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RRSP equivalent to TFSA?! Really? So says CIBC...

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[OP]
Member
Mar 16, 2008
224 posts
63 upvotes
Edmonton

RRSP equivalent to TFSA?! Really? So says CIBC...

Am I missing something here?

"If your tax rate in the year of withdrawal is exactly the same as it was in the year of contribution, the RRSP has provided you with a tax-free rate of return on the investment income earned therein, mathematically equivalent to saving in a TFSA."


From here: Financial Post: Death, taxes and your RRSP: What you need to know to minimize the tax hit to your estate.
https://financialpost.com/personal-fina ... our-estate

this seems completely wrong... Am I missing something. The author is from CIBC, so I feel I must be missing something. Please educate me, I don't have a any of these credentials:
"CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto"
31 replies
Newbie
Aug 2, 2015
36 posts
28 upvotes
Birdton, NB
Based on your question you are likely missing something, but since you don't provide your thoughts specifics (i.e. why you disagree) it is impossible to tell what exactly you are missing :)

For starters, please refer to the following article and specifically to the table under "Main Difference Between RRSP and TFSA":

https://youngandthrifty.ca/tfsa-vs-rrsp/
Deal Addict
Sep 2, 2004
2415 posts
762 upvotes
That's correct. I have not clicked your link but essentially TFSA is using after-tax dollars and RRSP is pre-tax with the deferred amount owing on your initial investment plus the gains.

My own simple example:

$10,000 at 40% tax rate
$6,000 into TFSA or $10,000 in an RRSP
Equal growth of 5% per year

After 5 years the TFSA has grown to $7,657.69, giving you a gain of $1,657.69 with no tax owing. The RRSP has grown to $12,762.82 but if you need to withdraw it all, you are left with $7,657.69 after tax.

I can't remember which ones specifically but I know there have been a few threads on RFD that have discussed this.
Deal Addict
Mar 3, 2018
2233 posts
2278 upvotes
GTA
CheapMike wrote: Am I missing something here?

"If your tax rate in the year of withdrawal is exactly the same as it was in the year of contribution, the RRSP has provided you with a tax-free rate of return on the investment income earned therein, mathematically equivalent to saving in a TFSA."
An RRSP does not provide a tax free rate of return like a TSFA. It is tax deferred on that investment income until withdrawn. So if the tax rates are the same on contribution and withdrawal and the rate of return is the same for the RRSP and TFSA then mathematically they are equivalent.
[OP]
Member
Mar 16, 2008
224 posts
63 upvotes
Edmonton
Ok I was wrong... Nothing to see here...

Zipper-mouth Face
Deal Addict
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Feb 1, 2012
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Thunder Bay, ON
The quote from the FP article is correct.

TFSA and RRSP are both tax-free accounts, in the sense that they are never taxed on interest, dividends or capital gains earned in either account. That is in contrast to non-registered accounts that are subject to taxes on all investing income including interest, dividends and capital gains.

With a TFSA, contributions are made in after-tax funds, and there is no tax on withdrawals. With RRSPs, you receive a tax deduction at your marginal tax rate when contributing (or when claiming the deduction) and pay tax at your marginal tax rate on withdrawals. Effectively the difference is that income tax is deferred from when the deduction is claimed until the funds are withdrawn. So if the marginal tax rate is the same on withdrawal, the accounts are equivalent. The second R in RRSP refers to retirement. Many people, perhaps even most, will have lower tax rate when retired, so that is the advantage of RRSPs. It's also why it is often recommended to fill up the TFSA first when young and income is low, then contribute to the RRSP later when income is higher.

There is more to it though, since the income from RRSP withdrawals can affect other taxes and benefits. For low income people receiving GIS, RRSP withdrawals will cause GIS to be reduced. Not a huge problem typically, since people on GIS aren't really likely to have much if anything in an RRSP. Other things like subsidized housing and social service income could also be impacted. RRSPs could cause OAS clawback for people over 65 with retirement income between approx $78k and $129k. Other credits like GST credit and Ontario Trillium benefit may be affected. Still, if you expect significantly lower income during retirement, RRSPs can be a good choice.
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
[OP]
Member
Mar 16, 2008
224 posts
63 upvotes
Edmonton
Ok I am going to beat a dead horse....

"the RRSP has provided you with a tax-free rate of return on the investment income earned therein"

I think this part of the statement still seems inaccurate. I'll claim it was the authors fault for confusing me Smiling Face With Open Mouth And Cold Sweat
Deal Expert
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Dec 12, 2009
21251 posts
9655 upvotes
Toronto
Capt. wrote: That's correct. I have not clicked your link but essentially TFSA is using after-tax dollars and RRSP is pre-tax with the deferred amount owing on your initial investment plus the gains.

My own simple example:

$10,000 at 40% tax rate
$6,000 into TFSA or $10,000 in an RRSP
Equal growth of 5% per year

After 5 years the TFSA has grown to $7,657.69, giving you a gain of $1,657.69 with no tax owing. The RRSP has grown to $12,762.82 but if you need to withdraw it all, you are left with $7,657.69 after tax.

I can't remember which ones specifically but I know there have been a few threads on RFD that have discussed this.
I think it is the magnitude of the tax savings up front vs the tax bite at the back end ($4000 tax savings vs $5,105.13 tax bill)‬ that makes it look like the TFSA is more tax efficient.
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Deal Addict
Mar 10, 2011
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Toronto
CheapMike wrote: Ok I am going to beat a dead horse....

"the RRSP has provided you with a tax-free rate of return on the investment income earned therein"

I think this part of the statement still seems inaccurate. I'll claim it was the authors fault for confusing me Smiling Face With Open Mouth And Cold Sweat
I think what they probably mean is that the RRSP has provided tax free compounding for the amount of time the investments have been in it.

Ex. Age 20 you put in $10k and buy a stock that pays dividends. The dividend is payed out each quarter and is reinvested in additional shares. At age 60, you have 40 years of tax free compounding in the RRSP. If this investment was done outside of the RSP, each year income tax would have been paid on the annual dividends therefore slowing down the investment compounding and total investment value.
Mind you, income tax will be paid when money is eventually paid out of the RRIF/RSP, however the investment has enjoyed 40 years of tax free compounding,
Deal Addict
Jul 15, 2009
2341 posts
1512 upvotes
CheapMike wrote: Ok I am going to beat a dead horse....

"the RRSP has provided you with a tax-free rate of return on the investment income earned therein"

I think this part of the statement still seems inaccurate. I'll claim it was the authors fault for confusing me Smiling Face With Open Mouth And Cold Sweat
The effect is the same (as long as tax rate at contribution time is the same as tax rate at withdrawal time).

Say your tax rate is 33% and you manage to double your initial investment over your investing time period. Invest $2 into a TFSA, end up with $4 at the end. To invest $2 into an RRSP you need to actually contribute $3 because you'll get $1 back as a tax refund. That $3 grows to $6, but after $2 tax, you end up with $4, same as the TFSA.
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Feb 1, 2012
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bubak wrote: The effect is the same (as long as tax rate at contribution time is the same as tax rate at withdrawal time).

Say your tax rate is 33% and you manage to double your initial investment over your investing time period. Invest $2 into a TFSA, end up with $4 at the end. To invest $2 into an RRSP you need to actually contribute $3 because you'll get $1 back as a tax refund. That $3 grows to $6, but after $2 tax, you end up with $4, same as the TFSA.
Best simple explanation I have ever seen.

Now imagine you retired and your tax rate drops from 33% to 25%. Instead of $2 tax when you withdraw, you only pay $1.50 tax, leaving you with $4.50 from the RRSP after tax, compared to $4 from the TFSA. That's the benefit of RRSPs for people that expect to have lower income when retired.
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Deal Addict
Mar 8, 2013
2723 posts
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I think you should consider that income tax on a RIF withdrawal after age 65 can be offset (partially or fully) for the first $2000 every year with the pension credit. Assuming that an RSP will be converted to a RIF, that is a difference from a TFSA.
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Dec 12, 2009
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akaManny wrote: I think you should consider that income tax on a RIF withdrawal after age 65 can be offset (partially or fully) for the first $2000 every year with the pension credit. Assuming that an RSP will be converted to a RIF, that is a difference from a TFSA.
I think the idea of this thread was to compare TFSA vs RRSP contribution assuming equal tax rate. It is a very narrowly focused comparison. If everything was put on the table, TFSA >> RRSP. There is the $2000 age amount. Then there is also the risk of OAS clawback. The one thing that I think most of us underestimate is future wealth and thus low likelihood that retirement taxation will be lower than while working.
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Deal Addict
Sep 2, 2009
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will888 wrote: I think the idea of this thread was to compare TFSA vs RRSP contribution assuming equal tax rate. It is a very narrowly focused comparison. If everything was put on the table, TFSA >> RRSP. There is the $2000 age amount. Then there is also the risk of OAS clawback. The one thing that I think most of us underestimate is future wealth and thus low likelihood that retirement taxation will be lower than while working.
"Most" are in a lower tax bracket in retirement, especially if they planned accordingly while working. Not to rehash too much but the median income in retirement in Canada is lower (~29k >=65y/o) than the median income while working (~38-42.4k for 25-34y/o, 41-62k 45-54y/o). On top of that, only ~15% of people 60+ are over the OAS clawback threshold.
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Dec 12, 2009
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cloak wrote: "Most" are in a lower tax bracket in retirement, especially if they planned accordingly while working. Not to rehash too much but the median income in retirement in Canada is lower (~29k >=65y/o) than the median income while working (~38-42.4k for 25-34y/o, 41-62k 45-54y/o). On top of that, only ~15% of people 60+ are over the OAS clawback threshold.
I am referring to those who need weigh the whether to focus on TFSA or RRSP investing.
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[OP]
Member
Mar 16, 2008
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Edmonton
bubak wrote: The effect is the same (as long as tax rate at contribution time is the same as tax rate at withdrawal time).

Say your tax rate is 33% and you manage to double your initial investment over your investing time period. Invest $2 into a TFSA, end up with $4 at the end. To invest $2 into an RRSP you need to actually contribute $3 because you'll get $1 back as a tax refund. That $3 grows to $6, but after $2 tax, you end up with $4, same as the TFSA.
My point is that the need to invest more in an RRSP is not obvious. When I read it, I assumed the initial investment was the same. You are not invest investing $2, you are investing $3 in the RRSP (pretax). So the author's statement can easily be misinterpreted by the uninformed. Everyone is providing an explanation here but the author did not and he published the advice on FP website.
[OP]
Member
Mar 16, 2008
224 posts
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Edmonton
dealhunter69420 wrote: 10/10 math thread, would come again
The math for 30% tax and 10% investment income over 5 years
TFSA x*0.7*1.1*1.1*1.1*1.1*1.1
RRSP x*1.1*1.1*1.1*1.1*1.1*0.7
where x is the pretax income to use for investment and * is fortunately commutative and associative
Jr. Member
Sep 28, 2011
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CheapMike wrote: The math for 30% tax and 10% investment income over 5 years
TFSA x*0.7*1.1*1.1*1.1*1.1*1.1
RRSP x*1.1*1.1*1.1*1.1*1.1*0.7
where x is the pretax income to use for investment and * is fortunately commutative and associative
To be apples to apples, don't you also have to factor in the RRSP tax refund you get up front?

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