I learned this recently so thought I'd share it with people.
If you make pretax contributions to a RRSP - via your payroll - you end up with the same take home as your post tax contributions to a TFSA if your tax rate at contribution and withdrawal is the same.
If your tax rate is lower at withdrawal then RRSP will come out ahead of TFSA.
If your tax rate is higher at withdrawal then TFSA will come out ahead of RRSP.
In all scenario's both beat out non registered.
For the examples below:
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 30%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 30% of (f)
$6,000
$0
$1,050
(h) Total Tax Paid: (c) plus (g)
$6,000
$3,000
$4,050
(i) Total Take Home: (d) minus (g)
$14,000
$14,000
$12,950
This math only works on PRETAX contributions to RRSP such as via payroll.
For POST TAX contributions to RRSP, which trigger a return from the CRA, you need to reinvest the return into your RRSP. However, TFSA could come out slightly ahead in this case depending on how much growth you get from reinvesting the return at a later time.
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 25%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 25% of (f)
$5,000
$0
$875
(h) Total Tax Paid: (c) plus (g)
$5,000
$3,000
$3875
(i) Total Take Home: (d) minus (g)
$15,000
$14,000
$13,125
Ideally most of us should be aiming to be in this scenario. It is after all the main selling point of RRSP. Contribute at higher tax rate. Withdraw at lower tax rate.
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 35%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 35% of (f)
$7,000
$0
$1,225
(h) Total Tax Paid: (c) plus (g)
$7,000
$3,000
$4,225
(i) Total Take Home: (d) minus (g)
$13,000
$14,000
$12,775
Yes I posted this last night, however, I tried to make an edit based on some suggestions in the comments and Reddit with its new interface decided to mess up all the charts. Too lazy to fix it last night. So I deleted the post and fixed it up this morning.
If you make pretax contributions to a RRSP - via your payroll - you end up with the same take home as your post tax contributions to a TFSA if your tax rate at contribution and withdrawal is the same.
If your tax rate is lower at withdrawal then RRSP will come out ahead of TFSA.
If your tax rate is higher at withdrawal then TFSA will come out ahead of RRSP.
In all scenario's both beat out non registered.
For the examples below:
- Let us assume you have 10K in PRETAX money to contribute.
- Let us assume you get a growth of 100% in 10 years and withdraw the full amount after those 10 years.
RRSP is the same as TFSA
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 30%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 30% of (f)
$6,000
$0
$1,050
(h) Total Tax Paid: (c) plus (g)
$6,000
$3,000
$4,050
(i) Total Take Home: (d) minus (g)
$14,000
$14,000
$12,950
This math only works on PRETAX contributions to RRSP such as via payroll.
For POST TAX contributions to RRSP, which trigger a return from the CRA, you need to reinvest the return into your RRSP. However, TFSA could come out slightly ahead in this case depending on how much growth you get from reinvesting the return at a later time.
RRSP comes out ahead of TFSA
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 25%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 25% of (f)
$5,000
$0
$875
(h) Total Tax Paid: (c) plus (g)
$5,000
$3,000
$3875
(i) Total Take Home: (d) minus (g)
$15,000
$14,000
$13,125
Ideally most of us should be aiming to be in this scenario. It is after all the main selling point of RRSP. Contribute at higher tax rate. Withdraw at lower tax rate.
TFSA comes out ahead of RRSP
Contribution Tax Rate: 30%
Withdrawal Tax Rate: 35%
Line Items
RRSP
TFSA
Non Registered
(a) Pretax Contribution
$10,000
N/A
N/A
(b) Post Tax Contribution
N/A
$7,000
$7,000
(c) Income Tax Paid on Contribution: 30% of 10K
$0
$3,000
$3,000
(d) Value after 10 years: 100% of (a) or (b)
$20,000
$14,000
$14,000
(e) Capital Gains
$10,000
$7,000
$7,000
(f) Taxable Amount on Withdrawal
$20,000 - 100% of (d)
$0 - Tax Free
$3,500 - 50% of (e)
(g) Income Tax Paid on Withdrawal: 35% of (f)
$7,000
$0
$1,225
(h) Total Tax Paid: (c) plus (g)
$7,000
$3,000
$4,225
(i) Total Take Home: (d) minus (g)
$13,000
$14,000
$12,775
Yes I posted this last night, however, I tried to make an edit based on some suggestions in the comments and Reddit with its new interface decided to mess up all the charts. Too lazy to fix it last night. So I deleted the post and fixed it up this morning.