Q – Should I open a Tax-Free Savings Account if I have not yet maxed out my RRSPs? – Tim B., Oakville, Ontario
A – The answer depends on two basic questions: What is your marginal tax rate when you contributed to the RRSP? What is the marginal tax rate when you plan to withdraw the money from your RRSP?
In most cases, people assume that when they retire, they will be in a lower tax bracket. If you expect to be in a similar or even higher tax bracket in retirement as you are when you’re working, then it might make more sense to load up your Tax-Free Savings Account (TFSA) to the maximum levels each year, because in a TFSA, the money will not be taxed when withdrawn.
With an RRSP, you get a tax deduction for contributions you make, and money in the RRSP grows tax-free until you withdraw. Withdrawals from your RRSP are taxable at your marginal rate at the time of withdrawal, so if you expect to be in the same tax bracket at retirement as you are now, then you’ll pay tax on withdrawals at the same rate as you do now. At maturity, you can, of course, roll over your RRSP into an annuity (very low rates at present) or another plan, like a Registered Retirement Income Plan (where withdrawals are still taxed at your marginal rate), but this is another story.
When withdrawing from an RRSP at retirement, you will want to make sure that you keep your income below the Old Age Security income threshold, or your OAS benefit will be “clawed back.” Essentially you would be giving “free” money back to the government.
Contributions to a TFSA, on the other hand, do not give you any tax deduction or credit. And contribution limits, and thus tax deductions, are much higher for an RRSP. However, money in a TFSA grows tax-free, and withdrawals, which can be made at any time, are also tax-free. In addition, withdrawals from a TFSA at retirement have no effect on your eligibility for federal income-tested benefits, such as Old Age Security.
My advice is to use a combination of TFSAs, RRSPs, and non-registered accounts. Meet with a financial planner to create a plan that will help you maximize your income in the most tax-efficient way in retirement. – R.T.
Robyn Thompson, CFP, is the founder of Castlemark Wealth Management, a boutique financial advisory firm, specializing in customized financial, investment, insurance, and retirement planning. She appears regularly as a financial planning expert on CityNews Channel. Phone 416-828-7159 or email today to firstname.lastname@example.org for a no-obligation, no-charge Castlemark Integrity Financial Planning consultation.
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.