How to Eat an Elephant by Frank Wiginton

Author:Frank Wiginton
Language: eng
Format: mobi
Publisher: John Wiley & Sons, Ltd.
Published: 2012-10-19T20:00:00+00:00

Sticking with the RRSP box analogy, tax-free savings accounts are another type of box that has its own rules. The rules for this box are:

You can currently put up to $5,000 in the box each year.

While the money is invested inside that box, it is allowed to grow tax-free.

When you choose to withdraw the money from that box, there is no tax owing.

The biggest con to the TFSA is that you do not receive any sort of tax deduction from the contribution to this program. As well, the amount you're allowed to contribute is typically less than what you are allowed to contribute to an RRSP.

The pros of the TFSA box are that money grows tax-free while it's inside the box, and upon withdrawal you do not have to pay any tax on the money. This not only becomes a very powerful tax-planning income tool in retirement but also an effective estate-transitioning tool for estate planning. Another benefit is that you never lose the contribution room—any withdrawals get added back to your future contribution room the next year!

RRSP or TFSA?

This debate comes down to your annual tax rate in any given year and your tax rate in future retirement years. When you deposit money into an RRSP you get a tax deduction, but when you start withdrawing the money you have to pay tax on it. So if your income is much higher today than it will be in retirement, then contribute to your RRSP. If your income will be high both today and in retirement, then contribute to both an RRSP and a TFSA. If your income is low today and will be high in retirement, contribute to a TFSA. If your income is low today and will be low in retirement, contribute to a TFSA.

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