| RRSP | TFSA | Non-Registered | |
|---|---|---|---|
| Contributions | |||
| Reduces Taxable Income | Yes | No | No |
| Contribution Limit (for 2021 tax year) |
18% (up to $27,830) |
$6,000 | - |
| While in Account | |||
| Can invest in stocks, bonds and mutual funds | Yes | Yes | Yes |
| Interest and Capital Gains are Taxed while within Account | No | No | Yes |
| Withdrawals | |||
| Increases Taxable Income | Yes | No | No |
| Contribution Room Restored after Withdrawals | No | Yes | - |
At a high level, if you are early in your career or at a lower income bracket, you are often better off using a TFSA. If you are in a higher income tax bracket, an RRSP may be better. Let's now look at two examples to do a comparison between money invested in an RRSP, a TFSA, and a non-registered account to see which is the best to use. In both examples, we will follow what happens with $1,000 cash that can be directed towards each of the accounts, and then compare the outcomes at retirement.
| RRSP | TFSA | Non-Registered Investment Account |
Comments | |
|---|---|---|---|---|
| Taxable Income (pre-contribution) |
$35,000 | $35,000 | $35,000 | - |
| Cash Available | $1,000 | $1,000 | $1,000 | - |
| Contribution Amount | $1,250 | $1,000 | $1,000 | This example uses the grossed up amount for the RRSP contribution. The $1,250 contribution minus the $250 refund that comes from this nets out to the $1,000 cash that is available. |
| Taxable Income (post-contribution) |
$33,750 | $35,000 | $35,000 | Only the RRSP Contribution affects taxable income |
| Income Tax Reduction | $250 | $0 | $0 | Marginal tax rate is ~20% |
| Value of Investment after 20 years at 4%/year growth |
$2,738 | $2,190 | $2,190 | - |
| Tax paid after selling investment | $0 | $0 | $119 | No capital gains tax needs to be paid within either the RRSP or TFSA |
| Income at Retirement (In today's dollars) |
$35,000 | $35,000 | $35,000 | - |
| Withdrawal | Full Amount | Full Amount | Full Amount | - |
| Income tax owed | $548 | $0 | $0 | The RRSP withdrawal counts as income, so the tax is paid at the ~20% marginal tax rate |
| Final Value | $2,190 | $2,190 | $2,071 | - |
In this example, the final value of the RRSP the same as the TFSA option. Because the marginal tax rate when the contribution was first made was the same as when it was withdrawn, there is no difference in the final value compared to the TFSA. Both the RRSP and TFSA account are equally advantageous when compared to the non-registered account. Let's see what happens when the contribution is made at a higher income tax bracket.
| RRSP | TFSA | Non-Registered Investment Account |
Comments | |
|---|---|---|---|---|
| Taxable Income (pre-contribution) |
$120,000 | $120,000 | $120,000 | - |
| Cash Available | $1,000 | $1,000 | $1,000 | - |
| Contribution Amount | $1,754 | $1,000 | $1,000 | This example uses the grossed up amount for the RRSP contribution. The $1,754 contribution minus the $754 refund that comes from this nets out to the $1,000 cash that is available. |
| Taxable Income (post-contribution) |
$118,246 | $120,000 | $120,000 | Only the RRSP Contribution affects taxable income |
| Income Tax Reduction | $754 | $0 | $0 | There is a larger reduction for the RRSP option this time because the marginal tax rate is ~43% |
| Value of Investment after 20 years at 4%/year growth |
$3,843 | $2,190 | $2,190 | - |
| Tax paid after selling investment | $0 | $0 | $119 | No capital gains tax needs to be paid within either the RRSP or TFSA |
| Income at Retirement (In today's dollars) |
$35,000 | $35,000 | $35,000 | - |
| Withdrawal | Full Amount | Full Amount | Full Amount | - |
| Income tax owed | $769 | $0 | $0 | The RRSP withdrawal counts as income, so the tax is paid at the ~20% marginal tax rate |
| Final Value | $3,074 | $2,190 | $2,071 | - |
The only difference in the set up for this example is that the income when the contribution is made is now much higher than in Example 1. Because of that difference, the marginal tax rate at contribution is much higher than when the money is withdrawn at retirement. As a result, the final value of the RRSP is now the highest of all the accounts, and may be the best choice to use. If the RRSP is the best choice, the next step is determine how much is the optimal amount to contribute. To determine that, try out the RRSP contribution calculator.