Author: Mike Holman

This question of TFSA or RRSP for your retirement funds is a tough one, because there are a lot of variables to consider.  To make things worse, some of these variables are unknown, which means you have to make assumptions about future events which might not be all that accurate.

I’ve put together some very general guidelines which might help guide the decision of where to put your retirement money.  My suggestions are very generic – it is important to understand the reasoning behind the suggestions and to be able to apply it to your situation or consult an investment or tax professional.  The further you are from retirement – the greater the uncertainties.

Quick review – Contributions to an RRSP are “pre-tax” and result in taxable income on withdrawal.  Contributions to a TFSA are “after-tax” and do not have any taxable implications on withdrawal.

RRSP contributions work great if you are withdrawing at a similar or lower marginal tax rate compared to the contribution.  If you are withdrawing at a higher tax rate or if you will be receiving GIS payments, the RRSP is probably not a good choice.

Here are some suggestions to help decide whether to contribute to an RRSP or a TFSA.  The income numbers refer to your current working income.

These income ranges were taken from the Ontario marginal tax rate page at TaxTips.ca.

High working income – $75,000 or more

In this case, the RRSP is likely to be the winner or equal to the TFSA.  If you are contributing at a high marginal tax rate, it’s likely that you will be withdrawing at a similar tax rate or lower in retirement.  The OAS clawback could influence this equation, but that doesn’t affect many people.

Michael James expands on this idea in Downside protection of the RRSP.

Low working income – Less than $38,000

In this scenario, the TFSA is likely to beat an RRSP or at least tie.  The reasons for this are:

1. You are contributing to the RRSP at a low marginal tax rate.  There is a good chance that your marginal tax rate will be similar or higher in retirement.
2. GIS clawback.  If your income is low enough to qualify for GIS – the TFSA will be a clear winner since withdrawals do not count as income.  If you are likely to qualify for GIS payments, contributions to RRSPs should be avoided altogether.

Medium working income – $38,000 to $75,000

This range is a grey area, since neither RRSP or TFSA is a clear winner.  In this case, splitting your contributions money between the TFSA and RRSP is a good strategy.  Or if in doubt, focus on the TFSA, since you can always use that money to contribute to an RRSP later on.  Take a look at your marginal tax rates and try to decide yourself what to do.

Some more TFSA vs RRSP factors to think about if you really want to get complicated

Tax rates can change

• The various tax brackets and marginal tax rates could change before you get to retirement.

OAS clawback

• Currently OAS payments get phased out if your net income is above $67,688 (for the 2011 tax year).  The clawback is 15% of the net income over that number.  Once your net income reaches $109,607, the OAS payment will be zero.
• Withdrawals from your RRSP or RRIF will be added to your net income.  TFSA withdrawals will not.
• The OAS clawback acts like an extra tax on your marginal rate.  If a retiree makes an extra thousand dollars, they will lose 15% due to the OAS clawback.
• Age credits – Once you hit 65, some credits become available which can lower your net income.
• Income splitting – It is very easy for married or common-law seniors to split their retirement income with a spouse for tax purposes.  This will likely lower their net income.
• If you are not sure about whether the OAS clawback will affect you – consider that only about 5% of seniors currently have their OAS payments clawed back or eliminated.
• If you can split income with a spouse, you would need to have a minimum gross income of roughly $140,000 in today’s dollars before you would even start to have any OAS clawed back.

RRSP contributions can span different tax brackets

• I’ve estimated that if you make more than $75,000, the RRSP is likely a good choice.  But what if you make $76,000 and contribute $5,000?  In that case, only $1,000 of your contribution is at the higher level.  The other $4,000 is in the “grey” area.

You can control RRSP/RRIF withdrawals and retirement date

• If you are 50 years old, have a two million dollar RRSP and are starting to worry about having “too much” money – consider retiring earlier.  Or start contributing to a non-registered account, once your TFSA is maxed out.

TFSA contribution room limited

• If you make more than $28,000 per year – you will have more RRSP contribution room each year than TFSA room.  Plus, most people have lots of unused RRSP room.  If you make a decent income and can save a lot of money – you will quickly use up your TFSA room.

You have other options

• If you are at a point where you have maxed out the TFSA and don’t want to contribute anymore to an RRSP – you can put the money into a non-registered account.

Canadian dividend gross-up

• Dividends from Canadian companies get a preferential tax treatment.  However, they also result in increasing your net income by the amount of the gross-up, which can decrease OAS payments.

Tax-free savings account have no withdrawal restrictions

• One of the dangers of the TFSA is that you can do a withdrawal anytime for any amount without any kind of penalty.  RRSP withdrawals are subject to withholding taxes and are considered taxable income.  For some people, money in a TFSA might be too easy to access.

The future is uncertain

The younger you are, the harder it is to determine which account to put your retirement money.  When in doubt – contribute to the TFSA first – you can always withdraw from your TFSA and contribute to your RRSP later on.

Good articles on TFSA vs RRSP

The Advantages of RRSPs over TFSAs from Canadian Capitalist.

New debate between RRSP and TFSA from Retire Happy (Jim Yih)

More information

TFSA rules

Rules for converting your RRSP to a RRIF

One of the important aspects of the tax-free savings account (TFSA) is estate planning.  Much has been written about TFSA contribution and withdrawal rules, but with the TFSA, you have the ability to decide who gets the money in the account if you die.

If you have a TFSA, take a few minutes to figure out the estate planning rules (they are not difficult) and make sure your tax-free savings accounts are set up properly.  If you do this, the TFSA can be passed to a spouse or common-law partner with little or no tax implications.  My wife and I set up our TFSAs a couple of years ago and to be honest, I have no idea if we have this set up or not.  It’s on the “to do” list!

The successor holder and beneficiary are provincially legislated.  The provinces and territories came up with their legislation at different times after the tax-free savings account was started.  If you were an early TFSAer, it’s very possible that your financial institution didn’t have the successor holder or beneficiary information on the account setup form.

Tip – To pass the TFSA to a spouse or common-law partner, designate them the Successor Holder.  Anyone else – designate them a beneficiary.

If you wish to give your TFSA (tax-free savings account) money to a designated person upon your death, this can be done using one of two options available through the TFSA. Note that these options are not available to Quebec residents.

1) TFSA Successor holder

You can only designate a spouse or common-law partner as the successor holder.  If you die, ownership of the tax-free savings account will be transferred to the survivor. The survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room.

Advantages to naming a successor holder:

1. No probate fees
2. No tax issues since money is never de-registered.
3. Money will remain in a TFSA.

2) TFSA Beneficiary

A beneficiary can be any person. If you die, the money will be transferred to the beneficiary. If the beneficiary is not a spouse or common-law partner, the money will be de-registered as of the date of death of the original owner and will not remain tax-sheltered. The money will be transferred to a non-registered account in the name of the beneficiary. Any future capital gains will be calculated using the value of the investments as of the date of death of the original owner.

If the beneficiary is a spouse or common-law partner, they are allowed to make an exempt contribution to their own TFSA. The contribution cannot exceed the market value of the TFSA on the date of the original owner’s death. If this applies, the survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room. You have to notify the CRA if you are making an exempt contribution as a survivor within 30 days of the transfer.  This can be done using Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA).

Advantages to naming a beneficiary:

• No probate fees.
• Minimal tax issues if beneficiary is a survivor.
• Money will remain in a TFSA is the beneficiary is a survivor.

Tip – Name a beneficiary, even if you have already named a successor holder.  If you and the successor holder die at the same time, the beneficiary will get the money.

If you live in a Quebec, these options don’t exist. The TFSA can only be passed through the estate.

Note that if you name both a successor holder and beneficiary on a TFSA, the successor holder will override the beneficiary.

These designations are account specific. You can name different successor holders or beneficiaries to each account. It is up to you to ensure that the correct estate information is assigned to each account.

You can designate a beneficiary or successor holder when you set up your TFSA or any time later on. The designations can be changed at any time.  Just contact your financial institution or advisor to verify or change your TFSA designations.

Definition: Survivor – a survivor is an individual who is, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder.

What happens to the TFSA if I don’t name a successor holder or beneficiary?

If you don’t specify a successor or beneficiary on the tax-free savings account, the money will become part of your estate. Your estate will be handled according to your will or applicable laws.  The money in the TFSA can still be willed to a spouse or common-law partner, but probate fees will be applied and the money will no longer be tax-sheltered.

TD Waterhouse is owned by the TD bank (Toronto Dominion Canada Trust).

Overall impressions

Of all the bank-owned brokerages, this is the one where I’ve heard the most favourable comments from users. Like all the other bank-owned brokerages, this one also charges very high fees.  You only get a break on trading commissions if you are an active trader or have $50,000 in household assets.

Online trading commissions

• $29.00 – If household assets are less than $50,000 and less than 30 trades per quarter.
• $9.99 – If household assets are greater than $50,000 or 30-149 trades per quarter.  Online statements.
• $7.00 – If 150 trades or more per quarter.

If you would like to compare all the different Canadian discount brokerages, check out the Canadian discount brokerage comparison.

Phone trading commissions

• $43 Cdn minimum or $35 Cdn + cost per share for stocks trading on Canadian index.
• $43 US minimum or $39 US + cost per share for stocks trading on US indexes.

Annual account fees

• Registered stock trading account – $100 if balance is less than $25,000
• Registered GIC and mutual fund acct – $25 if balance is less than $25,000.
• RESP – $50 if balance is less than $25,000
• TFSA – $50 – waived if balance > $25,000 or sign up for eServices

Foreign exchange fees

• Spot rate + 1.50%.

If you are exchanging a larger amount ($10,000 or more) or have a lot of assets, then phone and try to negotiate a better exchange fee.

Mutual funds

• Full range of mutual funds available.

Allow US$ in RRSP accounts

• No, but they allow “wash trades” where you place the trade, call same day, tell them to “do a wash” they will buy a US$ money market fund so there is no conversion.

Free real-time quotes

• Yes

Minimum to open account

• None

Dividend Reinvestment Plans

• Yes

Phone number and automated voice shortcuts

• 1-800-465-5463
• To get through the automated phone tree, just press 2,2.

Some opinions on TD Waterhouse discount brokerage

I asked a few TDW clients their opinion of TD Waterhouse discount brokerage:

My Own Advisor had this to say:

I have been with TDW for over 5 years. I chose TD Waterhouse (TDW) since at the time, I already had many investment accounts with them and I felt it was a logical choice to keep most of my investments under one roof – keep things simple.  That however, was not my only reason.  Other primary reasons for selecting TDW were as follows:

• Fee and commission structure is competitive.
• User interface (EasyWeb for web-banking) is easy to understand and use; from what I understood about their discount brokerage site (WebBroker), it would be no different.
• Customer service is excellent.  Whenever I had a question about my accounts, the setup process, I recall within a few prompts, I was talking to a live representative that answered my questions effectively and efficiently.

What I like about TDW:

• Fee and commission structure remains fairly competitive – I consider them “in the middle”.  Although not trend-setters in this category, they are part of the sub-$10 online stock trading commission community.  Even though I don’t trade often, low-fees are important when I do trade.
• User interface (WebBroker) remains excellent.  Their online views associated with investing and account balances are straightforward.
• Website overall is easy to navigate and very user-friendly.  I find there is no guesswork involved to make your online transactions.  Their stock order-entry process is simple and efficient; within a few clicks, I’m done.
• TDW representatives are professional and customer-focused, they remain so.  Within a few telephone prompts, I’m always talking to a “warm body”, I don’t have to wait long to speak to a representative.
• I can DRIP all the securities I own (stocks, ETFs, REITs) in my registered and unregistered accounts.  As a dividend investor, the reinvestment process is very important to me.
• The real-time quote feature (for stocks, ETFs) is nice.
• The ability to create a portfolio of holdings to monitor/watch is nice.
• Via their Global Trading menu, the ability to have online access to multiple European and Asian stock exchanges is nice.
• eServices menu is excellent, the ability print pdf files of account statements, transactions and tax documents.
• Happy that the account administration fee for a TDW TFSA is waived if your balance is > $25,000 or you sign up for eServices.

What I dislike about TDW:

• Why can’t you have U.S.- dollar RRSPs?  What’s the big deal?   (For example, why not hold my Coca-Cola stock in my RRSP in U.S. funds?)
• It would be nice to see TDW lower their “cheap trade” (sub-$10 commission fee) threshold to $25,000 or $50,000 per household.  This would help many DIY investors.   (I recall I was paying $29 per trade in the beginning, that’s steep – it’s a big deterrent to many DIY investors trying to build a passive, ETF portfolio in their RRSPs).
• TDW charges $100 annually if your registered account such as an RRSP or LIRA balance isn’t > $25,000.  That’s very annoying, especially if you have more than that amount if you added up the balances of all other TDW accounts, such a nonregistered portfolio and a TFSA.  TDW should strongly consider waiving all account fees if the balances of all accounts owned exceeded $100,000 or better still $50,000; provide an incentive for investors to build then maintain portfolios.
• I’d like to see better tools – introduce some features or functions to show yield on cost, long-term performance results of your holdings.
• Include more investment calculators, such as dividend reinvestment calculators.
• Upload some demos or online videos to show how features can be maximized – “taking a tour” is not very learner-centric.
• Get creative going-forward – why not develop better relationships and partnerships with some notable Canadian bloggers as resources?  (Let’s breakdown some of the existing barriers between financial consumers, writers and institutions.)

Potato had this to say:

I’m a current TD Waterhouse customer, I love ’em, and recommend them to all the newbie investors I talk to. The main reasons being e-series index funds and customer service.

• From what I’ve seen of RBC and CIBC, the trading platform is just ok, but does the job for normal occasional traders. No L2 quotes available for normal accounts, and you have to manually hit refresh to see the real-time quotes. From what I know, they do have a separate advanced platform for day traders.
• Customer service is excellent. Phone wait times are a bit longer than with RBC, especially the first week of January when people are phoning in to make in-kind TFSA contributions and clogging up the system, but the quality of the reps makes up for it, especially in helping out new customers. They’ve always gone the extra step for us to solve problems. Examples: one friend set up a Waterhouse account, but forgot to sign up for the electronic statements to get the annual fees waived. When the first fee hit, he called up, explained his stupidity, and they helped him sign up and reversed the charge without asking. They’re very patient with new investors.
• Research is mixed: they do have a good selection of in-house and 3rd-party research available, some market commentary pieces, etc. Their in-house research team generally seems to have their heads on their shoulders. They don’t keep old research reports up though, so if they publish a nice 3-page report on a company, and you want to go back and look at it a month or two later, but in the meantime they’ve published a 1-paragraph note on a takeover or something, the older reports will be gone. They also put all their research from a given day into a single PDF which is kind of weird, but not necessarily bad (makes it easy to grab everything for the day that morning).
• I am paradoxically both an active and passive investor. As an active investor I don’t trade much though. As a passive, I use the e-series funds, which are great for small amounts and regular contributions.
• TD Waterhouse does have some weirdness with cash transfers: even coming from a TD Bank account, the cash won’t show up in your activity/account until the next day. For cash coming from PC Financial, I find it takes 2 or 3 days to show up, and when it does it’s back-dated to the day or day after the transfer was made, which is kind of strange. My friend said his very first transfer from PC to TDW took a full week, with others acting like mine usually do.
• Forex fees are on the high side, I think about 1.5% each way. To help offset that, non-registered accounts can have a USD account to reduce conversions, and registered accounts can wash trades with a phone call.
• I think other brokers have the same service, but you can set up email alerts with them, which will send you an email when a stock crosses a price target you set, and will also forward press releases and articles from the globe in which the company is mentioned.

Jungle had this to say:

• Platform looks rather basic and plain, sometimes simple is better.
• Customer service is amazing, I don’t cringe if I have to call them. I cringe when I have to call Scotiabank.
• Just a few stocks and mutual funds (e-series).
• I’m concerned about the costs from currency conversion and holding usd funds in RRSP.

Plugging Along had this to say:

• I found the trading platform very simple, and easy to use. Not a lot of bells and whistles, but I just want to trade not be entertained.
• Customer service – I LOVE IT. They are easy to get through to. The staff is relatively knowledgable. They were quick to set up my account. Also, when I was over charged on my trades (there was a valid reason), a quick phone call to their centre and it was resolved. They have never argued about charges. I compare them to Questrade, and BMO, and a couple of others where we have not enjoyed working with.
• I don’t use a lot of tools other than the real time updates, and it’s pretty quick.
• I totally recommend TDW, their service is really good.

Scotia iTrade announced that they have just joined the US$ RRSP party. They are a bit late considering that Questrade was the first brokerage to offer a US$ RRSP three years ago and RBC Direct and Qtrade have also offered a US$ RRSP account for some time.

With friends like this, who needs enemies? Anonymous

They are offering a “U.S.-Friendly RRSP”, which is a special program to give a better currency rate for investors selling and buying US$ securities in their iTrade account. This feature is optional and costs $30 per quarter, which of course, works out to $120 per year.

Read my Scotia iTrade discount brokerage review.

Why would you want a US$ RRSP?

Traditionally, all RRSP accounts settled all their trades in Canadian dollars. The problem is that if you sell a US$ security, you have to pay a currency conversion charge when the proceeds get converted to Canadian dollars. This fee can be quite significant.

If you would like to compare the different exchange rates offered by all the Canadian discount brokerages, check out the Canadian discount brokerage comparison.

If you want to buy another US$ security, the money will get converted to US$ again and another currency conversion fee will be charged. Doing this “round trip” can easily cost 3 or 4%, which is a significant drag to your investment performance.

Questrade discount brokerage created Canada’s first US$ RRSP account where you can choose the settlement currency and avoid all currency exchange fees if you are selling and buying US$ stocks. You still have to pay currency exchange fees for new Canadian dollar contributions, but once the money is converted to US$, it stays in US$ and there are no currency exchange fees.  They also accept US$ contributions and no conversion is required.

Read my Questrade discount brokerage review.

Scotia iTrade US$ RRSP still charges currency exchange fees

According to the Scotia website, if you sell a US$ stock or ETF – a Scotia Capital currency conversion rate (SCI rate) will still be charged. I phoned Scotia and a rep told me that this rate will be about 0.5%.

This means that if you sell a US$ stock and then use the proceeds to buy another US$ stock, your total currency conversion cost will be approximately 1.0%.

The regular Scotia iTrade currency exchange rate is 1.5% to 2.0%, which is one of the highest in Canada. The exact rate depends on the size of the transaction.

Under the regular Scotia rates, an investor who sells and buys a US$ security will pay total currency conversion rate of 3% to 4%. With the new “friendly” program, that same investor would pay 1% conversion rate.

A 1% currency conversion rate is far superior to a 3%-4% currency exchange rate. On a $25,000 sell and buy, an investor would save $750 to $1000, depending on the exact exchange rate. Yes, currency exchange fees are that high.

Is the Scotia iTrade US-Friendly RRSP a good deal?

This program is a good deal if an investor meets the following conditions:

• Already a customer at iTrade – This feature is certainly not worth switching to iTrade for. If you are currently paying a lot of money in your RRSP for currency conversions, you should look to Questrade, RBC Direct or Qtrade to save money.
• Savings from lower exchange rate on US$ sell/buys is greater than $120 per year – Even if you are an iTrade investor – make sure you are paying enough conversion fees to make the program worthwhile. If you only purchase Canadian based equities, this program won’t save you any money. Note that the security has to actually trade on a US$ exchange for currency conversion to be relevant. If you own an ETF based in Canada, such as the iShares XSP S&P Index ETF – this trades in Canadian dollars, even though it is based on a US stock index.

If you would like to compare the different exchange rates offered by all the Canadian discount brokerages, check out the Canadian discount brokerage comparison.