RRSP vs. TFSA – Which One Is the Best Investment Choice?
Much has been written about the relative merits of saving in RRSPs and TFSAs. The discussion usually comes down to a close call based on some elaborate calculations. For me the choice is clear.
For those who make a good living, marginal tax rates are somewhere near 45%. Given $10,000 of income burning a hole in your pockets, the choice is to put the $10,000 in an RRSP or to pay $4500 in taxes and put $5500 in a TFSA.
If all goes well in the future then it can be a close call which approach is better. But what if your financial future is terrible? What if your income is so low that you will be able to withdraw the $10,000 from your RRSP during retirement and pay a low tax rate? In this case, $10,000 from the RRSP is much better than $5500 tax-free from your TFSA. Choosing the RRSP over a TFSA offers some downside protection.
Of course, it’s better to save enough to fill both your RRSP and TFSA, and if your marginal tax rate is much lower than 45% you may prefer saving in a TFSA. Overall, I fill my RRSP first because it will provide a better buffer against the possibility of a meagre retirement. If I’m rolling in cash during retirement then it doesn’t much matter whether I saved in an RRSP or TFSA.
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