TFSAs or RRSPs? Which Way are Canadians Leaning?

TFSAs or RRSPs – which make more sense?  As a finance professional, you’re probably asked this question frequently.  And, with tax season once again upon us, a lot of people are wondering what most Canadians are doing these days.  How do you get your response to this seen by as many of your clients as possible?  Blog about it:

A recent BMO study maintains that more and more Canadians are looking into TFSAs.  According to the study, 67% of Canadians currently hold an RRSP; while 39% have a TFSA.  Taking into consideration that TFSAs have been around for a few years (they were first introduced in 2009), that’s a fair percentage!

The BMO study furthermore concluded that although more of us still hold RRSPs, if handed a limited sum of money to invest, 42% of Canadians said that they would invest the money into a TFSA, while only 37% said that they would go with an RRSP.

 

The reasoning behind this lean toward TFSAs?  36% said that the tax-free aspect was what they found most attractive, and 20% cited the fact that the money could be withdrawn at any time without penalty.

And, while making an RRSP contribution is tax deductible, it must be taken into account that when the money is finally withdrawn, it will be taxable. 

Following is a table (similar to one that the federal government created when TFSAs were first introduced) to further illustrate TFSAs vs. RRSPs, borrowed from The Wealthy Barber Returns: Significantly Older and Marginally Wiser, Dave Chilton Offers His Unique Perspectives on the World of Money By David Chilton. Copyright © 2011 by David Barr Chilton, released September 2011.

	TFSA	versus RRSP
Pre-tax Income	$1,000	$1,000
Tax	$ 400	N/A
Net contribution	$ 600	$1,000
Value 20 years later @ 6% growth	$1,924	$3,207
Tax upon withdrawal (40%*)	N/A	$1,283
Net withdrawal	$1,924	$1,924
* the marginal tax rate — the rate of tax charged on the last dollar of income

Bottom line:  Investing and saving are a crucial aspect of our lives.

A final thought from David Chilton:

“Reminders: (1) If you go the RRSP route, don’t spend your refund; (2) If you go the TFSA route, don’t spend your TFSA; (3) Whatever route you go, save more!”