Face-off! RRSP vs TFSA
Published by Wayne A. Hissa on Aug 24, 2017
|Product ||Advantages ||Disadvantages ||Considerations |
Registered Retirement Savings Plan (RRSP)
- Historically the most popular retirement savings tool
- Lowers income tax payable (often provides an income tax refund)
- Eligible amounts are accumulative • While funds remain in RRSP they are completely tax sheltered
- When invested carefully they provide a retirement income “nest egg”
- Can be set up as an “automatic monthly payment” or lump sums
- Group Plans through work
- Lump sums may be contributed until March 1st to count on previous year’s taxes
- Better value after a certain level of income (over $40,000)
- ‘Forced retirement savings’ (cannot be accessed without penalty)
- Contributions levels higher than TFSA (18% of your earned income up to $25,370 for 2016)
- Can be invested in mutual funds, segregated funds, GICs, Stocks, Bonds, Daily Savings Interest Account
- Clients may overlook the benefits of the TFSA
- Taxes are paid when funds are withdrawn based on current income tax rate
- Amounts withdrawn are lost – no chance to ‘re-pay the money’
- MYTH: once retired – income lower so RRSP taxed at lower rate of income – MAYBE NOT!
- Only keeps up with TFSA if you’re ‘grossing-up’ every single year.
- Amounts withdrawn prior to retirement are added to taxable income for that year
- Tax refunds are considered a “windfall”
- Most people tend to spend their refund instead of adding it to their investments
- Must be aware of “claw-back’ programs that could kick in at retirement
- Most often a combination of both RRSP and TFSA are the best option
- When would you like to retire?
- What will be the marginal tax rate vs. the tax rate today?
- Will you continue to work part-time, or consult?
- A Professional Planner can assess the best way to take advantage of lower tax rates
- Planners can help avoid or lessen ‘claw-backs’
- Once retired the following ‘hit’ your tax page (leading to potentially higher taxable income level):
- Rental income
- Investment income
- These could actually put you in a higher tax bracket than when you were working
- Tax refunds should not be considered a ‘windfall’ for spending; but the present value of a future tax payment to be made when funds are withdrawn – therefore they should be re-invested.
Tax-free Savings Account (TFSA)
- Grown in popularity since being introduced in 2009
- Contributions paid in ‘after-tax’ dollars so can be withdrawn tax-free’ any time
- Eligible amounts are cumulative
- Funds inside a TFSA can be invested in GICs, mutual funds, stocks, bonds etc.
- No penalty from CRA for early withdrawal
- Withdrawn amounts will automatically be added to your TFSA contributions room the following year
- Since TFSA withdrawals are tax-free, they are not included in ‘net income’ so do not negatively impact federal Government tax credits and benefits.
- Multiple contributions can be made throughout the year including monthly ‘automatic’ contributions up to maximum limit
- Great vehicle for long term tax control and investments
- Current 2017 limit of $5,500 contributions
- Easy access to money
- Must be at least 18 years old with a valid Social Insurance Number
- Must be a resident of Canada (Non-residents are subject to tax)
- $5,500 invested each year for 35 years (at 6% rate of return) grows to $500,000…realizing a lower tax rate than an RRSP.
- Current total maximum contribution per person is $52,000 in 2017