Personal Finance

RRSP is better than TFSA if you have kids and average income and can re-invest tax return to TFSA?

  • Last Updated:
  • Mar 2nd, 2018 10:09 am
[OP]
Deal Addict
Jan 22, 2009
2775 posts
672 upvotes

RRSP is better than TFSA if you have kids and average income and can re-invest tax return to TFSA?

I did some calculations and according to the calculations, RRSP is better than TFSA if you earn average income, have kid(s), and can make sure you deposit the tax return you get from RRSP contribution into TFSA.

Assumptions: AB residents, couple with 1 kid, net family income $65000. Total TFSA contribution room for the year is $11,000. I will calculate the total worth of these $11000 after 1-year's investment into 3 different cases assuming I will take the RRSP out in the second year under the same tax bracket. Also assume 3% return.

Case 1: $11000 all into TFSA.
Total worth at the beginning of year 2: 4572.48 (ccb based on net income of 65,000) + 11000*1.03 = $15902.48

Case 2: $5500 into TFSA, and another $5500 into RRSP
Total worth at the beginning of year 2: 5077.44 (ccb based on net income of 59,500) + (5500 + 1677.5)*1.03 + 5500 * 1.03 * (1-30.5%) = $16407.44
Note: 1677.5 is tax return re-invest into TFSA by contributing 5500 into RRSP at AB rate of 30.5%. 30.5% is the percentage of rrsp tax I pay when I take it out in the second year

Case 3: $11,000 all into RRSP
Total worth at the beginning of year 2: 5626.82 (ccb based on net income of 54.000) + 3355 * 1.03 + 11000 * 1.03 * (1-30.5%) = $16956.82
Note: 3355 is tax return re-invest into TFSA by contributing 11000 into RRSP at AB rate of 30.5%. 30.5% is the percentage of rrsp tax I pay when I take it out in the second year

Case 3 is clearly winning.

Please also note I assumed I will take the RRSP money out in the second year for comparison purpose only. In reality I will take it out when I retire. So there is a high probability that you will be in a lower tax bracket when you take out your RRSP, which makes case 3 even better.

So my conclusion is: given I have enough RRSP room, average net income, have kid(s), and can re-invest the tax return into TFSA without spending it, I should invest into RRSP instead of TFSA, and when I receive the tax return by contributing to RRSP, re-invest it to TFSA.

Am I correct on this one?
Last edited by braveblade on Feb 28th, 2018 4:16 pm, edited 4 times in total.
5 replies
Deal Addict
User avatar
Aug 1, 2007
1380 posts
192 upvotes
The next step is to figure out how much it will be worth after tax when you do withdrawals. Remember that everything that comes out of an RRSP is taxed like regular income. Withdrawals from a TFSA will not be taxed (unless something changes of course).
Newbie
Aug 26, 2007
54 posts
24 upvotes
Vancouver
Nice job, looks right to me. The best answer in the TFSA vs. RRSP debate has always been to do both.
cmackie wrote:
Feb 28th, 2018 5:48 pm
The next step is to figure out how much it will be worth after tax when you do withdrawals. Remember that everything that comes out of an RRSP is taxed like regular income. Withdrawals from a TFSA will not be taxed (unless something changes of course).
He did that, that's what the (1-30.5%) bit is for
Newbie
Aug 26, 2007
54 posts
24 upvotes
Vancouver
But also a quick note that there will be withholding taxes when you withdraw over age 65 too. Withholding taxes are just taken to cover the income tax liability, just like off your regular paycheck. It's not a specific penalty for withdrawing early. Not any different before or after retirement.
[OP]
Deal Addict
Jan 22, 2009
2775 posts
672 upvotes
tetramerces wrote:
Feb 28th, 2018 6:01 pm
But also a quick note that there will be withholding taxes when you withdraw over age 65 too. Withholding taxes are just taken to cover the income tax liability, just like off your regular paycheck. It's not a specific penalty for withdrawing early. Not any different before or after retirement.
Thanks for clarifying on the withholding tax! I thought it was a penalty for withdraw RRSP before retirement.
Deal Fanatic
Feb 1, 2006
9520 posts
646 upvotes
Muskoka
There are a few older threads here with lots of details on how RRSP's affect CCB. For family income under $65, definitely worth it, as CCB is tax free.

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