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.

Tax implicationsRRSPsTFSAs
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.

*This example represents the growth of a hypothetical investment, assuming a hypothetical annualized rate of return of 5.5% over 30 years. This example does not take into account inflation or applicable fees/sales charges and should not be considered to be representative of the performance of any specific investment product or investment strategy. The example is not intended to reflect future values of a specific investment or returns on investment in a specific investment.
**Based on a hypothetical marginal tax rate after 30 years of 30%, 40% and 50% respectively. Assumes no redemptions have taken place before the money is withdrawn from the respective accounts at the end of 30 years and that the investor’s marginal tax rate is not affected.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

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