withdraw a lot of RRSP savings, you will get dinged huge tax wise.

    Because they will be treated as income, these ‘penalties’ if you will, will leave you with much less than what your total RRSP investment value was, should you decide to withdraw them. And there are withdrawal restrictions if your RRSPs are locked-in.

    The CPP correlation is there for sure because your pension amount is based on how long you have been contributing and for how long you have contributed to the plan. If you decide to withdraw a large portion of your RRSPs whenever it is you decide to retire, let us assume it is around the same time you expect to earn CPP, it will affect how much money you end up getting because you are essentially earning income from another area. And before you know it, you have to consider rolling them out to a RRIF!

    All i’m saying that if you think you’re going to be in a scenario where you will be working until well into your fifties, you would have to time it right so that you perhaps start withdrawing some RRSPs in your mid-fifties so that you don’t pay too much in taxes when you start earning CPP at age 60, etc…that is of course if you expect to be working until roughly that time.

  • Kirk S. October 2, 2009, 6:27 pm

    As far as dipping into the TFSA, I find it less accessable than a regular savings account, but far more accessable than an RRSP (I would never touch my RRSP). Right now, my TFSA isn’t planned for retirement, but a bigger purchase in the future (down payment on a second house, etc.). I have not been tempted to use any of my money in it yet.

  • RRSP fan October 2, 2009, 6:34 pm

    Here is another (my) way of looking at the RRSP. I am in the 35-40% tax bracket in Ontario (Fed + Provincial taxes). I am allowed to contribute approx $10,000/yr in my RRSP. I contribute this in various ways (personal + employer). I get a refund of $3,500. I stick this refund in my kids (2) RESP, and I get an additional $700 or 20% from the CESG. So I just invested a total of $14,200 (10,000 + 3,500 + 700), with an initial outlay of $10,000. Did I not just get a 42% ROI or am I completely out of the park on this?

    Don’t get me wrong, the TFSA is excellent, and a long time coming, but how do I create a 42% ROI from that. I want my money to work much harder than 1.5-2% that high interest savings acounts offer. With inflation and taxes, one might actually lose money with such low interest rates.

  • Ms Save Money October 2, 2009, 8:09 pm

    This is off the TFSA subject, but relates to the self control and your future topic.

    I was just thinking the other day – many people work really hard to save money. And mostly because it seems to be for the sole purpose of being able to retire. So in the end we work hard all our lives and adopt “self control” so that we don’t get to enjoy life as much as we would like to so that we “may be” able to enjoy our “future self” or when we’re old and wrinkly (and probably will be sick). I don’t know about everyone else but this thought depresses me. Because one day when we do retire, we would be old, sick, and definitely not in shape to be out at bars partying in the Bahamas (cuz it’s just not a place for grampas and gramas), sporting a bathing suite at age 65? – I don’t know about that, hiking to waterfalls deep in the jungles? – (definitely out of the question with those brittle bones and short breath). So what future self are we trying to chase after? Why would it be worth it to save so much money we won’t be able to enjoy?

    So I say – it’s better to save what we can now and invest in our ideas now so that while we live, we enjoy, and we would still be financially independent once we’re old.

    Tell me if I’m wrong, but a very successful person told me – it’s not about budgeting, it’s about knowing how to make money.

  • Adam October 2, 2009, 8:12 pm

    @ RRSP fan.

    Exactly! Why have less money working for you, with an RRSP you get your tax % back which you can have working for you as well.

  • RRSP fan October 2, 2009, 8:52 pm

    Completely agree with MS Save Money. It’s more about knowing how to make money (better job, higher education, smart investments), then to look at your savings balance every day, and feel content with the 1.5% one is earning. I am not advocating instant gratification, just a smart balance to life. I would rather buy my kids a $10 – $20 toy once in a while than to feel “prudent”, that had a saved it I would have been richer by 0.20 cents…..after a whole year!!! Trust me, the look on there faces is worth far far more than $0.20 cents

  • Kathryn October 2, 2009, 9:57 pm

    I agree with Ms Save Money and love the question, ” So what future self are we trying to chase after? Why would it be worth it to save so much money we won’t be able to enjoy?”

    For me it’s all about the balance but it’s not about making more now. I work 30 hours a week for now so that I can be there for my kids after school. I cold make a lot more money if I did something else but I’d have a lot less time.

    My future self wants security. My present self wants to have fun and spend money in ways that align with my values. If I found out today that I had only a few months to live, I’d have no financial regrets. I am seeking to both save for the future AND live in the now.

    Great thoughts everyone.

  • DAvid October 2, 2009, 11:29 pm

    RRSP Fan,
    Yes, you are out of the park on this one. It has been clearly shown in many places on the web, and with financial planners reports, that at the end of the day, RRSP and TFSA end up being within a few hundred dollars of one another if equal amounts are invested. While you may have more held in your RRSP than your TFSA prior to withdrawal, the taxes on the RRSP at withdrawal bring it’s value down to that of the un-taxed withdrawals from the TFSA.

    Your description of ROI matches nothing I have ever seen described. But I’d like to help you understand. ROI is what you have AFTER you cash out your investments. So to use the first part of your example, if you put $10,000 into an RRSP, and then withdrew it a year later, you would have $6500 in your hands after taxes. Add the $3500 you got back in taxes, and you’re right about $10,000. ROI = $0. You can stretch this out as far as you want until retirement, and the numbers will be similar. The RRSP is valuable if you can contribute when at a high tax bracket, and withdraw when living at a lower tax bracket.

    Finally, if you are in the 35 – 40% tax bracket, you should be able to contribute considerably more than $10,000 annually to an RRSP.

    DAvid

  • Mark in Nepean October 2, 2009, 11:41 pm

    I too, certainly don’t see my TFSA or RSP as “mine”.

    We currently have our TFSAs in a high-interest savings account, with the 2010 contribution going to a brokerage TFSA for more diversified (and higher earning) savings.

    Overall, we consider our TFSAs as emergency fund money, for now, not retirement savings. This way, RSPs stay locked and TFSAs stay in our high-interest savings until they need to be pulled, as necessary.

    I figure after $10-15 K are in our “emergency fund”, the rest is strictly investment for the long-haul.

    Cheers!

  • The Rat October 3, 2009, 2:35 am

    @RRSP fan:
    If you think that you can only earn 1.5-2% through non registered investments, you’re just not looking hard enough. A simple non-registered brokerage account will allow you to invest in Canada’s top banks, all of them having yields that kick the hell out of any GIC today. Even GIC’s can get you more than the 1.5-2% you are talking about if you aim for say 4 to 5 year terms. The problem with RESPs, similarly with RRSPs, is that its not what its all cut out to be. There are restrictions with RESPs that may not be good for you. For example, what if one of your kids decide to not attend post-secondary education? Your registered account could face some challenges to say the least. At any rate, i dont want to get into RESPs too much because that is not this post’s intentions.

    @FourPillars: I trust my explanation satisfied your concerns

    @Kathryn: It appears as though you have some self-control concerns and that RRSPs give you the perception that you are in more control of thins. Whatever works I suppose.

    @Highlander: You seem to have a somewhat sound approach to retirement. I like your 20K dividend generation goal. Remember, dividends are treated much more favorably tax wise in comparison to interest income or income generally. When RRSPs are deducted, the amounts will be counted as income and you will possibly be losing principal balance value of your RRSPs’ total value, depending on what investments you have in your registered account. With dividend generation, you can maintain your principal value while withdrawing the dividend income for living expenses,etc.

    @everyone on the post: I think its important to think of RRSPs and TFSAs as ‘real’. Some seem to think that RRSPs are “not really theirs”.. Arbitrarily parking money away into a RRSP account suggested by a bank’s financial planne and not having to think about where its going and what its for until retirement time comes can be dangerous.

    My personal preference is the TFSA, but it doesn’t mean someone can’t benefit from having both. In my case, I opened up a TFSA account for my wife and I and we are contributing $10,000/year. I like the flexible nature of it and the liquidity factors the most.

    Cheers

  • The Rat October 3, 2009, 2:36 am

    @RRSP fan:
    If you think that you can only earn 1.5-2% through non registered investments, you’re just not looking hard enough. A simple non-registered brokerage account will allow you to invest in Canada’s top banks, all of them having yields that kick the hell out of any GIC today. Even GIC’s can get you more than the 1.5-2% you are talking about if you aim for say 4 to 5 year terms. The problem with RESPs, similarly with RRSPs, is that its not what its all cut out to be. There are restrictions with RESPs that may not be good for you. For example, what if one of your kids decide to not attend post-secondary education? Your registered account could face some challenges to say the least. At any rate, i dont want to get into RESPs too much because that is not this post’s intentions.

    @FourPillars: I trust my explanation satisfied your concerns

    @Kathryn: It appears as though you have some self-control concerns and that RRSPs give you the perception that you are in more control of thins. Whatever works I suppose.

    @Highlander: You seem to have a somewhat sound approach to retirement. I like your 20K dividend generation goal. Remember, dividends are treated much more favorably tax wise in comparison to interest income or income generally. When RRSPs are deducted, the amounts will be counted as income and you will possibly be losing principal balance value of your RRSPs’ total value, depending on what investments you have in your registered account. With dividend generation, you can maintain your principal value while withdrawing the dividend income for living expenses,etc.

    @everyone on the post: I think its important to think of RRSPs and TFSAs as ‘real’. Some seem to think that RRSPs are “not really theirs”.. Arbitrarily parking money away into a RRSP account suggested by a bank’s financial planner and not having to think about where its going and what its for until retirement time comes can be dangerous.

    My personal preference is the TFSA, but it doesn’t mean someone can’t benefit from having both. In my case, I opened up a TFSA account for my wife and I and we are contributing $10,000/year. I like the flexible nature of it and the liquidity factors the most.

    Cheers

  • The Rat October 3, 2009, 2:54 am

    Oops, fogot:

    @frugaltrader: any serious investment strategy is age dependent. (See previous reply to address the income treatment confusion.)

    @Mitch: Sounds like you and your wife bought a laddered GIC for your TFSA. This could be ok I suppose if that is what you bought, but you may want to consider buying some blue-chips or a canadian REIT for example, that will get you some higher yielding tax free income that you can use for either living expenses or invest elsewhere.

  • RRSP fan October 3, 2009, 11:06 am

    David and Rat: You seem to be caught up in the bad brand image that RRSP’s have. In Canada, there is no other way to defer taxes and invest with PRE-TAX dollars. The TFSA is funded with AFTER TAX dollars. In my case, I need to earn approx $7,750, to have $5,000 to stick in the TFSA.

    David : the reason I am in the 35-40% tax bracket is that, my additional income (rents + investment) does not create RRSP room, but does attract taxes.

    If I don’t contribute to a RRSP today, a higher amount of my current $$$ is left with the CRA, just because I am “afraid” to pay the CRA when I start to withdraw this money. That is not, in my books, a way to manage one’s finances. My goal is to pay the taxman as little as possible of my money today, and even less when (and if) I fully retire. There are several ways to minimize your tax hit when retired, and I will cross that bridge once I get to it. Would suggest you speak to a tax accountant. I use my accountant extensively to help me create “what if” scenarios for most of my investment decisions.

    I am using the TFSA to its max as well so that my investment income does not attract the tax hit it currently does. Lastly, David while your theory might be right that my ROI will be 0, if I were to pull out my $10,000 in the first year, that is not in fact my reality. Let me simplify this more with my real life example and not a theory.

    1) I contibute $10,000 to my RRSP every year, this saves me $3,500 today (sometimes even pushes me to a lower tax slab)
    2) I am now out of pocket by $6,500. I take the $3,500 and invest this in a family RESP
    3) The govt. chips in $700 by way of the CESG.
    4) I just created 2 accounts with a balance of 14,200 (10,000 + 4,200) with a total of $6,500 out of my pocket.
    5) Both accounts will compound/grow on a tax deferred basis till I am ready to dip into them
    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.

    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.

  • The Rat October 3, 2009, 11:51 am

    @RRSP fan:

    Let me be clear: I’m not advocating that everybody should be going strictly the TFSA route or strictly the RRSP route. Everybody’s financial and work opportunity situation is different and based on the tax bracket you seem to be in, you are probably optimizing your present situation by doing what what it is you are doing. It’s also doing what makes you comfortable and to guage what your situation will be like come time for reitirement.

    Despite my rant on RRSPs, as I previously mentioned, I still invest in them through my employer matching my contribution on a bi-weekly basis. Rest be assured, I’m not following any ‘brand image’ or whatever it is you may perceive my thoughts to be, and I’m not the one submitting as ‘RRSP fan’, so we obviously know your position prior to even commenting. And my first post said that I generally do not like RRSPs and I stand by that. But that’s besides the point. As I mentioned, you seem to have clearly outlined your goals and seem to be comfortable with it. There’s absolutely nothing wrong with that.

    From a tax perspective, 10 different accountants or financial planners can tell you 10 different things; your investment ‘comfort zone’ if you will, will dictate your investing behavior. The professional assistance you seek is meant to guide you, not necessarily make your decision. Personally, its not the pre-tax scenario that I’m as interested in – it’s the post-tax result; in my situation, I’m doing what I think is best, its just that simple. Your RRSPs will likely grow quite nicely over time, but its also likely that when you start withdrawing, it will not only be coming off as income, it will likely be chomping down on some of your principal.

    Best of Luck

  • Michael October 3, 2009, 1:10 pm

    The good news is that with a TSFA you are placing your income outside of the taxman’s purview. If you feel like your TSFA is more readily accessible to the ‘current you’ than an RRSP, you may want to consider a laddered GIC approach for that TSFA money. As we are nearing the end of the year, my TSFA is approaching $5,000. Starting next year, every 3 months I will be buying a $1,000 5 year GIC. That way I have my $5,000 cushion ($10,000 if you count my spouse too) and will be getting the higher interest rate of a 5 year GIC. Because it is laddered, in 5 years, I will be getting access to those maturing GIC’s. My wife and I will pick different starting months so that in a few years we will have GIC maturing every month. This new online bank call ALLY may also help as it seems to offer less of a penalty for cashing out early. So while you are able to get at the money, at least it is one step removed, i.e. will not show up in your daily banking numbers; you will have a $5,000 cushion each for real emergencies and you are saving tax free.

  • Four Pillars October 3, 2009, 1:44 pm

    @Rat – unfortunately I don’t understand the logic in your explanation. :)

    The rrsp and tfsa are both financial tools – you have to look at your own situation and decide which one is better for different purposes. There is no doubt in my mind that the RRSP is FAR superior for my retirement purposes. This may not be true for others so they need to determine themselves which accounts to use.

  • The Rat October 3, 2009, 2:43 pm

    @FourPillars:

    “The rrsp and tfsa are both financial tools – you have to look at your own situation and decide which one is better for different purposes.”

    Isn’t this precisely what I have been echoing?

    I think there is a healthy debate going on here and I am totally receptive and genuinely interested in seeing where we see things differently. I have a lot of unused RRSP contribution room, and if you can convince me that it would be worthwhile, I will definitely change my own investment strategy.

  • Brendan October 3, 2009, 5:16 pm

    TFSA and RSP are the same. You either pay the tax now or you pay it later.

    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.

  • Chet October 3, 2009, 7:40 pm

    Just a thought:

    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

  • Sampson October 4, 2009, 3:08 am

    @RRSP fan – I think the reason you and DAvid are disagreeing here is your assumption #7. If you present tax rate (and hence RRSP refund), is greater than your retirement rate, then yes – the RRSP will outperform the TFSA.

    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.

  • Sampson October 4, 2009, 3:11 am

    Personally, I’m with Brendan.

    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.

  • Mark in Nepean October 4, 2009, 12:00 pm

    If I could MAX out both, I probably wouldn’t…here’s why:

    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!

  • DAvid October 4, 2009, 1:41 pm

    RRSP fan said: “4) I just created 2 accounts with a balance of 14,200 (10,000 + 4,200) with a total of $6,500 out of my pocket.”

    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”

    Only the portion you contributed, and only if you have the RRSP room. It is also calculated at its current value on transfer, not the value of the contributions. Since you have stated you max your RRSP for other reasons, you would have no room to transfer this money.

    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

  • Sampson October 4, 2009, 5:05 pm

    Hey Mark (in Nepean),

    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.

  • Mark in Nepean October 4, 2009, 6:02 pm

    @Sampson,

    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!

  • Four Pillars October 5, 2009, 12:43 am

    Rat – in comment 20 you say that you can’t stand RRSPs and if someone has only $5k to invest that the TFSA is a no brainer.

    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.

  • RRSP fan October 5, 2009, 11:06 am

    David:

    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.

  • Stephen October 5, 2009, 2:32 pm

    Ok guys, the amount of misinformation in these comments is astounding. RRSP fan has gone particularly overboard and is way off base on his calculations. DAvid is the one making the most sense for sure.

    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?

  • Chet October 5, 2009, 3:29 pm

    “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?”

    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

  • The Rat October 5, 2009, 8:01 pm

    @FourPillars and whomever wishes to reply:

    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

  • Briefcases October 5, 2009, 8:09 pm

    Personally I don’t think a TFSA is for me. The bank rep convinced me to sign up for one, but a couple months later I closed that account. Basically I didn’t like that I couldn’t transfer money out online. I don’t want to have to go into the bank if I suddenly need that money. So instead I will keep zero interest with my chequing account instead.

  • FT FrugalTrader October 5, 2009, 8:28 pm

    briefcases, not all TFSAs are treated equally. As far as I know, most can transfer money online, especially if you set one up with an online discount broker.

  • Stephen October 6, 2009, 10:54 am

    I also want to add that I ran some more calculations and that if you can guarantee that your marginal tax rate will be lower in retirement than in your working years when you could feasibly have contributed to the RRSP, then it provides a significant advantage over the TFSA only approach. If your marginal tax rate was 30% during contributions and 15% during withdrawals you will actually have MORE than a 15% gain over the TFSA due to the compound growth of the 15% difference in untaxed dollars.

    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.

  • DAvid October 6, 2009, 12:15 pm

    RRSP Fan said: “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.”

    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

  • Sampson October 6, 2009, 8:22 pm

    @Rat post #58 – point #1

    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.

  • cannon_fodder October 18, 2009, 11:37 pm

    While it is true that generally RRSP’s and TFSA’s provide very similar benefits if the marginal tax rates during contribution periods and withdrawal periods are the same, there is an important factor. If your RRSP withdrawals (along with other income) start invoking clawbacks (GIS, OAS, Allowance, etc.) then you now have a disadvantage when compared to the TFSA.

    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.

  • Chet October 18, 2009, 11:56 pm

    Remember the old adage about death and taxes. With any beneficiary on a TFSA there are no taxes when it is collapsed and will by pass probate too.

    Cheers

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