TFSA or RRSP?

[MomToTwoBoys]

I've been doing a lot of thinking about retirement. I've also been doing a lot of thinking about saving money. We want to be able to do both, but for now, I'd rather get money started into retirement. Savings will come as soon as we finish paying off my inlaws (which will be with this income tax return - I think).

I've been considering a RRSP. But at the same time, I'd like to explore a TFSA. A RRSP would reduce my taxable income, but I don't have any to speak of. A TFSA would allow me to save money interest-free and the amount each year is rolled into the next year indefinitely. The contributions for an RRSP are tax-deferred, meaning that the money isn't taxed until I withdraw from it. Likely, that won't happen until retirement. With a TFSA, there's no restriction on when I can take the money out and no restrictions on how much I withdraw.

If I put $100 per month into an RRSP, but 65 I'll have $150k in the bank. If I put $100 a month into a TFSA, I'll have $38,400 by the time I turn 65.

Anyone have experience with either one and likes one over the other?

[frugalcdngal]

We have withdrawn money from RRSP's twice. You are taxed 10% of the amount you withdraw at the time of withdrawal and then taxed again at tax time. I do not know too much about the TFSA. My husbands RRSP's come out before he is taxed. He has a pension, so the RRSP's are just a back up, but we are happy with them. My parents swear by GIC's. I would research all the options.

[monkeywrangler71]

If I put $100 per month into an RRSP, but 65 I'll have $150k in the bank. If I put $100 a month into a TFSA, I'll have $38,400 by the time I turn 65.

What are you basing this calculation on? The exact same investments are available for RRSP & TFSA, you should be coming out with the same answer for both. The choice between the two comes down entirely to taxation.

You should not be investing in an RRSP if you have little or no taxable income - you will increase your lifetime tax burden, not decrease, not to mention jeopardize your eligibility for guaranteed income supplement at retirement. You should be in a TFSA.

The question is, how much does your husband make? If his income is in the upper tiers, then he is the one that should be in an RRSP.

[monkeywrangler71]

We have withdrawn money from RRSP's twice. You are taxed 10% of the amount you withdraw at the time of withdrawal and then taxed again at tax time.

Not exactly. 10% is withheld when you withdraw (up to $5000), in the same way that income tax is withheld from any other paycheques. Then the difference is either paid or refunded at tax time, based on your total income for the year.

RRSP withdrawals are taxed at your marginal income tax rate, the same as regular employment income or interest income. This is one reason why they are not always the best option. Investment income from dividends and capital gains are normally taxed at a lower rate, however, all income in your RRSP is taxed at the full rate regardless of its source. Therefore, if you do not benefit from the deferral of taxes (ie. have a high income when you contribute and a low income when you withdraw), you could end up potentially paying twice as much tax on your investment then if you had kept it non-registered and paid the tax annually.

[MomToTwoBoys]

What are you basing this calculation on? The exact same investments are available for RRSP & TFSA, you should be coming out with the same answer for both. The choice between the two comes down entirely to taxation.

You should not be investing in an RRSP if you have little or no taxable income - you will increase your lifetime tax burden, not decrease, not to mention jeopardize your eligibility for guaranteed income supplement at retirement. You should be in a TFSA.

The question is, how much does your husband make? If his income is in the upper tiers, then he is the one that should be in an RRSP.

I got it from the website that explained both a TFSA and an RRSP. They had a table on there that said 'If you invest $100 per month, at 8% interest, you'll come out with about $140k+"...

It's from the Sun Life Financial website (who happens to be DH's insurer).

http://www.sunlife.ca/Plan/Investmen...gnLocale=en_CA

There's also another website that gives amounts and explains a bit about the contribution for a RRSP located here:

IC Savings & Credit Union

He made about $44k last year. I'm thinking that we might want to put the $200 per month into his RRSP. Depending on how much extra income we have with bills and everything, I'd like to put money into the TFSA.

[MomToTwoBoys]

Btw MW, here's that table that I brought up:

Sun Life Financial - RRSP tips

With my pension and his OAS/CPP (though we're not sure CPP will be around when we get older), plus about $300k in the RRSP, we can expand even further down the road and contribute to the TFSA if we haven't hit the contribution cap.

[ConnieD]

If you're going the RRSP route, then your husband should contribute into a spousal(you) RRSP. That way he gets the tax deduction, but when you cash it in at retirement it'll be taxed at your income level (which is lower than what your hubby's would be). This is what we've done in the past.

[monkeywrangler71]

I got it from the website that explained both a TFSA and an RRSP. They had a table on there that said 'If you invest $100 per month, at 8% interest, you'll come out with about $140k

He made about $44k last year. I'm thinking that we might want to put the $200 per month into his RRSP. Depending on how much extra income we have with bills and everything, I'd like to put money into the TFSA.

The same calculation would apply to growth in a TFSA as in an RRSP, if you invest the same amount in the same investment you get the same result. One does not make more money than the other.

The difference is that your earnings in the TFSA are not taxed at withdrawal, nor do they impact the calculations for any government supplements. As far as the government is concerned, that money does not exist.

Contributing to an RRSP allows you to DEFER taxes until retirement (it does not reduce taxes like most people think). If you are in a high tax bracket you can benefit from an RRSP by deferring paying tax until you are in a lower bracket - which typically happens at retirement; or by shifting income to the lower income spouse with a spousal account. If you are already in a low bracket, then all an RRSP does is let you avoid taxes today and pay the same or more later - basically borrowing money from your retirement rather than saving for it.

Bottom tier income cutoff is $41,544. Anyone below this income, or anyone who contributes enough to reduce their taxable income lower than this amount is not benefitting from an RRSP.

So if you can contribute $100 a month and end up with $140 000 (and that is a big if, returns like that are not guaranteed), would you prefer to keep all $140 000, or would you prefer to give the government 25-45% of it? That's the difference between a TFSA and an RRSP.

[monkeywrangler71]

Just wanted to add, there are some immediate benefits to an RRSP contribution, in that contributing will increase your other income based benefits if you receive any (CTB, GST credits). But short term benefits will get cancelled out by long term disadvantages if you hold it into retirement and never rise into the higher income tiers.

One trick is to contribute to an RRSP while you have children at home to maximize your benefits, then withdraw when they are gone if your income is still low and move it into a TFSA so that it doesn't impact your GIS at retirement.

But now we're getting into the really complicated stuff...

The key is to make sure you do something productive with any immediate benefits. Don't blow a tax refund that was generated by RRSP contributions - that money is borrowed from your retirement, so put it to work.

[frugalcdngal]

Not exactly. 10% is withheld when you withdraw (up to $5000), in the same way that income tax is withheld from any other paycheques. Then the difference is either paid or refunded at tax time, based on your total income for the year.

RRSP withdrawals are taxed at your marginal income tax rate, the same as regular employment income or interest income. This is one reason why they are not always the best option. Investment income from dividends and capital gains are normally taxed at a lower rate, however, all income in your RRSP is taxed at the full rate regardless of its source. Therefore, if you do not benefit from the deferral of taxes (ie. have a high income when you contribute and a low income when you withdraw), you could end up potentially paying twice as much tax on your investment then if you had kept it non-registered and paid the tax annually.

We were definately taxed when we withdrew money.. I remember, it was painful. Then it was added to my husbands income at tax time, bumping him to a higher income, how would we not have been taxed again??

[monkeywrangler71]

We were definately taxed when we withdrew money.. I remember, it was painful. Then it was added to my husbands income at tax time, bumping him to a higher income, how would we not have been taxed again??

You were not taxed twice, you just made two separate payments on the taxes owed.

RRSP withdrawals are income. Income is taxable at whatever tax rate is applicable for your circumstances. If your tax rate is higher than the percentage that was withheld, then you will still owe more in April. The same thing would happen if your employer only withheld 10% from your paycheque for taxes, at tax time you would owe the difference.

If you withdraw from an RRSP when you have no income, or enough deductions to reduce you to zero, then at tax time you would be refunded the money that was withheld when you withdrew. I cashed out a $1900 pension last spring. $190 was withheld for taxes. I have no other income, therefore will be getting a $190 refund when I file my taxes.

[mslolsalot]

I'm no professional, so please take this for what it is- personal opinon/experience.

My income is about the same as your DH's. Being a single parent, using all of my deductions (equivalent to spouse, child care, fitness amounts, etc, etc), I pay essentially no income tax on what I make whether I put money into an RRSP or not. (It sounds like you are getting a refund as well- even without contributing to an RRSP.) Thus, the RRSP has no immediate benefit (i.e.: reduction in tax paid this year). However, the TFSA only allows you to save 5K per year (10K for you and your spouse) without penalty.

The whole point of an RRSP as a savings vehichle is to defer taxes on your current income with the assumption that you will be at a lower tax rate in retirement. I work for a non-profit and I don't expect my wage to increase significantly (like, ever!). Therefore, my retirement income will be pretty much equal to current income- no benefit deferring the tax until then.

If I had to choose one, I'd choose the TFSA due to my income and taxation level as well as my projected retirement income level. Please remember that all investments (typically mutual funds) held in an RRSP can also be held in a TFSA account. The potential growth is equal. The issue is really more that most families won't be able to retire in comfort if all they save is the maximum (5-10K) in a TFSA for 40 years (or whatever). Most people need more than one retirement vehichle.

I max out my TFSA and my RRSP every year-because i can afford to. When I get my refund (I forgot to request a decrease in withheld tax- duh) I will use the refund to contribute to my TFSA- which will almost max it out for the year. When I get a reduction in source deductions, I will use the difference (~$500/month) toward my RRSP. It's a painless way to save- but you forfeit a refund at tax time.

I hope that all made some sense- and was vaguely helpful. For more info check out the moneysense website as well as canadianmoneyforum.com. There is a lot of good info out there.

GL with your plan!

[MomToTwoBoys]

I think what DH and I are going to do is we're going to put money into an RRSP in his name and put the money for the TFSA into my name. I'm trying to convince him to put our tax return money into an RRSP, but that's a road I haven't gone done yet. I just want to get things straight first.

FIL told us, "Don't worry about retirement or money for Dakota's education." Both him and MIL have money in retirement and I assume that that means they'll be helping us with that, which is nice and all. But it makes me feel uneasy. I'm going to bring up the retirement talk again when they get back from Palm Springs and see if it's the same result.

I'd still like to start putting money into a retirement fund, whether it be a TFSA or RRSP. Even though we'll have CPP/OAS (if they're still around) and my pension, we want more to be able to go and do the things we want to do. I don't want us stuck around the house or being unable to enjoy whatever years we have left between the two of us.

[mslolsalot]

Sounds like a good plan. I think it's getting increasingly confusing to decide where to put your money, but in reality as long as you're saving something, you're doing yourselves a favour! I like using my TFSA and I tell myself that I can always move the money into an RRSP if I feel like I need to in the future.