TFSA Vs RRSP
TFSA Vs RRSP
It’s the classic debate for Canadian’s. What should they contribute to? The Registered Retirement Savings Plan (RRSP) or The Tax Free Savings Plan (TFSA).
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 It also can be withdrawn at any time with no extra fees or fine print.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.
Diversification
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%
Dollar Conversion
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!
Company Match
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…
Conclusion
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.
Hey I’m Rob, creator of Passive Canadian Income.
In 2011 me and my wife had almost $60,000 in debt and a negative $7,000 Net Worth. Through hard work and financial education we paid all that off. Now we are focusing on increasing our Passive Income Streams to make the money work for us. Feel Free to Follow along the Journey by clicking the Social Media links below or subscribing to get notified of new posts on the sidebar.
TFSA is like 401K and RRSP is like Roth IRA. TFSA limit is 57,500? That’s crazy man! We can contribute 18,000 max to 401 (K). Even maxing that out is a struggle. Roth IRA is 5,500.
Based on what you mentioned it makes sense to add US equity in TFSA and Canadian equity in RRSP. How does it work out for ETFs? Holding US ETFs in TFSA gives you US tax exemption?
I looks like I lose 30% of my dividends from international funds. The only way to get a foreign tax credit is by itemizing. With my mortgage payment I might itemize this year.
Hey geek. The 57500 is total not per yr. Is the 401k total or per yr? Sorry maybe i got to reread what i wrote. I was trying to point put not to have us equitys in a tfsa but hold them in a rrsp and keep canadian stocks in our tfsa’s. As for etfs im not 100% so i hold my us etf in my rrsp. I think the tfsa is there to help canadian companies so doubt a us etf can go in there without the tax implecations.
Cheers man. Will look over the post again to clarify.
Just wanted to clarify that the contribution limit to the 401k is 18,500 for 2018 and not $18,000 like it was in 2017.
The more you know…..
No debate, just max out them all, rrsp, tfsa, resp. 🙂
Haha Cant argue that May!
The beautiful thing about this infamous question is that whoever is asking it is already winning 🙂
Sooo true! Haha.
Hi Passive,
Generally agree with your comments and conclusions. Wanted to point out that witholding tax in TFSA is only on dividends and not gains.
Cheers,
MG
Hey mg welcome, love seeing new faces. You just blew my mind! I seriously didnt know that. Googled it to make sure and you are 100% right. Always learning something new. Thanks alot will edit page and correct it.
Thanks again
Cheers!
Happy New Year!
Just a few points to the debate regarding TFSA and RRSP.
-for avoiding any confusion or risk to get your USA dividends taxed keep any investment in USA market in an RRSP account
-keep any canadian stock which pays interest or dividend +interest (Ex:H&R reit) in a registered account(TFSA or RRSP)
-there are many calculators to help you calculate the difference/advantage of investing in TFSA vs RRSP.
-If you are under 75000 income or under 40 years old I would consider first TFSA and only after that the RRSP
-all the return from the RRSP contribution invest it back into TFSA or RRSP
-sometimes I do a transfer in kind from my TFSA to RRSP account and the return I put it back to TFSA. Any withdraw from the TFSA will become available to contribute next year. Best to do this transfer is in December (you can re-contribute in January the amount in TFSA) then in February (you get the RRSP return in couple months).
-keep the RRSP amount invested equally between spouses. It will make sense at the retirement (unless there are other considerations to take in consideration).
-Open a spouse RRSP to help in deducting the contribution to the person with a higher income.
-If you do not have too much money to invest then the best is to borrow money and start investing in a non-registered investing account (buy only canadian stocks which pay eligible dividends). The interest on the borrowed money is tax deductible.
Good luck in the new year.
Woot! Nice Cris. Well put, ditto…… haha
I actually hold mostly reit’s and things in my tfsa, anything that gives off a lot of non-eligible dividends. Do same as you for RRSP, holds all the US/international stuff. And then keep Canadian stock in my non-sheltered accounts, since once I retire those will be incredibly tax friendly.
Hey Mr. Yeah ive seen your portfolio, its where i want to be! Nicely setup for tax purposes.
For me, there is no debate at all. Every year, my goals are to maximize my TFSA and RRSP contributions for both my wife and I. In addition, I have two kids and I also want to maximize the education grants for them too.
There shouldn’t be a debate at all in my opinion. The goal is to maximize the growth of your money, minimize the tax that pay and get the most free money for your savings.
True, if you can max out every registered account that’s gold. No debating that!
Cheers
I’m in my 30’s and I am focusing on my TFSA first before RRSP. Enjoyed reading this article thanks for sharing.
Hey Matt I agree 100% just sucks having some sectors so low that Canada lacks in companies. One reason i like to add to the rrsp account.