Two of the main self-funded retirement vehicles which Canadians use are the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). The RRSP was introduced in 1957, while the TFSA was introduced in 2009. The RRSP is typically known as the investment account you use to save for retirement, but a TFSA may be the correct choice for your situation.

So TFSA vs RRSP for retirement savings, let’s see which is best for you! 

How does an RRSP work?

An RRSP account can be opened once you start earning income from employment or certain other sources. Your RRSP contribution room is the lower of 18% of your previous year’s income or the specified maximum ($30,780 for 2023), subject to certain adjustments, usually for work pension contributions. Your unused contribution room is carried over each year, so it keeps building. One of the main benefits of an RRSP is the contributions are tax deductible. For example, if you make $80,000 a year and you contribute $10,000 in one year, your taxable income will be reduced to $70,000 and your taxes payable will be reduced by roughly $3,000. Your tax deductions go against your marginal tax rate, not your average tax rate. Another main benefit is the growth within your RRSP is tax-sheltered. When you withdraw money from an RRSP, at any time after contributing it or in retirement, both your contributions and growth will be treated as taxable income. Presumably, your retirement income is lower than your earned income over your career, resulting in a net benefit to you over the years.

How does a TFSA work?

A TFSA can be opened by all Canadian residents who are 18 or older. There is a specified contribution amount each year, but you can carry forward the unused contribution room up to your lifetime maximum. Contributions to a TFSA differ from an RRSP as there are no tax deductions, however the growth within your TFSA is tax-free, and when you withdraw from your TFSA there are no taxes to pay whatsoever. For example, if your TFSA is valued at $50,000 and over 30 years it grows to $150,000, you can take out the full $150,000 without paying taxes.

When an RRSP may be better

You are self-funding your retirement

If you are like most Canadians, you won’t be part of a pension plan through work. That means you have a greater responsibility to save towards retirement. Building up an RRSP over your working career means you get tax deductions on your contributions and will receive a stream of income each year in retirement. RRSPs by design are rolled over to a Registered Retirement Income Fund (RRIF) in retirement (or at the latest age 71) when the government specifies you start taking out at least the minimum each year. You will also need RRSPs as a mainstay because only saving in your TFSA, will not get you the retirement income you need to survive.

Your income is higher while working than in retirement

A key factor with RRSP contributions is determining if your income is likely to be higher when you are contributing compared to what it will be in retirement. RRSP contributions are tax deductible against your marginal tax rate. If you make $130,000/year, your marginal tax rate is roughly 43%.  If you contribute $10,000 in a year, your taxable income would be lowered to $120,000 and you would lower your taxes payable by $4,300. 

If you will be receiving roughly $65,000/year in retirement, your marginal tax rate would roughly be 30%. If you withdraw $10,000/year in retirement, that would increase your taxable income to $75,000 and you would have taxes payable on that additional withdrawal of $3,000. The net difference is $1,300 in your pocket.

You lack financial discipline 

A TFSA is a lot easier to access your money from. Since your withdrawals aren’t taxed and you get your contribution room back the following calendar year, it may feel easy to take out lump sums. On the other hand, an RRSP withdrawal has taxes withheld on the withdrawal. If you want to take out $50,000 for example, the withholding tax is 30%. You would need to take out $71,429 to receive $50,000 in your bank account, given $21,429 (30%) would be withheld for tax purposes. I’m addition, you do not get to re-contribute those funds back into the account at a future date. That may be the incentive an individual needs to not make any lump-sum withdrawals throughout their working career. 

When a TFSA may be better

The TFSA is generally misunderstood. A lot of individuals think of it as a savings account as opposed to an investment account. Some situations where a TFSA contribution makes more sense are listed below.

Your current income is low/lower than in the future

If you are in a lower marginal tax bracket, contributing to a TFSA probably makes sense over an RRSP contribution. If, for example, you’re making $45,000 in a year, you would be in a marginal tax bracket of 20%, meaning a $10,000 RRSP contribution would lower your taxes payable by $2,000. Given the tax deduction isn’t at a high rate and you may have a salary increase later in your career (which means a higher marginal tax rate), TFSA contributions would make more sense at a lower income.

You have a pension through work

When you have a pension through work, you will receive a pension income which is taxable in retirement. Let’s say you receive a pension income of $55,000 each year, and between Old Age Security (OAS) and Canada Pension Plan (CPP) your income from them is another $20,000. This would mean your base taxable income in retirement is $75,000. Given RRSP withdrawals are taxable, this leaves you with a higher tax rate in retirement. If on the other hand, you had built up your TFSA throughout your career, all withdrawals are tax-free, keeping you with $75,000 taxable income even with a $20,000 TFSA withdrawal in one year. 

You may want to access the money before retirement 

When you withdraw from a TFSA, the withdrawal is tax-free. If you take out a lump sum when you are 50 to help purchase a cottage or a car, the TFSA would make the most sense. The next calendar year you would get your contribution room back. If you were to withdraw a lump sum from your RRSP when you are 50 to purchase a cottage or a car, there will be withholding taxes on your withdrawal, it would be treated as taxable income, and you would lose that contribution room. 

Keep in mind that TFSA money can always move to an RRSP, if it makes tax planning sense down the road.

So…which one is best for you?

These have been a few main examples of when it would make sense to invest in one account over the other. It may seem confusing which account is best for you as everyone’s situation is unique. It is beneficial to put a plan in place with a professional to guide you along the way. A lot of individuals will end up using both accounts at different times throughout their working life. A change in jobs, from a job with no pension to a job with a pension (or vice versa), may mean a change in the account you’re contributing to. One of the most important aspects of investing is to start early and stay invested long-term. 

Disclaimer

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.

Have you had to settle an estate lately? If you have, you may know that it can be an exercise in frustration. More recently, banks and credit unions are asking for probate on smaller and smaller amounts. A recent, immediate, family story was a request to probate a bank account with only $23,000 in it. Their threshold is apparently $20,000; however, it is within their discretion to request a probated will on any amount below that. In this family’s situation, all other assets passed directly to the named beneficiaries on various investments accounts, such as TFSA and RRIF. Not only is there now an undue delay of months, depending on whether you do a simplified method or not, the average cost can range between $2000-$3500. That’s an awful lot on $23,000! 

On the upside, there is a way to keep your estate efficient, private, and less costly for settlement: have some or all of your non-registered/taxable/open investments with a life insurance company. While still offering an investment portfolio of both growth and security, their products allow you to name a beneficiary, bypassing any need for probate. Any inheritance remains completely private, unlike a will, which is public, and your money can be distributed in weeks versus months or longer. Potential costs associated with these investments are increasingly unfounded, as companies have introduced low-cost versions, to attract estate planning money, knowing this has been a long-standing objection.

If your financial advisor is not talking to you about this, we would love to!

When Stephanie Lafond began her financial career at Mutual Life, the gender balance at her office was 50/50. She didn’t know then what an anomaly that was. “In 1993, that was leading edge. I didn’t realize until I left in 2005 how male dominant the industry was. I would go to these big meetings and the room would be 80 to 90 percent men.” A very recent report from Investment Executive Report Card currently has female Advisors across all channels at 20.6 percent.

Today, Stephanie is part owner of Limestone Financial Inc.,and Senior Financial Planner at the Limestone Team, at Assante Financial Management Ltd.” with offices in Brockville and Kingston, Ontario. While she’s seen many changes in the last three decades, the lack of women in the industry is not one of them.

Stephanie begs to differ. In her experience, many women are, by nature, ideally suited for a career in financial planning. “We’re compassionate and nurturing,” she says. “A lot of time in meetings, particularly with women, you talk about many different things that aren’t purely about the client’s investment or insurance portfolio. You certainly must be well-versed and wear that hat too, but you build the relationship by talking, listening and sharing about life with people.”

Talking a lot – an attribute Stephanie was disciplined for in elementary school – turns out to be something that helped her do well in her own career. “It’s just so interesting to see how certain childhood experiences and personality traits led to my success in this career: leadership skills, giving people direction and advice, as an instructor and lifeguard, hardworking and goal-oriented, as a top student and Canada Cord Girl Guide, and loving to have conversations with people all around me!” she laughs.

Conversations – especially about the many rewards financial planning has to offer as a career – is also one of the ways that could encourage more women to enter the industry. “Female independent Financial Advisors need to talk to other women about what a wonderful career this is,” says Stephanie, who has recently been having some good conversations about this herself. “The push is for 50 per cent but that seems like a huge hurdle to overcome. Lack of diversity and gender bias are still very real in our sphere.”

She notes it’s a great career for women who are starting, or anticipate starting, a family. When Stephanie was a new mother herself, she controlled her own schedule, so she could pick up her kids from school, stay home if they were sick or take holidays that coincided with the family’s schedule. Today, the kids are adults, but Stephanie’s schedule allows her the flexibility to help her aging parents. “It’s hard to keep going to your supervisor and asking for that flex time. And that’s huge for women who are, a lot of the time, the primary caregiver for children and older parents. In the right environment, much of the work that I do, can be done from home, given the widespread use of cloud-based technology, especially post-pandemic.”

That flexibility also extends to gaining the knowledge and designations required to become a Certified Financial Planner. In fact, the financial planning sector has, long before the pandemic, offered courses online, for self-study. And that’s a good fit for someone who is raising a young family and needs to work through studying on their own time. 

Why women are good for the finance industry 

Given the makeup of the financial services industry, half the population may be underserved. And that half wields a lot of power. According to Forbes Magazine, women control more than half the private wealth in the U.S. and make 80 percent of the purchases. Women will also inherit 70 percent of the $41 trillion in intergenerational wealth transfer expected over the next 40 years. Similar statistics have been reported in Canada, and given the choice, says Stephanie, many of these women would prefer to get financial advice from another knowledgeable, professional, and compassionate woman.

Stephanie recognizes that attracting more female Advisors is a challenge for most head offices, especially since advisors aren’t employees. “In my opinion, if an advisory team is going to move over to Assante, they’re not usually starting from scratch,” she says. “They’re coming from another dealer, where they have an established business. Given that it’s mostly men out there, mostly male teams will be transitioning over. So, I can see where it’s hard from a corporate perspective. But we need to start thinking outside the traditional toolbox, from a recruiting perspective.”

Interestingly, across their offices in the Kingston area, Assante does have a 50/50 split: I’m sure it’s one of the highest percentages in the country,” says Stephanie. Once you get a woman or two, they often attract other women, which is what has happened in our area.

Stephanie’s own team has gone from one man and three women to, currently, two women and three men. “We have to switch the balance back again,” she laughs. Beyond Stephanie, the Limestone Team includes Tom Shillington, Service Associate; June Donnelly, Business Associate and Licensed Assistant; Everett Childs, Financial Advisor; Rajpreet Singh, Marketing and Digital Communications; and Graham Milligan, Insurance Advisor. “Tom is in the autumn of his career. He’s looking to retire from an active advisory role this year and step into an administrative role, where he can work part time and remotely,” says Stephanie. “Everett is a junior Advisor. He will be getting a CFP designation, so with Tom stepping away, he and I will be the primary advisors for the time being.”

Stephanie has been deliberate in the way she’s structured her team. She’s ensuring there’s a succession plan in place, so the transition is seamless for both her team and their clients, when an Advisor decides to leave. “It happens all the time,” she says. “An Advisor just leaves. They’ve tried to find succession but for one reason or another, it hasn’t worked out. It’s really hard on clients.”

Knowing they could build a team is one of the reasons Stephanie moved over to Assante. “There are many Assante Advisors in Eastern Ontario. We can build relationships with them and hire younger people, sometimes even share employees. From these sources, and other progressive Assante programs, we’ve built a team so that, when the day comes, everyone is familiar with the clientele. You care about your clients – we treat them the way we would treat ourselves or our parents. It’s their money and I don’t want to leave them in the lurch. I inherited some clients where that happened, so I know how upsetting it is to be restarting those close relationships.”

Increasingly, Stephanie’s team is building relationships with higher net-worth families, and a new generation of clients, their children. “About 93 percent of an Advisor’s accounts will transfer out upon the death of a spouse,” says Stephanie. “If you want to keep your business healthy, you need to meet the spouse, and the next generation.”

She notes that some Advisors shy away from younger clients because the money that comes with them tends to mean small accounts. And that’s missing the big picture. At Limestone, where her team ranges in ages and experiences, her junior Advisor can take on a younger client who will, hopefully, grow to be a client for life. “Most importantly for us, philosophically speaking, is working with people who are both willing to pay for advice and to implement it.”

Outside of her practice, Stephanie finds time to give back to the community. An avid volunteer over the years, one of her latest ventures is as a committee member for the Southeastern Ontario Fund for Investment in Innovation (SOFII). The program offers loans to high-growth, innovative small and medium-sized enterprises, to help them face growth challenges. “One of the areas we are focused on is funding women-led businesses. I wanted to be a part of a committee that is helping to lift female entrepreneurs up.”