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February 2021: The RRSP vs TFSA debate

Updated: Apr 20, 2021

In this issue, we rise the RRSP vs TFSA debate again for your review.

If you are a higher income earner RRSPs may be the most apparent and best match for you if you are aiming to reduce your current tax bill. Mainly so, when you plan to withdraw funds at a lower tax rate than when you contributed to your RRSPs initially.   This article from the Financial Post (to read the article, click here) goes into great detail on why you should contributing to your RRSPs. Remember that the deadline this year is March 1st, 2021. On the other hand, if you are a lower-income earner ($40K or less) you'll be better suited to lean on the TFSA option - as it will NOT add to your taxable income after retirement (unlike RRSPs). The only catch is that you must keep from the temptation of taking these funds too early (before retirement). To read another article from the Financial Post that makes the case for TFSAs, click here.

Withdrawing from your RRSP before retirement should always be your very last choice of action:

Your present self should know that the year that you withdraw this amount you will experience the following:

  • Get taxed on this amount - adding to your current income tax bill.

  • Will not receive 100% of the RRSP withdrawals due to withholding tax. Meaning that if you withdraw $5000 from your RRSP you will only receive $4,500 (10% withholding tax).

The amounts that are withheld are based on how much you withdraw: Withdrawal amount $0 - $5,000 = 10% tax withheld, Withdrawal amount $5,001 - $15,000 = 20% tax withheld

Withdrawal amount > $15,0001 = 30% tax withheld

  • No increase in contribution room. For example, your Notice of Assessment read that in 2021 your contribution room is $45,000. In a desperate moment, you choose to withdraw $20,000 from your RRSP. Unfortunately, even if things got better and you could put back the $20,000 in RRSPs you are limited by your maximum contribution which is $45,000 for 2021.

In a simple example, you will see that if :

You withdraw $20,000. You only receive $14,000 (20% withholding tax) and this $14,000 is added to your taxable income for the year in which you withdraw.

Your future self will be missing out on compounding interest, which happens when money makes money by being invested. The longer it stays in this account the more it grows.

Next issues we will discuss other options in times of emergency. Stay Tuned!

If you have any more questions about RRSPs and TFSAs you can connect with us by filling out the Contact Us Form.

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