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?
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.
