Frankie Fenton CMA

RRSPs vs. TSFAs

After decades of having only one obvious method of tax-effected savings, in 2009 we Canadians were finally treated to the extravagance of choice.

If I may digress to a rant for one moment – I continually hear people saying they only have “one choice” when left with only one course of action to take.  A “choice”, by definition, requires an opportunity for selection from two or more options.    So.  Now that we have two options, we have a choice.

RRSP’s were introduced in the 1950’s by Premier St Laurent, shortly before he left office.  While the savings plans offered then were much different than they are today, they were nonetheless ground-breaking, being offered before even the Canada Pension Plan was established.

In 1957, the deduction limit was the lesser of 10% of earned income and $2,500.  While these parameters have increased over the years, it was not until 2009 that indexing was finally applied to the annual maximum deduction limit.

However, the flexibility of RRSP’s has also been improved over the years, offering some alternatives within our lonely savings method.  In the 1990’s, unused deduction room could be carried forward. The Home Buyer’s Plan was introduced in 1992.   In 2005 foreign content restrictions were lifted. In 2007, the upper age limit for making contributions was increased from 69 to 71 years of age.

And in 2009, the birth of the TSFA.  We’ve come a long way, baby.

There has been a lot of information supplied regarding the TSFA, so I won’t get into that here.  The more interesting question is “when should you utilize each option?”

There are always arguments for making things more complicated, but the simple rule of thumb  – invest first in an RRSP if you expect that your taxable income level (and therefore the tax bracket you will be subject to) will be lower when you retire than it is today.  By investing in an RRSP now, you have the benefit of the deduction today at the higher tax bracket, and will pay tax on the income later at a lower tax rate.  Alternatively, if you are blessed with the expectation of a higher income on retirement, opt to pay tax on the income now and invest your after-tax dollars in the TSFA.

There is, of course, a third dark-horse option – pay down your existing personal debt.  Unless your debt has been acquired for the purpose of earning income and that interest is deductible, you are paying interest with after-tax dollars.  However, the attractiveness of this option can only be measured with a more complicated analysis of rates of return vs interest rates and current and future tax rates.

Three options, two choices.  Get it straight.

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