TFSA vs RRSP for 100+K salary

[hmiranda03]

Hello,

I see the question asked a lot as to which one should be maxed out first.

I see people say that the TFSA should be maxed first if your Retirement income with be more than your current salary. This is where my confusion comes in.

When this statement is said, what exactly is meant by this? Are they saying 'what will be your salary right at age 60-65 right before you retire? OR Are they saying 'how much money will you be pulling out of retirement yearly'?

End goal is to understand which one I should invest in first. Current salary is over 100k

 

[jeandemetz]

@hmiranda03 The TFSA/RRSP trigger has good info to consider. I always have to add that the tilt goes to RRSPs for anyone who receives the Canada Child Benefit. CCB is based on your Adjusted Family Net Income, so reducing your net with RRSP contributions adds to your CCB. More kids gets you more "return" in CCB for reducing your net income. (It's not linear.)

 

[resjudicata]

@hmiranda03 What is meant by that is that the advantage of an rrsp is deferring your income so that when you withdraw it again, you are in a lower tax bracket.

Most people that “live on” $100K while working can live on less in retirement because their house is paid, and working costs money (you need work clothes, you buy more takeout because you’re busy etc). Many say you should aim for 70% of your working income in retirement.

With a lower income, you will not only pay less tax overall, you will likely pay tax at a lower marginal rate. At $100K the next dollar you earn will be taxed at say 35%. At $70K it might only be 25%.

So if you contribute $10K into your rrsp today (35% marginal tax rate), you’ll get $3500 back in “overpaid taxes”. Then when you withdraw it in retirements you’ll pay tax again, but only $2500. So you just got a “free” $1000.

At $100K income I would say you may still be better off putting it into tfsa but you would have to provide more details about your current income, expected income throughout your career, and expected income in retirement.

 

[sal4]

@resjudicata Not only that, but you're building equity on the tax you would have paid. It's invested so it's not a 1-1 ratio. You have 8% average compounding interest per year, you will be way out ahead even if you were taxed at the higher rate later by differing.

 

[tnvolfirefighter]

@resjudicata You're assuming that tax bracket rate will remain the same or lower . Doubtful

Power is from getting that 30% money back you can invest for 30 years

 

[jjp297]

@hmiranda03 !TFSARRSPTrigger

 

[joyhlathi]

@hmiranda03 Here is something that could help you decide.

https://www.planeasy.ca/tfsa-vs-rrsp-pick-the-right-one-and-save-100000/

 

[mwas]

@hmiranda03 Look up what the marginal tax rate is in your province. That's the federal and provincial tax combined. For example here in Manitoba anything over $106,717 is taxed at 43.4%. so a good rule of thumb is anything you make above this number, buy a registered fund to offset the income tax. Again, as an example, if you make $115k, you could buy an $8,283 RRSP, and theoretically get back 43.4% of that, or $3594.82. That money could then be dumped into a TFSA. I used this rule of thumb, and it worked very well for growing both. The rub is that you need to be disciplined enough to put the return into the TFSA, and not spend it on other stuff. Best of luck.

 

[azninsurrection]

@mwas This is how I pretty much handle my RRSP vs TFSA. Contribute enough that it brings back a tax return that allows for a maximum contribution to TFSA. Rinse and repeat.

The addition of FHSA throws a welcome monkey wrench into the tax benefit plan. Curious how it'll shake down during this year's return.

 

[12344321]

@hmiranda03 RRSP’s main benefit is the tax deferral. So you receive a refund of the taxes you paid on contributions but you pay taxes on the money when you withdraw.

If you income is higher when you withdraw then your are paying more taxes than what you were refunded on the contribution.

So, if you know your income is higher in retirement, thus a higher tax bracket, then a TFSA is better

Edit to add: at your salary you should contribute to your RRSP, you are in a pretty high tax bracket already. You can look at the combine fed/prob brackets and see what you need to contribute to drop down a level or two, then switch to TFSA is that is more advantageous.

 

[angelbaby777]

@12344321 Actually the main benefit is tax free growth until withdrawal.

Tax deferral is nice but we do not know where tax rates will lie so it is a very big shot in the dark to estimate with that.

It has side benefits such as, as another user mentioned, reducing income for income tested benefits.

 

[12344321]

@angelbaby777 Sure…but…

OP is talking about TFSA vs RRSP, both have tax free growth.

Also, side benefit of TFSA is it is NOT income for income tested benefits when withdrawn.

 

[angelbaby777]

@12344321 Yes, that is very true. Ultimately the benefit ends up being tax deferred growth. So the question becomes, which is more inline with your current tax needs and which is more flexible on your path to retirement.

If you have limit tested benefits then an RRsP can be the better choice. If you do not, the TFSA will give more flexibility if there are absolute emergencies.

 

[resjudicata]

@hmiranda03 a decade ago.. i asked a friend of mine why he isn’t using his rrsp deduction, he said, his income will be much higher later in life… his income at the time was 70k… he then went to a top tier business school and came back to canada (didn’t like the US environment) and is making 300k plus bonus.. he will likely clear over 500k this year…if you can guarantee your income will hit the highest bracket, then waiting is better

 

[aspie3000]

@resjudicata This happened to me. I never ever contributed, went to business school and got a big raise, multiple times my prior salary, then maxed out rrsp and get about half back.

My pay is lumpy though so I don't actually get much back but it offsets a huge tax bill.

 

[hettie]

@hmiranda03 I've only been investing for the last few years and have a lot of room on my RRSP. My approach has been to max out my TFSA and invest in high growth. Then in February I take my returns from my TFSA and put it in my RRSP (still high growth but less risky). It's worked out well for me. A nice hefty tax return while growing the room in my TFSA.

Not sure if this is smart or advisable but it made sense to me.

 

[eternityondemand]

@hmiranda03 With a $100K+ salary max both accounts and then you don't have to spend brain power on the choice.

 

[lollypoppies]

@hmiranda03 At the end of the day, they are pretty similar unless you have a massive income disparity at retirement vs current income. I prefer to max my tfsa first because the money is liquid and can be withdrawn any time (I'm planning for a house renovation) and then whatever else I have I put into rrsp.