I must say upfront that both the RRSP and the TFSA can be part of a sound planning strategy, and you should consult with a professional financial planner to determine what is in your personal best interest.
I illustrate one specific example to highlight some of the advantages of the TFSA.
The Advantages of the TFSA:
- Earnings are not taxable
- Withdrawals are not taxable
- Contribution room is never lost.
If you withdraw funds you can put them back, whereas if you withdraw from an RRSP you have lost that contribution room forever. - Withdrawals don't affect CPP and OAS entitlement.
- Flexibility - If you want to withdraw from your RRSP under the Home Buyers Plan there rules surrounding how you need to pay it back.
If you withdrew the money from a TFSA, then you are free to chose how or if you want to put that money back.
- $6000 RRSP contribution ($5000 + $1000 of the tax savings) vs $5000 annual contribution to TFSA
- 20 Years of contribution
- 35% marginal tax rate during contribution & 25% marginal tax rate during withdrawal
- 7% earnings each year on balance
After the same 20 years the TFSA assets would total just under $220,000.
Advantage RRSP one would think.
The key in this scenario is that TFSA withdrawals are tax free while the withdrawal from the RRSP will be subject to tax.
So in order for the RRSP to have access to $20,000 after tax, they need to withdraw $26,667 (assuming 25% tax rate).
After 15 years of withdrawals of $26,667 the RRSP the balance would be just over $9000, so in just over 15 years the RRSP will be depleted.
With the TFSA, it would take just over 18 years to deplete the assets.
A clear advantage for the TFSA.
Not all situations are created equal and that's why it's always best to consult a professional to determine what your best plan is.
I highly recommend you enlist the services of an experience professional for all tax return preparation services.
They have the ability to view your situation from both macro and micro perspectives.