Quote:
Originally Posted by squiggs96
Let's say you want to invest $10,000 in a stock that has a value of $1.00 per share. Let's further assume in 10 years this stock has gone up to $100 per share.
If you made this investment through your RRSPs, you'd save $2,500 (give or take depending on your marginal tax rate) during the year of the contribution and then would pay $430,000 (assumed rate of 43%) in taxes when you withdraw the $1,000,000 investment.
If you had made the same investment through your TFSA, you wouldn't receive the $2,500 contribution savings, but when you withdrew your investment, you'd get to keep the entire $1,000,000, as the earnings are not subject to tax.
In this case, it's very easy to see the TFSA works much better.
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There is alot wrong with this example. For one thing, it is unlikely your marginal rate when contributing will be 25% and 43% when withdrawing; for the vast majority of people, it will be the opposite.
Let's re-do the example with the more realistic tax rates (43% at contribution and 25% at withdrawl). Take the $4,300 saved from the contribution at add it to the orginal stock buy. Now, the stock it worth $1.43 million in the RRSP after 10 years, due to the greater intial stock buy. A tax rate of 25% would leave the RRSP with $1.07 million net; greater than the $1 million in the TFSA. Of course this assumes that you reinvest your RRSP savings, rather than blow it as many people do with their tax refund.
As I said before in this thread, this is why blanket statements regarding which is better, an RRSP or a TFSA, is usually never right. So many factors go into each it is very hard to easily compare the two. Personally, I think you should use both fairly evenly and that will create the best result.