High-earners and TFSAs

For the wealthy, RRSPs lose their luster

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If you think you’ll be in a higher tax bracket come retirement, opt to save with the TFSA instead.

2 comments on “High-earners and TFSAs

  1. They should transcribe the videos .. so that people don't have to 'watch' videos and can skim through the information.

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  2. This advice is wrong. It reinterates the mis-information propagated by the advice industry. First off – the Title is wrong. The video addressed the situation of a person (NOT high earner) expecting to have higher taxes in retirement than while working.

    Second, it starts with the wrong premise that the only benefit you get from RRSP comes from the contribution tax credit — if you withdraw at a lower rate than the rate of your contribution you come out ahead. The author needs to understand how the RRSP works – not just its mechanics. Read http://www.retailinvestor.org/RRSPmodel.html

    There are four variables determining what benefit is received from RRSPs. The most important is the protection from tax on all profits withing the plan while inside and on withdrawal. The author completely ignored this benefit and implied it does not exist (use of term 'defer').

    The second most important is the effect of a change in tax rate highlighted in this article. But even this issue is not addressed correctly. The wage earner's contribution is <taxed> at his top marginal rate. But the RRIF draws are taxed progressively. The first dollars at lower rates and only the last $$$ at his marginal tax rate.

    Both RRSPs and TFSA protect profits from tax in exactly the same way. So the effect of a change in tax rates is the deciding factor between choosing between the plans. Since it is impossible to say for certain WHAT your taxes in retirement will be, the only generalities that can be reached are: If you are contributing at the top tax bracket you will probably benefit from a lower rate on withdrawal. And if you are contributing at the bottom tax bracket you will probably pay a penalty for w/d at a higher rate – and so a TFSA is preferable.

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