6 January, 2017

RRSP versus TFSA Contributions

By Alida Hildebrand

Let’s get ready to rumble!! the Old Favorite “RRSP” versus the Feisty Newcomer “TFSA”…  Articles about TFSA’s vs RRSP’s always end up narrated in the style of a WWE or Monster Truck announcer in my mind!

ROUND 1: Contribution Room

RRSP contribution room is based upon the lower of either 18% of your income for the previous year or the maximum annual contribution limit for the tax year. This amount is found on your Notice of Assessment sent to you by the Canada Revenue Agency.  (You could also obtain this information by contacting CRA.)

The amount you can contribute to a TFSA is the same regardless of income. From 2009-2016 the total accumulated contribution room is $46,500 and the annual limit for 2017 is $5500. If you haven’t taken advantage of a TFSA, the contribution room of all previous years, where you were eligible for TFSA contributions, has accumulated.

ROUND 2: Tax Implications

The RRSP gives that initial income tax deferral that is so satisfying, as well as a potential tax refund. As we all know the tax man will eventually prevail because RRSP’s and their growth are fully taxable when taken out for retirement. The general assumption made when contributing a majority of retirement savings to an RRSP is that your tax rate in retirement will be lower than your current income tax rate.

TFSA’s, in contrast, are not a tax deduction, as they are made with after-tax income.  However, when they are withdrawn their principal and growth are not subject to tax like RRSP’s are.

ROUND 3: Withdrawal Consequences

The format of an RRSP is very opposed to early withdrawal. Options for withdrawal that don’t result in withholding tax penalties are the Home Buyers Plan or Life Long Learning Plan. Both plans have strict schedules and limitations that apply.

TFSA’s, on the other hand, are much more flexible.  If you withdraw from your TFSA the amount withdrawn will be added to your contribution room at the beginning of the following year. The versatility of TFSA withdrawals is great in case of emergencies but the investor needs to be committed to leaving funds alone otherwise the purpose of investment is defeated.

There is also the question of the longevity of the investment before withdrawals occur. RRSP’s must be converted to RRIF’s at age 71 at which point the carrier must pay out a minimum each year to you. (The payout is taxable.) Conversely, your TFSA is not on a schedule to be withdrawn.

So, who wins the prize fight? Unfortunately the answer isn’t as cut and dried as a wrestling match. Every investor must consider factors such as income, employer RRSP matching, amounts to be invested, current and future tax rates, and investment timeline. At the Fraser Financial Group we work with our clients to navigate these matters and help you get the most out of your retirement savings!