Individual Pension Plans

Individual Pension Plans

TFSA vs. RRSP

The question looms… which is best?  The simple answer… It depends.

Tax Free Savings Accounts (TFSA’s) were introduced in the 2008 Federal Budget and have become an important tool when planning finances.  Unfortunately, everything that is contributed to the TFSA is not tax deductibleL; with that however, everything that is withdrawn is not taxableJ.  This is a mirror image to the RRSP where contributions are tax deductible but then fully taxable when withdrawn.

Before making a contribution to either, the first thing to consider is the objectives of the contributor.

Here’s something to consider:

When income tax brackets will be the same in the contribution year as they would be in retirement, the math tells us that there will be no monetary difference between the two as you can see in the graph below.

	TFSA	RRSP
Contribution	10,000	10,000
Marginal Tax Rate @ 30%	3,000	0
Net Contribution	7,000	10,000
Total in 25 years @ 6% return	30,043	42,918
Marginal Tax Rate @ 30%	0	12,875
Net Proceeds	30,043	30,043

 

Where the TFSA may be a better solution, is when income tested government benefits are factored into the equation.  As withdrawals from a TFSA are not added on to income, like RRSP or RRIF’s, withdrawing funds from a TFSA in retirement will not negatively affect government benefits such as Old Age Security clawbacks, Guaranteed Income Supplement, HST rebates, MSP Premiums, Fair pharmacare, and others which are income tested.  These Government benefits can add up to thousands of dollars every year for retired Canadians and we would hate to miss out on them due to poor planning.

If you’d like a more in depth analysis tailored to your specific needs and goals, please contact me and I’d be glad to help.