Home > personal finance > RRSP vs TFSA (Part 1) – Should I contribute to RRSP or TFSA account?

RRSP vs TFSA (Part 1) – Should I contribute to RRSP or TFSA account?

The answer is pretty easy IF you know what your tax rate will be when you start making withdrawals from your retirement accounts (RRSP or TFSA)

RRSP or Registered Retirement Savings Plan is a retirement plan that provides immediate tax benefits when a contribution is made to the account. Money in the account grows tax free. However any subsequent withdrawals from an RRSP account are taxed at the account holders then marginal tax rate.

In summary, Tax benefit received now and tax paid in future

TFSA or Tax Free Savings Account as the name implies is a tax exempt account i.e. the money grows tax free (like an RRSP) and any withdrawals from this account are not taxed. Any withdrawal from a TFSA account is not taxed!

In summary, Tax paid now but tax benefit received in future upon withdrawal

There are 3 answer choices depending on your personal situation:

1. Current Personal Income Tax Rate EQUALS Future Tax Rate
Both accounts will have same after tax value.

2. Current Personal Income Tax Rate GREATER Future Tax Rate
Contributions to RRSP account will have a higher after tax value than TFSA all else being same.

3. Current Personal Income Tax Rate EQUALS Future Tax Rate
Contributions to TFSA account will have a higher after tax value than RRSP all else being same.

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