As we have shown, if you’re looking to begin a savings plan for retirement or if you’re unsure of what type of account to invest with at any age, you should start by maximizing your contributions to a TFSA. Focus on your TFSA first and work with your advisor to decide which plan is right for your situation for any additional savings. By never withdrawing from your plan until you retire, you could save thousands of dollars in taxes every year of your retirement.
Since the benefits of a TFSA are so fantastic, the following question might arise for those clients who already have RRSP’s and have room to spare in their TFSA: should I withdraw money from my RRSP every year to contribute to a TFSA and maximize my tax free growth?
Contrary to what may seem like an obvious answer, once you have money invested with an RRSP, it is better to leave RRSP investments in an RRSP account until you need it or until it is passed on with your estate. The financial benefits of keeping your RRSPs where they are instead of transferring money to a TFSA are very small but for the sake of convenience and hassle free investing, leaving the RRSPs alone is a very attractive option. The advantage is seen across every tax bracket.
The following table looks at our two options over the course of 10 years: transfer a net $5,500 to a TFSA every year (keeping in mind the taxes paid on withdrawal from the RRSP) or leave the RRSPs alone. This example scenario has a client starting with $100,000 in existing RRSP investments which earn 6% per year. The figures shown are the net estate values after all taxes are paid at the various marginal tax rates common to Saskatchewan residents.
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*The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.