[Szarky]

Just when I thought I had it all figured out

I'm making the switch this week for both my partners and my RRSP's out of our institutions high MER mutual funds (mine is the worst with a 2.72% MER @ Investors Group, ouch!). After lots and lots of reading on these and other forums I figured I'll make the switch to TD eFunds. I thought I had it all figured out and then I ran into this new guy on the block... TFSA.

We're both in our mid 20's. Each have incomes around the 50k level. We each have about 10k in RRSP's. We never max. out our RRSP contribution room and I don't think we ever will in the future.

What priority should we have for TFSA vs RRSP? Let's keep this strictly about retirement savings. I know the TFSA has the benefit of being able to take out the money at anytime but I don't want to do that. I keep reading it all depends what tax bracket you'll be taking the money out at. Well I'm a looooong time away from retirement. I have no idea what I'm going to be doing in 30 years. Maybe I'll be making more money, maybe I'll be making less money.

Would it be safe for now to just focus on 100% RRSP with tax returns going back into the RRSP's. Or should I start thinking about putting a bit of money towards a TFSA. Right now we're doing bi-weekly contributions towards only RRSP's.

 

[osc]

Maximize RRSP for now for the tax returns that you get now (and use the tax returns for more RRSP). When you get to $500k (adjusted for inflation) in RRSPs reevaluate your financial situation.

 

[leslie]

You are correct that the cost/benefit to RRSP depends on your tax rates at contribution vs withdrawal, and that it is impossible to predict. But at $50,000 you are at the bottom of the 2nd tax bracket, about in the middle of possibilities. So there is a pretty good chance you will be withdrawing eventually at the same rate. So no differential cost/benefit from TFSA.

You are only allowed to put $5,000/yr into the TFSA and at $50,000 you certainly should be saving (two times) more than that. So the issue here is only what to do with the first part of your savings.

You restricted the discussion to "retirement". That is a error. All savings that increase your net worth are savings 'for retirement'. There is nothing to be gained from labeling different pots. The problem with doing so is that you end up putting money into 'retirement' even while you are borrowing money for a new car or realestate downpayments etc. You do not save money by borrowing.

You do not mention owning realestate. At your age it is premature to work on the presumption that you will NOT want any. I am against using the RRSP for RE downpayments (simply because you can is not a reason). But the TFSA is perfect for savings for that purpose.

I say put the first $5000 into the TFSA and the next $$ into the RRSP.

 

[Jon202]

In 2 months, you and your partner will have a combined 20k in TFSA room to use. Use it.

 

[Ben]

Decent points made above, not much to add to that. Just give my own plans for flavour.

I've used my TFSA purely for the cash emergency fund thus far. Come Jan, we will have the full $20k sitting there.

Beyond that, we are putting 10% of gross to RRSP, and the rest to mortgage reduction. Until fairly recently we had been maxing RRSP's, but mortgage reduction is now top priority.

When the mortgage is gone, we would intend to raise new RRSP contributions to the 18% max, and also catch up on unused contribution room.

When the RRSP is maxed out, I would intend to open a TFSA investing account, and build my non-registered savings.

As the decades pass, I will re-evaluate the retirement earning scenarios in the context of when I want to retire, and the retirement lifestyle I want to have, evaluating TFSA/RRSP/CPP/OAS income streams.

 

[msimms]

Just when I thought I had it all figured out

I'm making the switch this week for both my partners and my RRSP's out of our institutions high MER mutual funds (mine is the worst with a 2.72% MER @ Investors Group, ouch!). After lots and lots of reading on these and other forums I figured I'll make the switch to TD eFunds. I thought I had it all figured out and then I ran into this new guy on the block... TFSA.

We're both in our mid 20's. Each have incomes around the 50k level. We each have about 10k in RRSP's. We never max. out our RRSP contribution room and I don't think we ever will in the future.

What priority should we have for TFSA vs RRSP? Let's keep this strictly about retirement savings. I know the TFSA has the benefit of being able to take out the money at anytime but I don't want to do that. I keep reading it all depends what tax bracket you'll be taking the money out at. Well I'm a looooong time away from retirement. I have no idea what I'm going to be doing in 30 years. Maybe I'll be making more money, maybe I'll be making less money.

Would it be safe for now to just focus on 100% RRSP with tax returns going back into the RRSP's. Or should I start thinking about putting a bit of money towards a TFSA. Right now we're doing bi-weekly contributions towards only RRSP's.

TFSA for short term --- RRSP for long term.

 

[Szarky]

You do not mention owning realestate. At your age it is premature to work on the presumption that you will NOT want any. I am against using the RRSP for RE downpayments (simply because you can is not a reason). But the TFSA is perfect for savings for that purpose.

I bought a property 2 years ago. Used HBP to help out. Only a little bit left to pay off since we didn't use that much from the RRSP.

 

[Szarky]

Thanks for everyone's input. Tough decision here. Might just keep going with RRSP's and then reassess in a few years.

What really amazes me is the divide between everyone on this topic. Between here and where I posted the same question on redflagdeals.com I'd say it's at about a 50/50 split for people favoring RRSP vs TFSA for my situation.

Base off this website someone posted, RRSP is supposed to be more beneficial(for me). http://taxtips.ca/calculators/tfsavsrrspcalculator.htm Lots of variables that could change over time though since I'm still young.

 

[Rickson9]

Tax free > tax deferred

Having said that, it's only $5K per year.

It's close depending on your goals.

 

[S.Edge]

Your solution

I believe there is a specific income calculated for retirement. If you are over it, TFSA. If you are under it, RSP.

 

[fatboybeanbags]

I have also used my TFSA purely for my cash emergency fund thus far and it has been a good decision.

 

[steve41]

When you consider the estate, i.e. if you should die prematurely, the TFSA option will be favoured. If you make it out to a ripe old age, then the RRSP will have been a better choice. Also, if you absolutely know you will be making a large lump sum 'cash call' at some point in time, then the TFSA is where this money should be stashed. In general, the scale of the two overall strategies are pretty similar.