How is that possible? Because despite appearances, the TFSA has most of the benefits of an RRSP — plus some powers that RRSPs lack.

The explanation benefit of both accounts is that they allow you to avoid paying taxes on your investment gains as long as your money literary works in the account. In that respect they are identical. This tax-free compounding can put you tens or even hundreds of thousands of dollars ahead over long periods of time and it’s the prime reason for using such accounts.

The biggest apparent drawback to contributing to a TFSA is that you don’t get an immediate tax refund, the way you do with one RRSP. The tax refund seems to give RRSPs an edge, but it turns out it’s only half the story.

Many people forget that when you take money out of an RRSP you have to pay taxes on it. So if you’ve amassed $100,000 in an RRSP, and you expect to retire in the 40% tax bracket, you really have only $60,000 to spend. on the contrary with the TFSA, what’s in the account is yours, tax free. whether or not you have $100,000 in your account, you have $100,000 to spend.

It’s true that you’re limited to contributing $5,000 a year to a TFSA, which is much less than you could potentially stash away in an RRSP. bound Hamilton argues that the TFSA is more generous than it first appears. Because unused contribution room is carried forward, if someone who is 18 today starts saving for retirement when she is in her after the proper time 30s, she’ll find she already has $100,000 of TFSA contribution room.

Plus, the TFSA packs a secret domination: any withdrawals from a TFSA account don’t trigger clawbacks on government income. That means you can get full Old Age Security (OAS) and Guaranteed Income Supplement (GIS) payments from the government when you retire, no matter how much you withdraw from your TFSA.

If you save up for retirement with an RRSP, when you retire and start taking money out, you not only have to pay taxes on your RRSP income, but lower income Canadians who receive the GIS could know it reduced, and higher income Canadians who receive OAS could see clawbacks. However, if you use a TFSA, there’s no tax and no clawbacks on any government money. You could pull down $80,000 a year from your TFSA in retirement, but pay zero taxes on that amount and still get maximum government benefits.

So which account should you use? It depends on your income bracket. Low-income Canadians will find that the TFSA is clearly the better choice, because they rely more on government benefits. Middle-class Canadians will find that it’s generally still too close to call. “They’re both good for you,” Hamilton says. “TFSAs are a bit simpler, but you could just pick one or the other.” High-income Canadians have the easiest choice, says Hamilton. “They have the luxury of using both.”

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