With regards to retirement, the key variable is how the tax rate at the time of withdrawal compares to the tax rate at the time of the contribution. Here are 3 scenarios, and how they may affect your choice of account:
- If the two rates are identical, the TFSA and the RRSP are equally effective tax-savings alternatives. You get the same amount at the end.
- If the tax rate at the time of withdrawal is lower than at the time of contribution, the RRSP is the better choice. Especially because with an RRSP you get a tax break at income tax time. Meaning you won't owe as much to the government at income tax time because you contributed to an RRSP
- If the tax rate at the time of withdrawal is higher than at the time of contribution, the advantage goes to the TFSA. But remember that you can only invest $5000 each year.
What I was interested in knowing though, is what would be best to invest my money in for short-term (under 5 years) savings. Would it be best to put it into a TFSA or just keep it in my high interest bank account? It's not a good idea to put it into an RRSP for short-term goals because you are taxed when you withdraw it. So a TSFA is great for short-term goals. Also, when you withdraw money from a TFSA you have to wait until the next year to re-invest it but you can put it all back in.
For those who will be receiving pensions when they retire, they are limited in what they are able to contribute to their RRSPs, so a TFSA is a great way to add more to their retirement fund. Max of $5000 per year, but that can definitely add up over the years!
My goal for 2010 is to start a TFSA. In 2011 I'll also try to max out my TSFA and if there is anything extra I will put it toward an RRSP. Now to only find permanent work. Life would be so much easier with a full-time job!