A pair of 30-year olds who put in the max every year for 25 years and retire early at age 55, would have contributed $250,000 between them. At 4% real-return, this would be $430,000 dollars sitting there, tax-free on withdrawal. That amount of money would be a fairly nice “icing on the cake”!

For those who may have a wish to leave a legacy with any remaining TFSA/RRSP money after they die, as I have blogged about before (http://canadianfinancialdiy.blogspot.com/2009/07/rrsps-and-governments-secret-tax-weapon.html), since RRSP/RRIF money is all deeemed to be disposed of at death and the totality of funds taken into income, chances are that the death year tax rate will be high if not in the highest tax bracket. With TFSA, the money is all tax free and can flow 100% to beneficiaries. Another plus for the TFSA over the RRSP.

I think the TFSA is not great for long term not because of the math but rather because the likelihood that people will take out the money long before retirement.

Anyhow, here’s my recent article on the topic before the release of the C. D. Howe Institute report. – http://www.wealthwebgurus.com/article/897/the-great-rrsp-debates.aspx.

Obviously if you make the assumption that you take all of your RRSP savings out in one gigantic lump sum cash out payment, then of course you skew the tax figures to one that shows that it doesn’t make any sense to use RRSPs. Similarly, if you assume that you only take out enough $ to match the basic exemption, then you skew the calculation the other way as you get all of that money tax-free.

As I said, I absolutely love the TFSA structure from a tax standpoint. It’s just that the $5K annual limit isn’t enough for me to consider it a serious retirement savings tool for at least another decade. Even then, it will never be able to catch up to the total balance sitting in my RRSP account – it will just be less of a rounding error. If they bumped up the annual limit to about $15K or $20K, then I would take it much more seriously.

Not true at all.

I know many 30 year olds in the 40% tax bracket. Combine that with an early retirement – somewhere between 45-55 and I can guarantee that RRSPs are advantageous.

I think this discussion is very important. CC will have the numbers, but most Canadians don’t even contribute RRSPs let alone decide which registered account to put money into. Even though its only $5k/year, look at the average savings of Canadian retirees, isn’t it somewhere between $100-$200k. That’s maybe 10-15 years of TFSA contributions (non-inflation adjusted), so it’s a ‘small’ amount, but still very significant.

Regardless, I will probably take the info and weight my contributions based on where i sit on the income scale, but still contribute some into both.

@Boko I don’t think of Tax differing so much a fraud, but rather before the TFSA it was our only option. But what i really wanted to ask you was what policies you are referring to south of the border on 401k’s?

@boko: I don’t know what’s going on with 401(k)s but I don’t think RRSPs are a government fraud. They are a legitimate savings vehicle and the only one we had before TFSAs came along. TFSAs are currently a great deal but who knows how the rules will be tinkered with in the future.

@Aleks: Personally, we use the TFSA to hold emergency savings but starting next year, we’ll be looking to it as a retirement savings vehicle as well. The nice thing about TFSA is that it can be so flexible — RRSPs not so much.