The two most common questions I receive are; should I invest in a TFSA or RSP? and what should I be investing in within my TFSA. I’m a big fan of visual aids so I’ll add come charts to help with this answer.
The RSP versus TFSA is really a basic question of where is your income today and where it will be when you retire. If your income will be the less in retirement than today then an RSP is usually the way to go. If your income will be the same or higher in retirement than your income today then a TFSA is the most beneficial. Please keep in mind this is a generalization and everyone’s specific plan will be different.
Let’s get started with some examples!
Let’s meet Isaiah. Isaiah lives in Ontario and currently earns $60,000 per year. He expects to have 70% of his current income (adjusted for inflation) during retirement. Given his income level and the tax brackets in Ontario he can expect to face 30% tax rate both now and in retirement.
Assumptions:
•Income is not in a range where RRSP contributions or withdrawals impact government benefits.
•Investment rate of return is 5% per year.
We can see in this example using a TFSA or RRSP would result in the same income in retirement.
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