When comparing TFSAs to RRSPs, it’s important to consider only the after-tax portion of your RRSP balance or you’ll be led astray. The concept of forgone consumption is helpful. Here I look at how to compare TFSAs and RRSPs when it comes time to draw from them in retirement. In the third edition of his book Tax-Free Savings Accounts – How TFSAs Can Make You Rich , Gordon Pape includes a section on questions he has received from readers. Unfortunately, the answer he gives to one of the question leaves much to be desired. Here is a paraphrase of the question: Q: I expect to run out of non-tax-sheltered investments in about 5 years. When this happens, should I start drawing from my RRSP or TFSA? Here is Pape’s answer: A: “Let’s suppose you have a $5000 investment in each plan earning 7 percent annually. Five years from now, that investment will be worth $7012.76. Now you are faced with a withdrawal decision. If you take the money from the RRSP, using a marginal tax rate of...

People tie themselves up in knots trying to compare RRSPs to TFSAs. Even well-known author and newsletter publisher Gordon Pape has some difficulty. The idea of forgone consumption helps to simplify things. It’s important to understand how much you’re really saving when you put money in registered accounts. With TFSAs, the situation is simple. If you deposit $3000, then you’ve saved $3000. RRSPs are more complex. If you’re in a 40% tax bracket and deposit $5000 in an RRSP, you’ll get $2000 back in taxes. Your forgone consumption is only $3000. RRSPs are easier to understand if you think in terms of only having saved $3000. Think of the other $2000 as belonging to CRA. Suppose that over 30 years your money grows by a factor of 10. Your TFSA now holds $30,000. In the RRSP, your part has grown to $30,000 and CRA’s part has grown to $20,000. If you withdraw $10,000 from your RRSP and your tax rate is still 40%, you’ll get to keep $6000 from your part and CRA will get $4000...