# RRSP and TFSA



## Fraser19 (Aug 23, 2013)

Hey,

So over the past few months I have been debating what I should be working at building. I am 25 and I make 46,280.00 a year. I put 5% into an RRSP and my work matches 5%. Until recently I was adding about another 5% on top of it. 
On over the past year or so I have been reading about finance nearly every day and trying to learn as much as I can. In addition I am always reading on this forum. So my current thought process is that my RRSP is building its self and I probably don't need to contribute any additional income to it at this time other than the 5% + the 5% work matches.
Based off of the calculators I have at my disposal at this time if I was to never contribute more and worked for 40 more year and earned an annual 6% rate of return (which I believe is conservative) it should work out to around 800,000.00 So as far as I can see right now that is damn fine.

So moving on, if I was to retire at 65 I would also have 40 years worth of TFSA contributions. So lets say I max out my TFSA room yearly at 6% that would total to about 900,000.00 Which is also very nice. 

So lets pretend it is a perfect world and the math works out to a perfect 6% over 40 years, the combined value of my TFSA and RRSP would be 1,700,000.00 give or take.

So I am under the impression that the TFSA makes much more sense for retirement planning as 0% tax on 900k is very nice. Is there anything I am missing that would make for good reason to contribute more to my RRSP? 
For a guy my age what would be some of the benefits for me to contribute more to the RRSP?
At this time I am currently investing my tax returns in my TFSA as well, I have read that it makes more sense for some people to put it in the RRSP for the tax return will grow further annually.

Truth is I still feel very lost with all this financial stuff. I want to do everything I can to ensure a secure future and often feel as if I am not doing enough. Realistically I do not want to wait until I am 65 to retire, so I am trying to learn everything I can so that I can take the best way or closest to the best way for financial security.

In addition I intend on starting with the government of Alberta next year, this should take my income from 46k to 73k which will provide me with the ability to contribute more to the RRSP as well. In addition I will also get a pension as I would like to do a significant number of years with them.


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## cashinstinct (Apr 4, 2009)

TFSA VS RRSP dépends on your expectations of future income (and many other factors).

If you think your income is going down, RRSP makes more sense since you would get your tax return based on marginal tax rate (example 40%) now but will be taxed on your average rate when you withdraw money in many-many years.

However, if you think your income is going up, TFSA makes more sense.

____

Since you can't control future tax rates, it's tough to know "which one" is better.

Since you plan to increase income next year by a significant amount, you should not deduct your RRSP contributions this year. You should wait till next year to deduct them since they will "pay more" (increase in marginal tax rate).

(you can make contributions in 2014 but use them in 2015).

___

My approach: I mix both. I invest in RRSP and TFSA. I max out yearly TFSA and the extra goes to RRSP.


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## My Own Advisor (Sep 24, 2012)

I try and max out my TFSA first. It's a tax-free account after all. 

I invest in my RRSP after that, 10% net income or more if I can. Hopefully I can max out RRSP contributions in a few more years...that's the goal anyhow.


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## cannew (Jun 19, 2011)

Take advantage of the employer rrsp contribution to the max. Then you can look at the tfsa and additional rrsp. Remember that tfsa are after tax, while rrsp reduce your current taxes (which you will then pay tax upon withdrawal). In all cases stick to solid companies and avoid speculation.


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## indexxx (Oct 31, 2011)

Like many, I do both. I also have an RRSP match at work, and also do a bi-weekly payment out of my bank into TD e-series funds in an RRSP. What I then do is take my tax refund and put it straight into my TFSA and top it up. 

The mistake most people make when they get an RRSP refund is to spend it, thinking it's 'free money'. Essentially, this defeats the whole purpose of the RRSP in the first place as of course you'll have to pay tax on the withdrawals at some point. So eventually I'll use the tax-free growth in my TFSA to pay the taxes on my RRSP. I assume my income at retirement will be slightly less than my working life. Most working people will be in this situation- unless they own businesses or lots of rental property or something.


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## uptoolate (Oct 9, 2011)

Also remember that you can make contributions to your RRSP now and start tax-deferred growth but wait until later years (hopefully when income is greater and marginal tax rate are higher) to claim the contributions in order to get higher refunds.


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## Tawcan (Aug 3, 2012)

That's great that you're taking advantage of the RRSP matching from your employer. What kind of stuff can you invest with the work RRSP account? If it's mutual fund with high MER I'd open a self directed RRSP and try to reduce the fees as much as possible.

I try to max both TFSA and RRSP. TFSA is typically the first account that I max out.


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## Butters (Apr 20, 2012)

Always take the free matching!!!

When you get to larger tax brackets RRSP is nicer especially if you plan on lowering your tax bracket later. (Go part time at 50 for example)

You can also use up to 25k of RRSP to buy your * first house *
(If you think of this it's like a free cash advance you have 15 years to pay back)

Until you get that raised annual income put in your 5.5k/year into TFSA


Other than that 25k you probably won't touch your RRSP unless you lose your income or retire

Whereas a tfsa you can take out to purchase something and build it back up next calendar year

You should figure out your goals (like house) then plan from there!


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## indexxx (Oct 31, 2011)

uptoolate said:


> Also remember that you can make contributions to your RRSP now and start tax-deferred growth but wait until later years (hopefully when income is greater and marginal tax rate are higher) to claim the contributions in order to get higher refunds.


Very good point. Of course there is also the perspective that one misses the opportunity for any potential gains of receiving those refunds earlier and investing them.


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## lb71 (Apr 3, 2009)

Kudos for starting to save at a young age and thinking about retirement. 

Although the TFSA withdrawals come out tax free, your RRSP contributions went in pre tax, while your TFSA contributions went in after tax. In effect, the RSP contribution results in a higher after tax current year income than the TFSA. For example, if your salary was 50,000 and you contributed 5,000. Assume a 40% flat tax rate. Your after tax salary is 30,000. If you contribute to a TFSA you are left with 25,000. If you contribute to an RRSP, you get a 40% tax refund, so you end up with 30,000 less 5,000 plus 2,000 = 27,000. Alternatively, you can think of the RRSP contribution being made before taxes are calculated, so your pre tax salary of 50,000 less 5,000 is 45,000. Take off 40% you are left with 27,000. There is an exta 2,000 you have with the RSP contribution, which you will need to pay taxes in the future when you withdrawal from your RSP.


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## leslie (May 25, 2009)

* Remember that inflation means that $$ in 30 years will only be 'worth' about half as much. In 40 years it will be 'worth' less. So the projected $900,000 is really only $450,000 in purchasing power.

* Don't make decisions this early in your life based on assumptions that everything will go swimmingly for the rest of your life. Things change - radically. Save enough now so that if life goes belly up, you will not think at that time ..."Geese I wish I had saved more when things were good".

* That said the OP seems to be a good saver and a 15% saving rate plus CPP will most probably replace his income in retirement.

* But the understanding of the tax shelters is a bit off. 
(a) Quote: "_It makes more sense for some people to put it in the RRSP for the tax return will grow further annually_" This misunderstanding comes from the wrong information promoted by the industry and advisors - wrongly claiming that you benefit from the extra income earned by the tax-reduction on contributions (that make the account larger). This is never a benefit because when the account is withdrawn you repay the government both the original tax reduction PLUS all that income it earned. Please watch (at least) the 2nd video of this series https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg 
(b) Quote: "_ the TFSA makes much more sense for retirement planning as 0% tax on 900k is very nice_." The taxes on RRSP withdrawals are not 'a cost' that makes RRSPs worth less than TFSAs. As you will have seen in the video those taxes are completely self--financed by the original tax reduction on contribution. The 'trick' is never delude yourself that the whole RRSP account is 'your own money' - that it is of comparable value to a TFSA of the same size. You should discount the RRSP account's value by the amount financed and owned by the government.

* Once the OP starts working for the government and getting a defined benefit pension, then he will no longer have the option to contribute as much ((or at all) to an RRSP because the contribution room accruing each year will be reduced by that pension.

* For now, get the matching and contribute to an RRSP to the extent that the deductions are done at the 2nd tax bracket. For remaining savings use a TFSA. The third video of the series shows the other RRSP benefits/costs the OP was asking about.


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## Guban (Jul 5, 2011)

uptoolate said:


> Also remember that you can make contributions to your RRSP now and start tax-deferred growth but wait until later years (hopefully when income is greater and marginal tax rate are higher) to claim the contributions in order to get higher refunds.


Don't do this! At least until you've maxed out on your TFSA. If you aren't going to claim the deduction, put the money in your TFSA first and then when you want the tax deduction, take the money out of the TFSA and put it in your RRSP. Tax free is better than tax deferred. As an added bonus, after the next calendar year, your TFSA limit will be higher. 

This assumes that the money actually grows in the TFSA. If the value drops, then this strategy will work against you.


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## uptoolate (Oct 9, 2011)

Yes I think Guban's points are very reasonable and sound like a good course of action.


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## humble_pie (Jun 7, 2009)

Guban said:


> Don't do this! At least until you've maxed out on your TFSA. If you aren't going to claim the deduction, put the money in your TFSA first and then when you want the tax deduction, take the money out of the TFSA and put it in your RRSP. Tax free is better than tax deferred. As an added bonus, after the next calendar year, your TFSA limit will be higher.
> 
> This assumes that the money actually grows in the TFSA. If the value drops, then this strategy will work against you.



what a neat idea! shall we call this Guban's Gambit?

to recap, don't early-contribute to RRSP while planning to carry the claim forward. Do what Guban says instead.

the only wrinkle i can think to add is that investor should keep those $$ inside the TFSA in a drop-proof vehicle, which pretty much means a HISA. Not all of the TFSA in the HISA, just the amount that could possibly be withdrawn for future RRSP contribs.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> what a neat idea! shall we call this Guban's Gambit?


I seem to recall similar suggestions in 2009 when the TFSA was new ... but I'm okay with Guban's Gambit. 




humble_pie said:


> ... the only wrinkle i can think to add is that investor should keep those $$ inside the TFSA in a drop-proof vehicle, which pretty much means a HISA. Not all of the TFSA in the HISA, just the amount that could possibly be withdrawn for future RRSP contribs.


This is a good point ... *if* the TFSA $ is going to be a major source for the future RRSP contributions.

The question in this case is how much is likely to be needed.

The OP says currently 5% + 5% goes into an RRSP on a $46K salary so it would seem that a new job at $73K would greatly reduce any need for down side protection or the need to use TFSA funds to make the RRSP contributions.


It may end up being more efficient to leave the TFSA funds growing and use the new, higher salary to fund the RRSP contributions. Particularly, if the OP files a T1213 Request To Reduce Tax Deductions At Source that documents schedule RRSP contributions with CRA (then with his employer after approval).

That way the OP will have any refund will be spread through the year, giving more cash flow versus waiting for the tax return to filed the following year.

http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html


If on the other hand, the OP wants to put as much as possible into the RRSP as early as possible that the new higher salary starts ... then a high percentage in a drop proof HISA is needed.


Cheers


*PS*

The new employer may offer a plan that puts the RRSP money in on a pre-tax basis (no refund but no taxes withheld) but most plans I know of that do this also limit the investment options.

That's where scheduled RRSP contributions into one's own RRSP which are documented on the T1213 gives a better blend of both worlds. Depending what one's RRSP allows, there can be more low cost choices and the T1213 reduces the time required for the refund to be paid.


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