Thoughts on RRSP vs TFSA'a
My brother retired and his wife is still working and she can contribute to the spousal Registered Retirement Savings Plan she set up for him a few years ago. We were talking about the best way to go, and he said that if she invested the maximum dollars she would move to a lower tax bracket, so they were going to put the money into a Tax-Free Savings Account. Over the past couple of years, they have been going back and forth between investing in their RRSP and their TFSA,
They have looked closely at both options and understand that there are two schools of thought on the RRSP. The first is that some believe their tax rate will be higher in the withdrawal phase than in the contribution phase, and they know that their tax bracket will be lower for him and either the same or higher for her. They also understand that they are using the deduction they received to lower their taxes and that is why they invest in the RRSP in the first place.
RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to an RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.
The issue that I have with them is they put the money they invest into a bank account that earns very little interest but they put the money in the TFSA into stocks and earn a fair rate of return. I have addressed this with my brother but he and his wife are not going to change and they are doing well. She will retire in about five years and they will have a solid income from their pensions and their RRSP accounts and their TFSA accounts.
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