How your tax bracket decides whether a TFSA or RRSP contribution is best
A person’s tax bracket before and after retirement can help you decide whether you would benefit more from putting your money into an RRSP or TFSA account. By using this as a basis for your financial planning, it will become more obvious how to limit the taxes you pay. For instance, RRSP accounts are better investments for those who make more now, but require and plan to live on less after retiring.
- The large majority of Canadians are in either the first (up to $47,630) or second bracket (i.e., most Canadians make less than $95,000 a year).
- From an after-tax perspective, most people would likely be indifferent between an RRSP and a TFSA, because most people are in the same tax bracket when working and when retired.
- Those who would benefit from the ‘tax bracket arbitrage’ by using an RRSP are those who earn less in retirement while maintaining a similar standard of living due to having put their children through school, paid off the mortgage and so forth.
“While many people have no strong opinion when choosing between RRSPs and TFSAs, there is a clear advantage to RRSPs for those people who have more than modest incomes that are likely to be a fair bit lower in retirement. For most people earning over $47,000 a year, therefore, RRSPs are likely to be the better option.”