Did you contribute to your RRSP’s or TFSA this year? Even though I am not a financial advisory I get asked what is the better option between a TFSA and RRSP. As a Chartered Accountant I can clarify some of the over looked tax implications:
- The first is obvious, a TFSA is tax free but you do not receive a deduction against your income like you would with an RRSP. Keep in mind that an RRSP is only tax deferral so at some time later in life you will have to pay tax on your contribution and the investment earnings.
- If you do not have a spouse at the time of your death then the amount remaining in your RRSP will be taxed at the highest bracket. So if you saved all your life and left your children with $500,000 in RRSP’s, after tax they only receive approximately $250,000 (let’s assume a testamentary trust is not established). With the TFSA option you have $500,000 to pass onto your children. This is a significant difference commonly overlooked by most of us.
- If you run into an emergency, there is a 30% withholding tax on RRSP withdrawals as opposed to zero on your TFSA.
- If you invest $5,000 in a TFSA each year from 18 to 65 and let’s assume you earned no interest or dividends then you would have $240,000. That is equivalent to $500,000 in RRSP’s at death.
- From 2009 – 2012 the contribution room per year was $5,000 increasing to $5,500 for 2013 – 2014, which is $31,000 in contribution room. Providing you are not using the account for day trading then the interest and dividends are tax free. If you can pass on the upfront tax deduction then the long term tax savings is significant.
It may sounds like I dislike RRSP’s but that is not true! I dislike the illusion of tax deferral and the erosion of hard earned savings past onto your family.
If you have any further questions, please get in touch. I am always happy to help you make an informed decision.