TFSA Vs RRSP
TFSA Vs RRSP
The rrsp is tax deferred – meaning you will get your taxes back on the income you made this yr (come tax time). All of the money (including the gains) in the rrsp in the future will be taxed at your current tax rate when you withdraw in the future. (You should be retired, and have a much lower tax bracket)
The Tfsa is already taxed – Your Tfsa contributions have already been taxed and there is no tax break come efile tax time. It doesn’t matter at all what your tax rate is when you withdraw. It is all tax free. ALL OF IT. All of those gains as well! It also can be withdrawn at any time with no extra fees or fine print.
Im not going to get into all the stuff about each account, you can click on the links for them to find out more. Both accounts have limits on how much money you can allocate into each account. If you think you will make more money in the future (therefore be in a higher tax bracket) it might be better off to max that tfsa first.
Canadian Equities in a RRSP?
One thing I keep reading or seeing from other people is Canadian stocks in a RRSP account. I’m a huge fan of Motley fool, I read their articles basically every day. A lot of the times they talk about how this Canadian Bank (or other Canadian Companies) is a great buy for a RRSP. I don’t get it, why not diversify?
The government recently raised the tfsa limit by $5500 again. Bringing the total you can contribute to your tfsa to $57,500 if you were 18 before it was introduced. Now if you are married double that. $115,000. Lets say you loaded that up with Canadian equities, why would you want any more Canadian Equities in your RRSP?
The biggest benefit of a RRSP in my opinion is that US stocks don’t get taxed the 15% withholding fee. (or 30% if you didn’t fill out the paperwork) If you hold US stocks in a TFSA you will get charged that tax on the gains and dividends. You should hold Canadian Stocks/index funds etc in your TFSA for tax efficiency.
It is great to be diversified geographically. (Something I’m working on) Why wouldn’t you load your RRSP up with American Stocks? While the tsx is full of great financial and energy stocks, why not add to the other sectors in us stocks? There are a tonne of great blue chip American companies with a even longer history of paying/raising their dividends.
Historically the us market has outperformed the tsx and many analysts are predicting that trend will continue next year. So if taxes weren’t a issue why not focus on us equities. Last year – 2017, the S&P 500 returned 19.4% the Dow Jones brought in 25.1% while the Tsx only returned 6%
The one issue I can see is the dollar conversion. Our dollar is down, is it worth the conversion? I used to think that. Obviously this is a issue, if our dollar was 60 cents I would focus on the tfsa. If you are a long term investor and its somewhere near now .80 cents per dollar, I would just make the conversion. You get paid in US dollars anyways!
If your company offers you a company stock match or something on your rrsp, by all means take advantage of that! I wish my work offered something like that. One thing I would do is every couple years sell some of that stock to rebalance your portfolio. You definitely don’t want to be so dependent on the company you work for. Ie the company does bad and needs to cut costs, they fire you and the stock most likely pulls back on the bad news. Leaving you out of luck…
Again its a hard debate, TFSA VS RRSP. Being in my 30’s I think the TFSA is a way better account long term. Because I plan on making more in my 40s-50s and also all those years of tax free growth working for me. The RRSP offers us a great opportunity to get exposure in the us market or emerging markets worldwide, and diversifies our portfolio a lot better.
Both accounts are fantastic tools for saving for the future. Us Canadian’s should be trying to maximize them to the fullest. The choice is yours, obviously. I just don’t understand why people would hold the same equities in both accounts.
Whats your thoughts?
Have a great weekend, Cheers.