The topic between TFSA vs RRSP is gigantic! In fact, it’s like opening a can of worms! But it’s never too late to start planning for your future. Whether you contribute into a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), there are lots of benefits to both. These are some of the ‘magic buckets’ in the Canadian Financial World! WHY? Because simply put, they both help each Canadian save💰!!
A little disclaimer before I begin: I am NOT a professional financial advisor and the contents found here are surely NOT professional financial advice. It goes without saying to do your own research and due diligence. Again, my goal is to hopefully point you in the right direction and spark some interest on the matter, since they are essential to one’s financial independence journey in Canada!
Also, since this blog is all about investing and financial independence… any form of investing always leads to tax implications one way or another. So while you consult your professional tax accountant (which I highly recommend you do!), at the very least, I shall show you the main differences of each of these two buckets and WHY I favor one over the other!
Needless to say, everyone’s situation is DIFFERENT and you should use each of these two buckets according to your own needs and most importantly — according to your own GOALS!!
To illustrate the basics and to take some of the boring parts away, I’d like to share some super fun visuals made by another one of my favorite Canadian personal finance blogs! — Young & Thrifty
My clear winner: TFSA
Yes, I LOVE the TFSA! If you need to know more about the differences between TFSA’s & RRSP’s and when to use each bucket over the other… I HIGHLY RECOMMEND you read this in-depth guide by Wealthsimple — RRSP vs TFSA: The Ultimate Guide
Why the TFSA is KING in my books?
My biggest reason (besides some of the obvious reasons already illustrated above) why I love the TFSA, is this very scenario example below on CAPITAL GAINS!
For easy math, and as an easy example, let’s take $1000 and invest it in one of the great companies born on Canadian soil — Shopify. Then, because of Shopify’s success and popularity, let’s hypothetically assume you more than triple your money in 3 years time without investing any penny more from day one (which is VERY possible, by the way!) 😉.
Even though both buckets have the SAME VALUE after 3 years time, you easily come out on top with the TFSA! With the TFSA scenario, you pay $0 in taxes after taking in that gain! AMAZING, ain’t it?!
“That’s not fair,” you might argue. “You forgot to include the $400 tax refund that the RRSP contribution generates!”
No, I didn’t. It’s a chair now. Or an iPad. Or a flight to Vegas. 😂
And that’s fine. I’m not saying it was squandered – chairs are important, especially when you’re sitting. But it does mean the $400 won’t help your retirement and, therefore, in this scenario, from a financial-planning perspective, the TFSA is a clear winner! …especially if greater capital gains are in play!
Hold your horses!
The RRSP also has a GOOD place in our investing strategy! Besides the obvious tax benefits, here’s the thing: if you own a U.S. stock, as a Canadian resident, there will be 15% withholding tax on any dividends earned from the stock!
BUT registered accounts like RRSPs (not the TFSA unfortunately) have an EXEMPTION from U.S. withholding tax when you own U.S. stocks, bonds or ETFs that own U.S. investments directly inside them. Here’s a quick breakdown by MoneySense on Filing taxes while holding U.S. investments in Canada.
Our main strategy:
As a result, my wife and I actually like to buy only Canadian stocks inside a TFSA and U.S. Stocks inside the RRSP to simply avoid paying 15% U.S. withholding taxes! At the end of the day, it’s one less thing for us to worry about!
One last word about TFSA vs RRSP!
On the flip side of things… besides that RRSP perk of avoiding to pay withholding tax, there might be more reasons why NOT to buy any RRSP’s at all! Have a look at this cool video by The Independent Dollar. They too use some pretty cool illustrations to take away the boring!! 😂
Hope you learned something! Happy investing everyone!
