The RRSP vs. TFSA decision, broken down for millennials

The RRSP vs. TFSA decision, broken down for millennials

The RRSP vs. TFSA decision, broken down for millennials With the introduction of the TFSA as an alternative to RRSPs in 2009, millennials have more to think about than baby boomers did. But the choice may boil down to a comparison of tax rates.

Introduced in 1957, RRSPs offer Canadians three solid benefits, according to a Financial Post piece by Financial Independence Hub founder Jonathan Chevreau. First, contributing to an RRSP reduces one’s taxable income, which typically leads to a tax refund. Second, RRSP-held securities that earn interest, dividends, and capital gains do not incur tax, so the potential for growth and reinvestment is significant. Third, withdrawing from an RRSP after retirement, during which the user is in a lower tax bracket, will expose them to lower taxes.

The introduction of TFSAs has given millennials an additional choice. Like RRSPs, TFSAs have no upfront tax deduction and shield ongoing investment income. However, TFSA fund withdrawals are not subject to tax.

The younger generation will also get to enjoy an expanded Canada Pension Plan, which was announced last summer and has yet to take effect. “With decent growth from equities, it’s conceivable a millennial who puts $5,500 into a TFSA every year from age 18 on will have $1 million or more by the time he or she reaches retirement age,” Chevreau said. “Even at a conservative 4% return, a $1-million TFSA will spin off $40,000 of tax-free income every year, and you will have the annuity of expanded CPP benefits that will be considerably more generous than they were for the boomers.”

His verdict: “Millennials not yet in a top tax bracket should prioritize the TFSA. They can always carry forward their RRSP contribution room to future years.”

To put it another way, Chevreau cited advice from Tridelta Financial’s Matthew Ardrey. “[A]ll else being equal, if your tax rate is higher now than it will be in retirement, choose the RRSP. If your tax rate is expected to be higher later, choose the TFSA over the RRSP,” he said.


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3 Comments
  • Dale Walters 2017-01-27 10:30:37 AM
    There is another reason for a TFSA and that is tax planning in retirement. If taking more money from your RRSP/RRIF would cause you to go into a higher tax bracket, you can instead take money from the TFSA. For example, if you need $70,000 per year to live on and the break in the marginal tax rate is at $65,000, you can take the first $65,000 from the RRSP/RRIF and the remaining $5,000 from the TFSA.
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  • I am not a robot 2017-01-27 3:07:39 PM
    A little bit of knowledge is a dangerous thing. This article can easily lead people to make wrong choices. Where is comparison of flexibility of use? Where is clarification that by 'tax rate' what is required is the 'effective tax rate' that includes the impact of thing like the Child Credit on contributions and the GIS clawback on withdrawasl? Where is the warning that many people will be taxed at higher statutory rates on withdrawal.
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  • Barb Amsden 2017-01-29 10:30:30 AM
    1. An important thing to highlight is that people accumulate not just RRSP room, but also TFSA room. Starting off, and at times when not working but there is spare cash, a TFSA is the way to go. Once working at a good salary, a person can take all your TFSA savings and put them in an RRSP for a big tax refund that the person can, in the following year, put in the accumulated room in his or her TFSA to restart building money tax-free. Nearing retirement (and mandatory RRSP to RRIF transfer), speak to a tax advisor to see if and when you can start moving money into your TFSA.
    2. Most important: this information is important not just for millennials, but to people of all ages.
    3. Beware the bogeyman - sorry, I mean CRA. There are twists that the CRA has refused to declare (see https://drive.google.com/open?id=0B2tVoND91_jtZ0N3T3kzdzlNY1k)– unlikely to affect many but it has led to the unfair treatment of honest taxpayers – to waive interest and penalties, taxpayers have had to waive their right to claim back taxes when a Tax Court decides that the CRA has over-stepped the rules.
    4. Minor but important typo: It should read: "UNLIKE RRSPs, TFSAs have no upfront tax deduction and shield ongoing investment income."
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