Using algebra to decide between TFSAs vs. RRSPs for retirement planning
- Thread starter herlings
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juliajulia123
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resjudicata
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@stormannorman Yeah Snap Projections gets the job done.
@resjudicata Anyway for a DIYer to get access to that? I've been seeing it on YouTube and it looks sweet.
resjudicata
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@herlings There’s a very fundamental qualitative consideration missing from the discussion.
If you are younger and need to withdraw money earlier for expenses before you are in a low income tax bracket - TFSA is more advantageous. Once you withdraw from an RRSP you never get that contribution room back. TFSA contribution room is returned the following year of a withdrawal.
If you’re 18 years old - you have a lots of time and expenses standing between you and retirement and will need money to those things too
If you are younger and need to withdraw money earlier for expenses before you are in a low income tax bracket - TFSA is more advantageous. Once you withdraw from an RRSP you never get that contribution room back. TFSA contribution room is returned the following year of a withdrawal.
If you’re 18 years old - you have a lots of time and expenses standing between you and retirement and will need money to those things too
mattinelmira
New member
@resjudicata Another qualitative factor: TFSA is not protected from creditors in the event of bankruptcy. RRSPs are. Do with that info what you will.
@herlings lol
I did a similar analysis years ago:
It's all about the withdraw tax rate vs contribution tax rate. If it's lower when withdrawing, the RRSP is better. If you are getting CCB the RRSP is even better.
RRSP FV = PV(1 + r)^n × (1 - tw)
TFSA FV = PV(1 - tr) x (1+r)^n
where r = rate of return, n = periods, tc/tw = tax rate on contribution and withdrawal
If your PV is 50k at 7% over 20 years, the RRSP will be worth 155k vs the TFSA at 116K, a 33% difference, assuming 40% tc and 20% tw. Note: PV for the TFSA is discounted by your tax rate since we're assuming after-tax dollars
The difference can be simplified to: (1 - tw) - (1 - tc) / (1 - tc) so at 40/20%
it would be (.8 - .6) / .6 = .33
One huge advantage of the TFSA is that you can take a lump sum anytime and there is no estate tax
You could also retire early and withdraw a good portion of your RRSP tax free. For a couple they could take out 30k per year at current personal amounts!
I did a similar analysis years ago:
It's all about the withdraw tax rate vs contribution tax rate. If it's lower when withdrawing, the RRSP is better. If you are getting CCB the RRSP is even better.
RRSP FV = PV(1 + r)^n × (1 - tw)
TFSA FV = PV(1 - tr) x (1+r)^n
where r = rate of return, n = periods, tc/tw = tax rate on contribution and withdrawal
If your PV is 50k at 7% over 20 years, the RRSP will be worth 155k vs the TFSA at 116K, a 33% difference, assuming 40% tc and 20% tw. Note: PV for the TFSA is discounted by your tax rate since we're assuming after-tax dollars
The difference can be simplified to: (1 - tw) - (1 - tc) / (1 - tc) so at 40/20%
it would be (.8 - .6) / .6 = .33
One huge advantage of the TFSA is that you can take a lump sum anytime and there is no estate tax
You could also retire early and withdraw a good portion of your RRSP tax free. For a couple they could take out 30k per year at current personal amounts!