Using algebra to decide between TFSAs vs. RRSPs for retirement planning

[badumtishs]

@mj82 employer matched is already +100% gain so do it no matter what.

 

[jimakoskx]

@herlings See, how hard was that. You don't need equations for that.

 

[johnnyhouse]

@joerob40 This is true only if you retire at the same province you are currently paying taxes at. For example let's say I make $65,000 in Quebec right now for the next 15 years, then retire in Ontario. It will be more beneficial for me to max out RRSP because the provincial tax difference is 10%. Then put the refund in a TFSA.

That's why OP wrote "expected future tax rate" and "current tax rate".

 

[herfatherseyes]

@joerob40 Just put money in TFSA during the year and then dump a bunch into RRSP to go down a bracket

 

[patrick45454545]

@herfatherseyes Just have lots of money so you can save all year long

 

[saussiona]

@patrick45454545 Just have rich mommy and daddy.

 

[we_are_all_human]

@saussiona May be upskill? May be get a better job?

 

[resjudicata]

@patrick45454545 You don't need lots of money, you just need to live below your means.

For example, if someone is earning 50k a year then someone with a similar situation earning more should have room to save.

 

[patrick45454545]

@resjudicata Just skip breakfast. And don’t buy avocado toast. It easy! Just don’t be poor.

 

[resjudicata]

@patrick45454545 Ah yes of course, there's no one with a similar life situation as you earning less and every single penny you spend is necessary, you couldn't possibly cut back. Your budgeting skills must be flawless.

 

[zango11]

@joerob40

Under 52K = TFSA

Often, but not always. Low income families can get quite a boost to their Canada Child benefit by contributing to RRSP.

 

[abnf]

@joerob40 I would say that can be tweaked a bit if someone has fluctuation in their work and earnings.

If they're in a trade that has boom and bust cycles, and for the tax year being considered they just did a ton of hours and had lots of income, then it's easy: RRSP.

That nets the nice income tax reduction, which is precious.

If someone had a slow year and their income is already low and in a low tax bracket, using making the RRSP claim might be squandering something that could be better used some other time.

I would say that that when it's a toss up, RRSP is favored because it reduces your income tax payable. That's "free" money from the government. You don't get that every day.

 

[yajoh]

@joerob40 That's so oversimplified to the point of being just untrue though.

 

[joerob40]

@yajoh It’s pretty close! ( for an average situation )

 

[cagbo]

@joerob40 No tfsa first always until max out after rrsp after non registered

 

[collyflower1981]

@joerob40 Is this joint household income or individual?

 

[joerob40]

@collyflower1981 Individual

 

[gioiamit]

@herlings as a cpa this gave me a semi

 

[stormannorman]

@herlings I’m going to be honest as someone who works in financial planning: your average PFCer, let alone myself is not going to go through any of these equations even if it was done in a ELI5.

There are calculators that do this for you and spit the output into a nice graph to visualize.

Appreciate the work put into this!

 

[herlings]

@stormannorman Totally fair, I realize this will be skipped over by most people. I mainly wrote this because I've been using snippets of these equations all over, so I wanted to put them together in a single post for future reference.