RRSP vs TFSA
Both shelter your growth from tax. The difference is when the tax gets paid. Put the same money out of your pocket into each and the answer depends almost entirely on one thing: whether your tax rate in retirement is higher or lower than it is today.
What this assumes
- The same amount leaves your pocket either way. Because an RRSP contribution generates a refund, that same out-of-pocket amount buys a bigger RRSP contribution.
- TFSA withdrawals are tax free. RRSP withdrawals are taxed as income at the rate you entered for retirement.
- If your rate in retirement matches your rate today, the two finish exactly level. Every dollar of difference comes from the gap between those two rates.
- A steady return every year, compounded monthly. Real markets are nothing like steady, and a bad first decade matters more than the average.
- Inflation is not applied, so these are future dollars rather than today's buying power.
- RRSP withdrawals count as income and can claw back income-tested benefits such as OAS and GIS. TFSA withdrawals do not.
Illustrative only, and not advice. I provide financial coaching, not licensed financial, investment or tax advice. Talk to an accountant or a licensed advisor before acting on any of this.
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