TFSA vs RRSP priority for young couple

7033 Views 11 Replies 10 Participants Last post by steve41, Nov 11, 2009

Szarky

Discussion Starter · Nov 4, 2009

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.

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leslie

· #3 · Nov 4, 2009

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.

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