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TFSA versus RRSP – Which plan is ‘better’ overall?

Once and for all, I’d like to say that the TFSA, overall, is the best savings vehicle for everyone at all income levels.

Read:

Why the heck did they name it “SAVINGS”

As a side note, where I think it gets sort of annoying is the government naming of these plans.

“SAVINGS” Plan, doesn’t make you think of INVESTING under it. So a lot of people, just throw the $6000 into a TFSA savings plan, earning a paltry 1% – 2% a year, rather than the healthy 7% – 11% that they SHOULD be getting, if they invest in index funds and leave it for the long-term.

But that’s another point of discussion. It’s misleading.

Sure, there are considerations, like how the RRSP gives you a tax credit which you can use early on to reduce high taxes, and with the difference saved, invest even more under the RRSP plan…. but in terms of flexibility, I really think it can’t be beat.

FLEXIBLE AF

Need the money for a down payment? Emergency? Wedding? Whatever you deem important? You can withdraw from the TFSA, use the money, then check your contribution room for the following year and RE-contribute back, so you don’t even lose the contribution room!

And the contribution room even accumulates into the future, meaning you don’t have to max it out in this year (use it or lose it), you can decide to do it the following year, and put in previous year’s contribution rooms.

ALL THE INVESTMENT GAINS BECOME TAX-FREE UPON WITHDRAWAL

I mean. If you put in $6000 a year starting now at age 18 (your minimum age), at age 60, with an 8% return, you will have after 42 years of compounding interest, $2,060,245.

TWO MILLION DOLLARS.

Of course, a lot of people don’t start at 18, but this is kind of why I want to give our son that money early on at 18, at least to secure something for his future, teach him how to manage it, invest it into index ETFs and let it sit there and grow as he works and figures out his life.

LET’S SEE WHAT PEOPLE HAVE SAVED SO FAR

Source: Globe & Mail

The total contribution as of 2022 for a TFSA (assuming you were aged 18 or older in 2009), is $81,500. We are under contributing to this (and to investing in general), but that’s not news. We have always in general as a society, sucked at saving and investing, and I suspect this is all linked to financial literacy (or lack thereof), which by the way, in elementary schools they are starting to teach now.

Thoughts?

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