Poll Results: RRSP vs TFSA for Middle-Aged Clients?

In February we asked KBR readers to weigh in on the following poll question: “The RRSP deadline for the 2023 tax year is February 29. From a wealth planning perspective, do you think middle aged Canadians should invest in a TFSA instead?”. The opinions were mixed with 64% answering “yes” in favour of the TFSA over the RRSP. As always, the important details are in the insightful comments left by our readers from the tax, accounting and financial services, and many pointed out it depends on “Know Your Client”.  Check them out:

The Yes’

“The TFSA, although it doesn’t give you a tax deduction at the time, provides access to tax free cash later.  It is really dependent upon the individual and an assessment of retirement income sources needs to be done to determine the best course of action.  RRIF’s and the mandatory withdrawal can also impact clawback zones.” - Marilyn Sims

“Yes. if clients have maximized RRSP contribution to reduce taxable income & ensure receiving other taxable income sensitive benefits. Contribution to TFSA to earn TAX FREE CAPITAL GAINS over the years will yield sizable WEALTH for Emergency Fund,  LEGACY DONATION FUND,  LEISURE FUND , ETC besides RETIREMENT FUND”- Cecilia Ng

“Calculations I have done and I have seen elsewhere put the greatest benefit to contributing to an RRSP and then putting the resulting refund into the TFSA. However, there are way too many variables to make a definitive answer to such a broad question.” – Anon

I answered yes; however, the “best” answer option of, it depends, was unavailable. It really does depend on current and future income levels and expected retirement situations. I would say that for most Canadians, the TFSA option, while not deferring taxes (note defer, hopefully reduce, but not eliminate) is probably the better option. For really high income earners currently in the upper tax brackets, the RRSP is likely the better option. It all comes down to that very important catch phrase, “Know your client.” - Michael Connors

“TFSA is really useful for building tax free retirement income.” - Malcolm Palmer

The No’s

“I replied “no” to question, only because there was no choice for: “depends”. Every client is in a different situation, but for employed clients, it still boils down to not giving the tax-man any more than required. Overall, it is still preferable to use RRSP to try to achieve a “zero” taxable income if possible, then use the tax rebate to invest in the TFSA. For the self-employed and business owners, it is a different situation. Still comes down to Knowing Your Client.” - Ron Young

The Others

“Great answers until you get to the point of a RIV and then the big problem is the amount you have to take out each year (4% now but was 5%) which becomes income.  I obviously can’t do it over again but at the point of the TFSA being another contribution situation I should have put at least 1/2 of my contribution into RRSP and the other 1/2 in to my TFSA.  This is the advice I give to my clients.”-  Leanor Davidson

“It really depends on a person’s situation.” - Michelle Chestnut

“It depends on the client circumstances like taxable income and current investments.” - Helen

“I believe they should split the RRSP and the TFSA contributions as 50/50. This allows for strategy of saving on taxes prior to turning 71.” - SUSAN Y MACKIE

“As is so often the case, the best answer is “it depends”.  If the individual is still raising dependent children and receiving the Canada Child Benefit, contributing to an RRSP can significantly increase CCB payments. I have worked through several low-to-moderate-income scenarios where the result of RRSP contributions was a net tax/benefit impact of over 60% of the contribution, accounting for reduced income tax and increased benefits.  As always, it’s best to run the numbers on a client-by-client basis rather than producing a generalization and trying to fit it to everyone.” - Daniel Housser

“Like the answer to many questions, it depends.  Nobody has a working crystal ball, so we have to work through every situation to determine which makes sense.If tax rates on withdrawal are higher than contribution, the TFSA wins in a lifetime taxation perspective.  If tax rates are lower, the RRSP wins.  If the same, it’s a draw. To invest in either requires access to some cash.  I’d suggest there’s no pat yes / no answer as we want to consider income and cash flow now and in the future and assess whether the tax deferral makes sense for an individual and couple that with estate planning to strive to achieve the best outcome for an individual / family / legacy.” - Derek T

“As a tax specialist I love a good RRSP to see how that federal tax can turn that frown upside down but I struggle with our elders who saved their whole life and left a beautiful RRSP goldmine to children on to see half of their hard work line the federal pockets!
Managing your money, at all ages in your life is the key to success. A TFSA can offer additional income tax free come retirement, act as a saving tool for travel, home Reno’s, even an emergency fund.Looking into more automation for TFSA may help taxpayers reach cash flow goals!” - Ann Laurin

“As with all things tax and money, there is no one size fits all as there needs to be some Retirement income forecasting done, and annual reviews to ensure that adjustments are made. Remember, you can always transfer TFSA’s (and the gains) to RRSP’s when new tax brackets are present, but to remove an RRSP in the future will cost you in tax, and the rate is not yet determined.”- Stacey Bartel

“It makes good sense to invest in a TFSA.  The caveat is whether or not the client needs to reduce his taxable income.  Ideally, they should invest in both to get the best overall benefit.  The ability to access funds tax free (TFSA) and the reduction in taxable income if required (RRSP).”

Thanks for participating in last month’s poll question. This month, tell us your thoughts on the following: “Do you think the final CEBA deadline on March 28 will push some of your clients into insolvency?”