Hey guys, Coach Julien here. In this video, I’m going to compare the TFSA to the RRSP using some basic assumptions. I’m going to show you which one makes more sense mathematically after tax. Hope you enjoyed the video, and if you like it, give it a thumbs up.
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So first, I’d like to go through some of the key differences and similarities between the TFSA and the RRSP. First of all, both have a limit. The TFSA has a limit of around six thousand dollars per year, and it’s cumulative. Once you turn 18, every year the limit is going to go up by six thousand. The RRSP’s limit works around how much money you make, how much taxable income you make, and there is a cap at around 27, 28,000. But it’s basically calculated on 18% of your previous year’s taxable income, and both accumulate. The TFSA, basically, no matter how much money you make, pretty much anyone who’s 18 and over is going to accumulate every year about 6,000 in room in the TFSA.
One similarity is both earn investment income tax-free. One of the key differences is on deposit. When you deposit money in an RRSP, you get a tax break, and when you take money out of the RRSP, you get taxed. The TFSA doesn’t work like that. You have to take after-tax dollars, put it in your TFSA, you don’t get any tax break when you put it in the TFSA. But when you take money out, there is no tax either. So it’s give and take, right? No tax break when you put money in, no taxes when you take money out. RRSP, you get a tax break when you put it in, but you get taxed when you take money out.
One of the key differences also is when you take money out. When you take money out of a TFSA, basically, there’s not a lot of strings attached. You can pretty much put the money back as of the following calendar year. RRSP, however, when you take money out, you’re going to be taxed, and you lose that room. Basically, unless you’re using the Lifelong Learning Plan or the First-Time Home Buyer Plan, you can’t put that money back in. Once you take money out of the RRSP, you lose that room.
Another difference is the TFSA doesn’t expire. Basically, you’ll have it all the way till you die. And actually, when you do die, if you assign a successor holder, they can actually continue to hold the TFSA account. Versus an RRSP does expire. By the time you reach 71, you have to decide—you take it out, you transfer it to an annuity, or transfer to a RRIF. So you’ve got to make a decision by the time you reach 71.
At death, if there’s no beneficiary, the TFSA is not taxed. The estate gets the money tax-free. Whatever is earned from the death on that is taxed. But at death, there are no taxes. Versus the RRSP or RRIF at death, if there are no beneficiaries, you will be taxed fully, as if it would be a salary. So, for example, if you have a million dollars in your RRIF or your RRSP and you die, and there are no beneficiaries, well, that’s like a million dollars of salary. And a million dollars of salary is taxed at the highest rate. We’re talking about 54-55%, depending on the province you’re in. But imagine that million dollars taxed at 55%. That’s 550,000. That’s why I’m looking at everything on an after-tax basis because that tax bill at death could be quite significant in a high-tax environment. Always consider this when you make your decisions. And evaluate based on after-tax dollars.
Before we get into the scenarios, I’m going to go through the key assumptions very quickly. If you want to go through this in more detail, just pause the video and look at these, but I’m not going to spend too much more time on that. This is the core of the video. The blue line is the TFSA, the green line is the RRSP line with the tax credits reinvested, and the red line is the RRSP without the tax credits reinvested. When you put an RRSP, you basically get a reduction in taxes, and the green line assumes that you take that money and invest it in a non-registered account, and the red line assumes that you just blow that money; you don’t reinvest it. So there’s a huge difference there. And I did a video that compares these two scenarios in more detail; I’ll flash it up here. But basically, if you don’t reinvest the tax credits, the RRSP is not that interesting. So there you have it. Mathematically, the TFSA after-tax makes way more sense because that money, once it’s in there, it’s never taxed. Investment income is untaxed and when you die, even if you have no beneficiaries, that money is never taxed because you put after-tax money in there. That money is never taxed, whereas the RRSP, look at that. We’re talking, the difference between two lines is a hundred thousand. So you get a hundred thousand, two hundred thousand, fifty thousand, two hundred and fifty thousand, a 0.000 difference between the RRSP and TFSA. In the description of the video, download my FREE guides below. There’s going to be a link to a couple of guides that I prepared, and they’re available for you for free. One of them is the step-by-step guide for beginner do-it-yourself investors. The other one is how to save money, critical habits to build wealth. So my recommendation is, if you have to choose between TFSA and RRSP, always choose the TFSA. If your TFSA is maxed, which is a good situation to have, then you can start pouring money into your RRSP. And what I would recommend is the tax credit you get from depositing in your RRSP. Invest that money into a non-registered account. Get advice, guys, always get advice, and I always say crunch your numbers because every situation is different. If you have a lot of money in an RRSP, it doesn’t matter. You have to have a plan to draw down the money so that you optimize your tax situation and don’t pay more taxes than you should. So make sure you crunch your numbers, get advice. I offer free one-on-ones. You have a link to my calendar below. Book a one-on-one with me. We can take a look at your situation. Guys, thanks for watching today, and we’ll see you real soon. [Music]