RRSP or TFSA. No Right Answer.

As a CPA, CA, we were taught to provide recommendations to clients based on the needs of the client. Often this would require getting to know the client first before researching a question and subsequently providing a recommendation. Often, the goal is to save money on tax usually in the short term and if possible the long term as well.

In light of this training, I used to think that every engagement would have a recommendation best suited for the client. However, in my 17 years of practice I have come across some questions that make it extremely difficult to determine what is best for the client. The difficulty lies in the deeper truth that often there is no better or worse rather just different.

Using a practical example, a common question I regularly encounter is whether to put money into a TFSA, RRSP, or something else. Of course the answer to this question is “depends” but even in light of that, I have come to realize from observation of previous recommendations is that there is often no better or worse solution rather just different. This is very true of any choice that we come across in our lives.

Continuing with the example, I used to think that RRSP’s would be best suited for clients under 45 so that they would be able to get the deduction on their tax return in the current year, let the investments grow on a tax deferred basis until the age of 70 and then withdraw the funds in a RRIF to achieve “smoothing”. However, when I bought my first accounting practice in 2013, I came across several clients who passed away unexpectedly. This was unfortunate for the estate because the amount of money remaining in the RRIF is taxed all at once in the year of passing. This is one of the major drawbacks of RRSP savings and is often not considered when tax planning 20-30 years beforehand.

The TFSA on the other hand doesn’t achieve the tax deductions that the RRSP has in the year you put money into it and has no rules on the withdrawal of the funds over a lifetime. In addition, in the year of death, the implications to the estate are nil and planning can be done to identify successors of the TFSA to avoid any tax. Looking at both of the options, there is no better or worse because it requires a prediction of the future.

Now here’s the kicker : what is best for you? Given that we can’t predict the future perhaps the lesson of humility for us as tax planners is that we can’t recommend a solution that suits you best. What we can do, however, is educate you on the various scenarios and ask probing questions to ascertain your preferences as of today. But, the lesson is that there is no better or worse in this case rather different depending on what happens. My recommendation is to get educated on the different scenarios, pick one, then KNOW the outcomes depending on what unfolds in life. That way, you are mentally prepared to not be shocked if your dad has a $500,000 RRIF at 71 and passes away unexpectedly (I experienced that firsthand with my father in 2003).

Surprisingly, if you look hard enough you will find that many of our choices in life today don’t have a better or worse outcome when you factor all of the impacts. If you choose something that gives you an expensive lesson today, rest assured that you will modify your choices (or repeat the same until you do modify) to avoid similar outcomes perhaps avoiding ones more costly in the future than the one you experienced today. At Agustus, we feel it is worthwhile to open up the dialogue, educate you in a time efficient manner, so that YOU can make the decision that you feel is best for you today.

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