How do RRSP and TFSA work
How can I determine which, if any, is right for me, RRSP or TFSA?
[John] Storjohann ['the 58 year old Calgary Project Manager'] is well aware of the two main benefits of RRSPs: tax refund when you contribute and deferred tax growth until you withdraw when you retire. This makes RRSPs ideal for those who expect to be in a lower tax bracket when they stop working - which most Canadians will be. For those who are in the highest tax bracket today, the RRSP is a breeze. That is why Storjohann is always surprised when he meets people who have good incomes and who think that TFSAs stack up better than RRSPs. "People just don't understand how these accounts work."
This is the most common objection to RRSPs: people just hate the idea of paying tax on the withdrawals. In contrast, the money withdrawn from a TFSA is tax-free, which sounds far more attractive. However, that logic ignores the fact that if you put money in an RRSP, you will get a tax refund while TFSA contributions are made with dollars after tax. So for the Fosters and other Canadians weighing this decision, the bottom line is whether it is better to pay taxes now or later. And that's not an easy question to answer.
Both Hamilton and Kirzner say that anyone making more than $ 50,000 is usually better off prioritizing RRSPs over TFSAs. While both accounts allow your investments to grow tax-free, the tax refund makes the RRSP more attractive to high-income users. ...
In short, this makes RRSPs better for higher earners than TFSAs: not only will you be taxed on your money years later, but you will also pay less tax because you are in a lower range in retirement.
When your income is between $ 35,000 and $ 50,000, the long-term tax differentials between RRSPs and TFSAs become negligible, says Malcolm Hamilton. In this salary range, being able to "just put money aside in an RRSP or a TFSA" is great.
However, RRSPs may still be a better choice for reasons that do not involve a tax deferral or refund. In his new book Wealthing Like Rabbits Author Robert Brown advocates preferring RRSPs to TFSAs most of the time, as the former usually mean less temptation to access your retirement savings early.
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