TFSA or RRSP?  Pros Vote for TFSA Top Up

Should Canadians top up their TFSA to get a jump on tax free savings in 2016 now that annual contributions have been capped at $5500, or should tax savings with an RRSP contribution be top priority now til the RRSP deadline of February 29, 2016?

Sixty-eight per cent of Knowledge Bureau Report readers said yes to our December 2015 poll question, while some 32% favored the RRSPs, with comments reflective of the various choices people make when savings resources are scarce. Stats Canada in fact found that savings vehicles can act as substitutes for each other, as reported before Christmas.

What’s important is the planning behind the choices:  is the client age-eligible for RRSP purposes, for example?  Is there RRSP contribution room? Has the TFSA room already been maximized?  Will the pre-retiree be in a higher or lower tax bracket in the future?   With middle income tax rates going down in 2016 to 20.5% and a new top tax bracket of 33% for those with taxable income over $200,000, this is a great year to check with your DFA-Tax Services Specialist™ first.

Our readers agreed.  Here were some of their comments:

“I think the major issue is whether (a registered saving) program is mandatory for employees or not! The reason why pensions work is because they provide forced savings. People have to pay CPP and they don’t even realize the money is gone.” (Paulo)

“It depends on the situation. If there is RRSP room and the taxpayer is in a high tax bracket, and will be in a lower tax bracket in retirement, it makes sense to pay less tax now and use the refund to save in a TFSA. The TFSA room is cumulative so [there is] no urgency to fund the TFSA.” (Kathy R)

“The current TFSA limit for 2015 is $10,000. Not taking advantage of the increased limit as early as possible could lessen the potential amount of growth that an investor could have on the additional $4,500 that might occur on a tax-free basis. Five per cent growth on $4,500 compounded annually for 30 years could be a fairly sizeable tax-free amount….” (Brian Fraser)

“Not sure it’s a ‘one answer fits all’ question. I’d look at their level of income and tax situation before making a recommendation.” (Dan Allen)

“Since we don’t lose the contribution room for a TFSA, I see no particular urgency to fill the contribution room before considering RRSP contributions.” (Cliff Yolland)

This month’s new poll gauges financial optimism at the start of this brand new year: Will 2016 bring more financial peace of mind to Canadian families, given the federal tax reduction from 22% to 20.5% in the middle tax bracket? 

Additional Educational Resources.  Tax and financial advisors and their clients may also wish to plan 2016 income levels and RRSP contributions in advance with Knowledge Bureau’s 2016 Income Tax Estimator to get a head start on savings this year as part of their annual meeting process, and attend the January Distinguished Advisor Workshops for a comprehensive Personal Tax Update that covers the most recent tax changes for 2015 filings and 2016 planning.

Refer a Friend	Research	Calculators	Course Trials