Much has been made of the C.D. Howe report on the tax effectiveness of RRSPs and TFSAs. As Canadian Capitalist’s summary of the report explains, the nod goes to TFSAs over RRSPs much of the time, particularly for lower-income Canadians. However, the analysis for a given individual is often much simpler.
The limits placed on contributions to RRSPs and TFSAs can make the choice easier for some people. Let’s look at a few cases.
Case 1: Low income
As the C.D. Howe report shows, most lower income Canadians are better off with savings in a TFSA than an RRSP. If by some miracle a low-income earner has more savings left after maxing out his TFSA, he can contribute to his RRSP. That case was easy.
Case 2: High income
It’s nearly impossible to achieve the income replacement rates in retirement used in the C.D. Howe report without using both RRSPs and TFSAs. This makes the whole discussion moot. If contribution room were unlimited, then it would be worth debating whether high income earners should contribute to one or the other.
Case 3: Middle income
Middle income earners are also better off if they use both their RRSPs and TFSAs. Often this is impractical though, because these people are unable to save this much money. So, these are the Canadians who need to pore over the C.D. Howe report to make their choice.
By showing that TFSAs are of greater value than RRSPs to a wide range of Canadians, it could be that C.D. Howe is preparing to make the argument that TFSA room should be greatly expanded. This is just speculation on my part, but it’s hard to see the point of most of their analysis otherwise.