Quote:
Originally Posted by mrkajz44
The sad truth is people don't really understand income tax at all, including the positives and negatives of RRSPs or TFSAs.
Too often I hear (and have seen in this thread already) that TFSAs are way better because there is no tax on them while RRSPs will be eventually taxed. While this is true, you can have way more money from the RRSP in the start becuase you avoid the tax.
RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns
So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP. The point here is you have to decide which is better, never paying tax again on the investment income, or starting with an extra $3,500, or 50% more inital investment. Over 20-30 years, it may or may not.
Moral of the story is, I encourage everyone to fully understand the difference between RRSPs and TFSAs, as well as how progressive tax brackets work in general. A little education would go a long way to saving a ton more money.
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Agreed on most parts. Also, with the RRSP route, assuming you make an average of $28,000 per year, you can contribute much more into it than the TFSA, which was $5,000 per year and is now $5,500 per year.
The biggest draw to the TFSA for me would be investing in penny type stocks and hoping you hit big on a few of them. Any money that you take out of your TFSA can be put back into your TFSA. This is appealing if you invest $5,000 and turn it into $100,000 and then pull it out to put into a house. When you have that money again, you can put the full $100,000 back into the TFSA and earn more money at a tax free rate.
If you are going to be earning the 2-4% per year, it makes more sense to me to put money into the RRSPs. I see several examples of if you earn 8% it will equal X dollars. There aren't that many people earning 8% per year.
I don't have any money in TFSAs, but I have been putting about 30% of my salary into RRSPs during the last 3 years. I had some unused contribution room and am trying to use it. I'll likely start looking at my TFSA soon, but I'd rather buy investment properties than put my money there. It's just a personal choice on where I'm more familiar with and where I think I can make bigger returns.