Saturday, 21 February 2009

Is the RRSP Refund as Contribution to TFSA Dipsy-doodle Worth It?

Some commentators have suggested the best way to solve the conundrum of deciding whether to contribute to an RRSP first or a TFSA is to make the RRSP contribution then use the tax refund to put into the TFSA.

Does this make sense? On first glance, one gets the impression that more is being protected from tax. For example, if you put $1000 into an RRSP and are in a 40% marginal tax bracket (despite the fact that no such tax bracket exists, it is convenient to use a round number for illustrative calculations), you get 40% x $1000 = $400 back, which can be put into a TFSA, which seems to result in a total of $1400 being "saved" while a straight $1000 in a TFSA produces no tax refund and so only $1000 is set aside.

The answer is that you are no better off doing the RRSP refund into TFSA than the straight TFSA contribution if you stay in the same tax bracket when you withdraw the RRSP money. Save yourself the trouble. Want to see the numbers? Look at the table below where I've worked through a simple example.

There are other factors to consider in deciding between the TFSA and the RRSP, most of which come out in favour of the TFSA as various people have said like Ed Rempel on and on Million Dollar Journey. The one thing that still goes in favour of the RRSP is when your tax rate upon withdrawal will be lower than at contribution. It may still not come out in favour of the RRSP if you lose income-tested benefits like OAS and GIS. has a handy calculator in which you can plug in numbers to test RRSP vs TFSA with differing tax rates and considering the OAS and GIS clawbacks.


ian in hamburg said...

Dipsy-doodle! I haven't heard that Canadianism in ages, though use it all the time. People tend to look at me kinda funny...
Do you know where it comes from? I think it was CBC Montreal hockey broadcaster Danny Gallivan describing deft stickwork, but I'm not certain.

Like reading your blog, btw.

CanadianInvestor said...

Ian, I think you might be right about the origin of dipsy doodle. After writing the post I thought of a hockey comparison ... the spinerama move that Serge Savard, or was it JC Tremblay(?) used to try pull to get around a defender by doing a 360 spin, but it never fooled anyone. Just like this RRSP move doesn't get around reality of not being able to create more dollars.

MillionDollarJourney said...

Thanks for the link! Just a note that moneyvsdebt is a scraper. :)

Jordan said...

Hey bud wanted to pop and and thank you for the link. ;-) Also great article write-up!

MoneyVsDebt said...

Wanted to thank you for the article write-up along with the link to MVD.

ian in hamburg said...

The spinarama move! You know, I think that was also a Danny Gallivanism. Or was it Dick Irvin? We used to call the intermission the Dicky and Danny show. :-)

Finance Enthusiast said...

Hey, great post. I was confused as to make a real estate investment through RRSP or TFSA at a particular company called VSM Investments. The table you posted has made things a lot clearer.


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