RRSP vs. TFSA – which makes more sense?
Author: Sound Choices
February 26, 2018
The content in the article below is meant for Canadian investors only.
Both offer long-term benefits – which you should consider depends on whether your marginal tax rate would go up or down.
The same logic applies whether you’re saving for retirement (when you may be in a lower tax bracket) or saving for something else (and might be in a higher tax bracket when you make the withdrawal).
So, when you withdraw the money and you expect to be in
- Same tax bracket: Either an RRSP or a TFSA
- Lower tax bracket: You’ll pay less taxes with an RRSP
- Higher tax bracket: You’ll pay less taxes with a TFSA
Understanding how RRSPs and TFSAs are taxed
With both registered plan, your investment grows tax-sheltered, but there are key differences on how they are taxed, which factor into your decision.
|When you invest||• Tax deduction – equal to the amount of your contribution |
• This means you’re not paying any tax on the money you’re investing (pre-tax dollars)
|• No tax deduction
• This means you’re investing money that you’ve already paid tax on (after-tax dollars)
|On any investment income or growth||• Not taxable (tax-sheltered)||• Not taxable (tax-sheltered)|
|When you withdraw||• RRSP withdrawals are considered income and taxed accordingly|
NOTE: this may impact the amount you receive from income-tested benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS).
|• No tax on any withdrawals since you already paid income tax on the money you invested
NOTE: TFSA withdrawals have no effect on government benefits since they are not considered income for tax purposes
Tax rates are important but may not be the only consideration. To learn more about RRSPs vs TFSAs, read “Should you invest in an RRSP or TFSA?”. To find out what makes sense for your situation, contact your financial advisor.