TFSA vs. RRSP debate

The TFSA vs. RRSP rumble reminds me of the old “mortgage paydown vs. RRSP contribution” fisticuffs of the past. The theory is that there are limited dollars available and so you must choose the option that will make you a winner.

Both RRSPs and TFSA give you a wide range of options for investments. That’s a draw. Both let you earn income without paying the taxman immediately. Another draw.

RRSPs have higher limits: a win. And there’s that tax deduction you can take if you’re in a tax bracket you wish you weren’t: a decided win. A $1,000 RRSP contribution will save you $278 at the 27.8% tax bracket, which is what you’ll pay on incomes between $31,000 and $41,600 in Manitoba. The next tax bracket, up to $67,000 taxable income, is taxed at 34.75%, so for every $1,000 you put into an RRSP, you’d get back $347.50. Make a $5,000 contribution and you’d have a tax saving more than $1,700. Sweet.

The offset argument to this is that you might pay as much tax when you’re retired, making the deduction not so clear a win. But wait…have you considered what you did with the money you saved in taxes? If you paid down your debt, that’d be a win. How about using that money to get to mortgage free faster? Another win, right? Or boosting your next year’s RRSP contribution? Wow…win/win.  Or you could use your RRSP refund to fund your TFSA. Talk about having your cake and eating it too.

TFSAs have tax-free income forever: that’s a definite win, particularly for people who will rely on government benefits come time to hang up their duelling pistols. But those people weren’t big RRSP players in any case since there was no major tax incentive to start and they likely didn’t have the financial resources to save. Let’s face it, if you’re planning on relying on the government’s monthly cheques to see you through your golden years, it’s for one of two reasons:

• you simply don’t make enough money now to save, so you’re used to living on far less, and are in no way capable of saving money with your tight cash flow, or

• you’re dumber than dirt and spend every cent of your income because you can’t stop scratching your consumer itch.

I feel for the first group; but you’re a thrifty lot and are used to making do.

As for the second, if you had the resources to plan for your future and you wasted them, then perhaps some belt-tightening and learning to make do on less will be your just reward.