TFSAs, in my view, are the better way to go. In fact, I have stopped putting money into an RRSP and only use my TFSA.
1. With a limit of $10,000 a year, we now have room to do some serious saving.
2. Unlike an RRSP, when you withdraw money it isn’t taxable, though you do have to wait until January 1 of the following year to be able to put the money back without penalty. You don’t get any tax break for putting money into a TFSA, but then there is no tax on taking money out, which makes it easier to use for a home downpayment. My mother says she really regrets having put her money into an RRSP at all. When I told her she got good tax credits for her deposits and why is she complaining, she said yes, but she was also working at the time and could afford to pay the tax then, but feels that she can’t now. With only a pension, having to withdraw RRSP funds and pay taxes on it causes her a lot of stress as she watches her balance decline every month and is paying tax on her withdrawals. Granted, it is at a lower marginal rate than when she was working, but it hurts a lot more.
3. Like an RRSP all money held in the account grows tax-free.
4. You won’t be forced to withdraw your money when you are 71 as you are with an RRSP.
5. Withdrawing money from a TFSA won’t put you in a higher tax bracket like an RRSP will. My mother has had a lot of stress with the forced withdrawals from her RRSP and the related tax consequences. As a senior with no income other than the Canada Pension Plan, she would qualify for programs such as $40 a year bus passes and the Old Age supplement.
The only down side I can see is that you don’t get the same sheltering from taxes the US government levies on dividends paid by US companies as you would in an RRSP, so there is no point in owning US stocks in a TFSA. It is great for stocks from all other countries.
