TFSA vs. RRSP - You May be Surprised!
Feb 11, 2025Oatmeal has been a part of my breakfast routine for a very long time, and I've only ever made the quick oats because it's just easy, and that seems to be what everybody else does. But then I got curious. I wanted to know if the steel cut oats were actually of a higher nutritional value and what the big difference was.
Well, nutritional wise, they're exactly the same, but the amount of time it takes to prepare them is considerably different. I know you're not reading this to learn about oatmeal, but when we asked the question of should we invest in the RRSP or the TFSA, just like oatmeal, it's all a function of time.
To find out which vehicle is going to give you the most after tax income. What we need to do is take a look at the tax rate that you're in during the years that you're contributing, versus the years that you're going to be redeeming.
Let's take a look at a few scenarios.
Assumptions: $5,000 pre-tax income in a RRSP, an equivalent after-tax amount contributed to TFSA based on 30 and 40 per cent marginal tax rates. Growth assumes a seven per cent annual rate of return for 20 years.
SAME TAX BRACKET
if you're going to be in the same tax bracket. When you're taking the money out as you are when you're putting it in, there's actually no real advantage from an after-tax income perspective as to which vehicle you use.
LOWER TAX BRACKET
However, if you're going to be in a lower tax bracket when you're taking the income out, then the RRSP strategy is going to edge out the TFSA.
HIGHER TAX BRACKET
Conversely, if you're going to be in a higher tax bracket when you're in retirement, then the TFSA edges out the RRSP.
Most Canadians, when they retire, they end up being in a lower tax bracket than when they were working. So for most of us, that would suggest that maybe the RRSP strategy is the better vehicle for you.
ASKING A BETTER QUESTION!
However, a better question to be asking ourselves is at WHAT AGE will we need to start taking retirement income?
Because if you're planning on retiring before 65, then the TFSA has a huge advantage over the RRSP because you can get access to income out of your TFSA on a tax-free basis, and plus there's no withholding taxes.
Keep in mind that if you're taking income out of your RRSP before 65, you're going to have tax and you're going to have withholding tax penalties on it too. So that's really the ultimate question shouldn't be: "which vehicle is it going to give me the most after tax income."
Rather, a better question that you need to be asking yourself is what age do I want to retire? Because that's going to lead you to either vehicle from a strategic perspective.
LADDERING
For those retiring before 65 laddering your income with a TFSA is a great way to bridge the gap until your RRSP is free from withholding tax. Another easy strategy is to use your RRSP refund to fund your TFSA!