# RRSP or TFSA



## amitdi (May 31, 2012)

I have read about RRSP and TFSA but want to ensure I am choosing the right option.

I was a student so have ~40K of unused tution credit. My annual taxable income this year will be ~60K. I want to make ESOP contributions.

So my (limited) knowledge tells me I should do this through TFSA and not RRSP. This is because:
- TFSA room can be reclaimed back once I withdraw
- My marginal tax this year will be low because of tution credit
- Preserving RRSP room makes sense as later I will have more income to save

Please let me know if my choice is correct. Thank you.


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## cldellow (Feb 16, 2012)

Yup, you've got it right.


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## 44545 (Feb 14, 2012)

It sounds like you have a handle on it but this article might be of interest to you: http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


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## Eclectic12 (Oct 20, 2010)

+1 ... though the one question is what the plan is when the TFSA is maxed out.

If there is cash flow left, you may want to investigate contributing to an RRSP so that it can grow but not claim the contribution until your income is higher and hopefully the tuition credits have been used up. 

I have done this in the past but only over a two year period (i.e. contribute to RRSP in 2009, then claim the RRSP deduction in 2011). I don't believe there is time limit for using the RRSP deduction but I don't remember off the top of my head. So make sure you check this option out in detail first.


Cheers


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## Toronto.gal (Jan 8, 2010)

Eclectic12 said:


> (i.e. contribute to RRSP in 2009, then claim the RRSP deduction in 2011). I don't believe there is time limit for using the RRSP deduction.


That's a good point, that you can carry forward your RRSP deductions & hence defer them for when you expect to be in a significantly higher tax bracket.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html


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## atrp2biz (Sep 22, 2010)

I may be mistaken, but the tuition credit doesn't reduce income--it's just a credit. But nevertheless, sounds like TFSA is the way to go especially if you think your income will be higher in the future.


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## Eclectic12 (Oct 20, 2010)

Toronto.gal said:


> That's a good point, that you can carry forward your RRSP deductions & hence defer them for when you expect to be in a significantly higher tax bracket.
> 
> http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html


The nice parts are that it grows tax-deferred plus the deduction can be taken when the tax rate is higher.

It's probably a good idea to point out that the RRSP is not as flexible as the TFSA. There are tax implications to withdrawals (as well as permanently losing the contribution room). So it is important to make sure the money contributed isn't needed.

There are exceptions with the Home Buyer's Plan and LifeLong Learning plans.


Cheers


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## Young&Ambitious (Aug 11, 2010)

atrp2biz said:


> I may be mistaken, but the tuition credit doesn't reduce income--it's just a credit. But nevertheless, sounds like TFSA is the way to go especially if you think your income will be higher in the future.


Correct.


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## amitdi (May 31, 2012)

*Thank You*



Young&Ambitious said:


> Correct.


Thanks to all of you.


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## cardhu (May 26, 2009)

Agree, TFSA is a good choice for the moment ... but this ... 



amitdi said:


> My marginal tax this year will be low because of tution credit


... is not correct ... tax credits have no impact on marginal rates ... they reduce the tax owing, not the income on which tax is calculated ... so unless the tuition credit is sufficient to reduce the tax owing to ZERO, an RRSP contribution would produce the same tax break regardless of whether the tuition credit is or is not used. 

It’s often suggested to make RRSP contributions but defer taking the deduction until your income is substantially higher ... be careful with this ... although you are allowed to defer the deduction for as long as you want, there is a limit to how long it makes sense to defer ... a few years is usually fine, beyond that the value of the deferral erodes rapidly and becomes a detriment.




CJOttawa said:


> ... this article might be of interest to you: link


The article is pretty good, but the author fell into a common trap by referring to an effective marginal tax rate of about 75% on RRSP withdrawals for GIS recipients ... although it is possible for this to occur, the income ranges in which GIS clawbacks overlap with ordinary taxation are quite narrow. More often, a taxpayer would be subject one of the clawback, or ordinary taxation, but not both.


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