The difference is that you pay taxes on TFSA now and you pay taxes on RRSP latter.
If you are filing your taxes by April 30, 2019, here are the federal and Ontario (provincial) tax rates:
Federal tax rates for the 2018 tax year
15% on taxable income of C$46,605 or less
20.5% on taxable income between C$46,605 and C$93,208
26% on taxable income between C$93,208 and C$144,489
29% on taxable income between C$144,489 and $205,842
33% on taxable income over $205,842
Ontario (provincial) tax rates for the 2017 tax year
5.05% on taxable income of C$42,960 or less
9.15% on taxable income between $42,963 and $85,920
11.16% on taxable income between $85,920 and $149,997
12.16% on taxable income between $149,997 and $219,997
13.16% on taxable income over $220,000
Ignoring tax exemptions, this means that the lowest amount of taxes that you can pay is 15% + 5.05%. About 20%. Most Canadian families pay more.
With RRSP, you don't have to pay taxes now so you get a tax break. Instead of $200 a month, you can save $250 a month in RRSP. In this case, your savings will be the same is your TFSA if you retire at the lowest tax bracket (20% taxed). This is because it makes no difference to your savings if you are being taxed now at 20% or taxed later at 20%. But let's be real, most people use that tax break on stuff instead of investing it. Sure, you may need that tax break. Maybe you would not be able to afford rent without it. But if you do not need to spend that tax break, then from a savings perspective RRSP will get you less then TFSA because most people are not diligent enough to invest their tax break. That is why I recommend investing in TFSA over RRSP if you must choose one.
The investments you can put in a regular TFSA or RRSP will be restricted to your financial institution's mutual funds (possibly high rate of return but with high fees), GICs, and savings accounts (low rate of return).
With a self-directed TFSA, you can invest in other financial institutions' mutual funds and GICs along with stocks (single stocks are risky), bonds, ETFs (could be low or high fees), and more.
Most aggressive growth mutual funds have a fee of around 2.5%, meaning that a 10% return becomes a 7.5% return so I would not recommend mutual funds. Most mutual funds from big banks also come with bonds, which lowers the rate of return even more.
ETFs are usually a mix of bonds and stocks so their return is usually lower than the average stock market return. Just know that low fee 100% stock ETFs that mirror index funds exist and they are something that I would recommend. But most banks don't offer them so you will need a do it yourself mentality and do a lot of research. Also beware of investments that have a very good rate of return, but have existed for only 5 years or less.
Also know that although it is possible to get around an average of 12% return with a fee of only around 1%, most big-name financial institutions do not offer them. Ideally, you want these kinds of investments in a TFSA to avoid paying taxes on growth. Regular investment, no matter how good, will be taxed every year on growth, so keep that in mind.
Again, a 12% annual return average (before fees) that grows tax-free is possible, but it is also misleading. For example, looking at the past 31 years of the S&P500, the average rate of return is about 12%. But the real rate of return would be equal to getting a 10.5% rate of return every single year for 31 years. On a side note, I highly recommend the S&P500, as will Warren Buffet who is leaving 90% of his legacy invested in the S&P500.
An option that I highly recommend (It's something that I sell) is IRP. Although I can also sell RRSP and TFSA which are more famous, I believe that IRP has the most benefits (but a combination of all 3 would be best).
With IRP, you can invest in an index fund like the S&P500 with 0% fees and grow your money tax-free. Doing so also gives you a bonus (performance bonus + accumulation bonus) of around 1.35% (this is looking at all 0% fee index fund options at IVARI since inception). There is also a low fee option without bonus with IVARI, paying 1.75%, but since inception, there has never been an index fund that would make you more money with the low fee option over the option that paid a bonus. BMO insurance had about 2 investments that were better with low fees, but these are the rare exceptions within BMO's multitude of other investment options. The catch is that there is a policy fee of 3%. So if you get a 12% return in the s&p500 with a 1.35% bonus, your return would be 12-3+1.35= 10.35%. Compare that to a mutual fund that gets you around 10% but charges you a 2.5% fee leaving you with 7.5% and choosing IRP over mutual funds becomes a no-brainer.
Another advantage of IRP is that because it has built-in insurance, it also gives you the privilege of accessing your money through loans. Right now, bank loans are about 4.2% (prime(2.7%) + 1.5%). Let's say that I will get an 8% return this year inside my IRP. If I make a loan, my money can grow at 8% and I will pay 4.2%. This is a net growth of 3.8%. If I were to withdraw my money tax-free, my money would stop growing. In short, debt that makes you money is always better than tax-free withdrawal.
Most people avoid insurance because it becomes extremely expensive when you are older. But with IRP you don't buy any insurance when you are older. If you need say $500,000 to protect your income, if your investment grows past $500,000 then you no longer need to buy any insurance. You also don't have to wait until you die to get the money. IRP is designed to supplement your retirement income for the rest of your life without ever running out. Thus it will outlast RRSP and TFSA, despite having part of the bonus pay for your insurance, which is a huge bonus because most people are not afraid of death but are deathly afraid of living without money.
For more info, schedule a time to talk to me at jtran@greatwayfinancial.ca
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