Where should working retirees put extra income: A TFSA or an RRSP?

RRSP vs. TFSA for retirees

Now to your question: Should you contribute to your RRSP or TFSA? I don’t know your circumstances, but I can show you the math. In the table below, you are going to see that there is no real difference if your marginal tax rate is the same at time of contribution and time of withdrawal.

RRSP vs. TFSA comparison on a $10,000 contribution over one year

Gross contribution $10,000 $10,000
Income tax (30% tax rate) $0 $3,000
Net contribution $10,000 $7,000
5% investment growth $500 $350
Value of account $10,500 $7,350
Tax owing $3,150 $0.00
After tax value $7,350 $7,350

The math for retires investing in an RRSP and TFSA

The above table shows that all things being equal a dollar invested into a RRSP or TFSA yields the same results. This is why it’s argued that an RRSP provides tax-free growth after all if, dollar for dollar, it gives the same after-tax value as a TFSA.

How could it not?

You may have questions about the table. For example, if you invest $10,000 and end up with $7,350 after one year, how is that a good investment? The $10,000 number is a before-tax figure. Remember, if you’re given $10,000 at the beginning of the year, and have a marginal tax rate of 30%, then you would be left with $7,000. Investing in a RRSP or TFSA leaves you with $7,350 after tax, so you have a gain.

The other thing to remember is that RRSP contributions are made with pre-taxed money and TFSA contributions are made with after-tax money. This is why you see the $3,000 income tax entry under the TFSA column, to make it a fair comparison. 

Where should Canadian retirees put their money

Now to your question Gary, should you contribute to your RRSP or TFSA? You see there’s no difference between investing inside an RRSP or a TFSA if your marginal tax rate is the same at time of contribution and withdrawal. If your marginal tax rate is higher at time of withdrawal, then the TFSA has the advantage. Conversely, if your tax rate is lower at time of withdrawal the advantage goes to the RRSP.

Also, consider that RRSPs and TFSAs are both available tax shelters to maximize when sensible and if possible. Canadians are to only contribute to their RRSPs until they turn 71, whereas TFSA contributions can be made right up until death. If there’s a chance you receive a lump sum of money from an inheritance, home sale, and so on, you may want to save your TFSA contribution room and use your RRSP now, while you can. 

There are some other finer details to think about. Does the RRSP tax deduction help with your age credit? Will future RRSP withdrawals result in OAS or Guaranteed Income Supplement clawback?

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