TFSAs, RRSPs or Both?

TFSAs, RRSPs or Both?
With the March 1st RRSP deadline quickly approaching, many people are asking which of the two options is better.The answer can be complex, but essentially can be broken down into tax rates and benefits.

Your Power of Deduction

The first part to consider is whether or not withdrawing your money places you in a higher tax bracket.

If you suspect that your income will be lower when you retire, you will likely get a bigger deduction today than what you will need to pay back later.  In this case, an RRSP will be a better bet.

If the opposite is more likely, resulting in a higher income when you retire, you should invest in a TFSA, since withdrawals are not subject to income tax.

If your tax bracket is the same now as in retirement, then there is effectively no difference between an RRSP and a TFSA.

Unfortunately it is difficult for young people to predict what their tax rates will be in 30 or 40 years.  The trend has been to reduce income tax rates, but that, of course, is subject to change at any time.

Helter Shelter

The second area to consider is whether or not you’ll lose any income-based government benefits.

For example a senior with an income of $72,000 has a marginal tax rate of 32.5%; however, with the loss of another 15% represented by the Old Age Security clawback, as well as a 2.25% reduction in the federal age credit, their effective tax rate increases to 49.75%!

On the other end of the income scale, a senior with income of less than $15,600 would be in a 71% effective tax rate with further RRSP withdrawals because of the 50% clawback on the Guaranteed Income Supplement.

Therefore, the sweet spot for RRSP withdrawals centres on your predicted retirement income being between $15,600 and $66,000.

An individual will likely do best by making a contribution to both.  Using this approach you can control where and when to withdrawal your money depending on your future tax rates and benefits available at that time.

The biggest drawback is procrastination.  It is always advisable to set up a savings plan for a TFSA or an RRSP rather than doing nothing at all.

Contact us to meet with one of our trusted certified financial planners on our Healthcare Financial Group Inc team.  We are here to help. for more information or to arrange a meeting.