RRSP vs TFSA – How Much Will it Grow?
Not knowing the difference between an RRSP and a TFSA, could cost you tens of thousands of dollars. As the debate between the two retirement investment opportunities grows, there is an important factor to consider – the growth. An RRSP gives you an immediate cash refund on your tax return that is hard to resist. A TFSA’s benefit comes in the tax-free nature of the withdrawals at retirement.
The best bang for your buck on an RRSP is when you are contributing at a high level of income and plan to withdraw at a lower level of income during retirement. Income grows with our age and experience. The older you are, the more likely it is that you will be in a higher income bracket. Therefore, RRSPs become more beneficial later in life.
Example (based loosely on a personal income of $70K/year at a 30% combined income tax rate.)
A $10,000 lump sum, invested by the taxpayer at the age of 35, will grow for 30 years before it is withdrawn in retirement. At a 10% average rate of return, this turns into $200,000 in year 30 or when the taxpayer turns 65.
If this is in an RRSP, yes you would receive an immediate refund of $3,000, but your tax bill on the withdrawal of the $200,000 would be somewhere close to $90,000 at 65. With a TFSA, yes you forgo the $3,000 refund, but have $200,000 tax-free in your retirement account. At face value, the TFSA retains roughly 45% more of your future nest-egg.
Invest the Income Tax Refund
What happens though, if you invest the initial tax refund into the RRSP as well. $3,000 saved for 30 years at 10% interest will grow to $60,000. This means that the total retirement account after 30 years will be valued at $260,000 less a 30% combined marginal tax rate will mean your investment’s tax paid value is $182,000 in an RRSP. The value of the TFSA with this same model would be $200,000, an $18,000 improvement.
What Does it Mean?
The farther away you are from retirement, the more attractive a TFSA is. If you are close to retiring and making income above $70,000/year, an RRSP is more advantageous. TFSA’s are growth- vehicles that benefit the young, not only in an increased retirement fund. However, there are many complicating factors involved in making these investment decisions including:
· Accessing funds prior to retirement
· RRSP Contribution limits
· RRSP to RRIF complications
· TFSA changing contribution amounts
· Required retirement income is high (over $70K/year)
If you need help navigating through these tricky retirement saving strategies, give Shaun a call at Sunshine Coast Consulting. His experience and education can bring you peace with your financial decision making.