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Why The TFSA Might Be Better For The Poor Than The RRSP


There is so much bad press about the increase in the TFSA account. Everywhere you read it states that the TFSA increase only benefits the rich and not the middle class or the poor. I actually disagree with this statement in some sense. It’s true that individuals have less money to put away into their savings, but that has nothing to do with the TFSA account. There are many numerous reasons why individuals lack the money to put away into the TFSA, and it can range from runaway housing prices, lack of real pertinent full time jobs, or perhaps just lack of salary increases, but saying the increase in TFSA is bad for the poor is just a dumb political excuse.

Over the many decades we have been drilled into our heads that the best way to save for retirement is the RRSP account. Unfortunately for many people, including the poor, this is not the case. The RRSP account, though having the word “Retirement”, in the account name doesn’t really provide the best savings mechanism for the poor. In fact, the RRSP is probably worse off as a savings tool for the poor than the TFSA account. Why is that? Quite simple. The RRSP is a tax deferral strategy to saving. The TFSA is completely tax free.

Tax You Later Alligator
AlligatorThe RRSP account lets you grow your money in the account tax free. The same holds true for the TFSA. The RRSP gives you back a tax credit when you make a contribution. The TFSA doesn’t. For poor people, getting that tax rebate may seem like a boon, but the fact is, that tax return amount needs to used in the future to pay for potential taxes when money is withdrawn from the RRSP. Many people fail to realize that when money is withdrawn from an RRSP, that the money is taxed at your marginal rate. That’s where the downfall to investing with your RRSP can really get you.

As an example, imagine if your tax rate was 15% as the lowest marginal rate and you invest in an RRSP:

  1. $1000 is invested in a RRSP
  2. Right away the government gives back $150
  3. The money grows 10% in a year in a RRSP
  4. The person needs the money and takes $1100 out
  5. The government taxes at 15% for the withdrawal or $165.00
  6. The person receives $935.00
  7. In total the person has $935.00 + $150.00 = $1085.00

Now imagine you use the TFSA instead:

  1. $1000 is invested in a TFSA
  2. The person gets nothing for the contribution
  3. The money grows 10%
  4. The person decides to take $1100 out
  5. The government doesn’t care about the withdrawal
  6. The person receives $1100

So why does the TFSA come out to be more money than the RRSP? The thought behind the RRSP was to save for retirement, but it seems worse off than using a TFSA account. As I’ve mentioned before, the RRSP is a tax deferral strategy and not necessarily for retirement. In order for the RRSP to equal out to the same amount of money as the TFSA, the $150 rebate would need to be invested as well by the individual and receive the same 10% gain. This makes up the $15 difference between the RRSP and TFSA. Unfortunately for most people in the low income bracket that tax refund gets spent, so in essence the RRSP is worse off for the poor.

The RRSP Benefits The Rich More

The reality of the fact is that the RRSP benefits the rich more than the TFSA. You won’t hear the newspapers and media companies complaining about this though because everyone loves the RRSP. So why does the RRSP benefit the rich? It’s quite simply because the rich pay more in taxes than the poor. By using the RRSP as a tax deferral strategy, the rich can delay paying taxes, and hopefully be paying a lower tax rate when they retire.

Let’s look at the same example, but this time the high earning individual pays 29% in tax. When using the RRSP:

  1. $1000 is invested in a RRSP
  2. Right away the government gives back $290
  3. The money grows 10% in a year in a RRSP
  4. The person needs the money and takes $1100 out
  5. The person no longer works and now falls to the 15% tax bracket
  6. The government taxes at 15% for the withdrawal or $165.00
  7. The person receives $935.00
  8. In total the person has $935.00 + $290.00 = $1225.00

If the same rich individual invests in the TFSA rather than their RRSP, then that person would end up with the same amount of money as the poor person or $1100.

So in summary:

  • A poor person using an RRSP would receive $1085
  • A rich person using an RRSP would receive $1225
  • If a TFSA account was used then both would receive $1100

If anything could be said of the RRSP account, it’s that it benefits the rich far more than it would the lower class.

All About Cash Flow

The truth behind the argument that the TFSA benefits the rich more than the poor is simply a political marketing tool aimed at the ignorant public. Political parties know how financially illiterate the general population is with their own money, which is why they need to spread false information to win votes. This isn’t a political blog, nor do I want to delve deeper in that matter.

The fact that remains; however, that the poor don’t have money to save. That is really where the difference really lies between the rich and the poor. It’s all about cash flow. In order to take advantage of any of these investment tools, people need to have positive cash flow.

girl-looking-in-mirrorPeople that are rich tend to have higher income or control over their expenses so that they have money to invest at the end of every month. Those with lower income, or even large spenders with big incomes will claim they are poor because they have little left at the end of the month to invest. The whole rich and poor conundrum really comes down to you, not so much about the TFSA or RRSP account.

Take Advantage Of Both

Depending on where you fall in your own personal finances, there is no reason why you can’t take advantage of both of these investment tools. Even if you fall in the lower income tax bracket and you can save a little bit of money, putting your money into an RRSP account or TFSA account to invest for future growth is better than doing nothing at all.

If there is any confusion around RRSP or TFSA. The TFSA will always provide you with tax neutral results on your returns regardless of your taxation status. The RRSP is very dependent on your own personal tax situation when you withdraw money. Sometimes it can be beneficial, while at other times it can be detrimental. Only you can really determine what the best path for your money should be, but if you’re confused consult an accountant or financial advisor.

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  1. […] limit was reduced from the $10,000 limit for 2015 back to $5,500 for 2016. Despite the fact that the TFSA might actually be better for the poor than the rich, the limit was reduced because it was politically slammed for being a rich […]

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