Tax Free Savings Accounts (TFSAs) won’t replace RRSPs for retirement savings

Tax expert, Jaime Golumbeck recently suggested that more people should look at putting money into Tax Free Savings accounts (TFSA) with some examples of how TFSAs might even be more beneficial than RRSPs.

This spurred articles from both Jonathan Chevreau in the National Post (Are Those Maximizing RRSPs Blinded by Tax Refunds), and Rob Carrick in the Globe and Mail (Why TFSAs trump RRSPs for the young and lower paid).

Jaime’s arguments are a little more balanced than the headings might suggest which is why I think people need to know that people should not ignore the RRSPs as a feasible way to save for retirement.

Two reasons why TFSAs might not be the best way to save for retirement.

1. Too easy to access the money for something other than retirement

The way I see it is one of the biggest problems of using the TFSA for retirement funds is the easy access to the savings. In Carrick’s article, he refers to the TFSA as an “all purpose savings vehicle” because you can take the money out and put it back again in a future calendar year. This is great for flexibility or emergencies or holidays but when it comes to saving for retirement, I think it needs to be more difficult to access funds prior to retirement.

It’s become increasingly harder for Canadians to save money, not because of lack of opportunities. But rather lack of discipline. This is precisely why the CPP and pension reform discussion is a big issue today. Statistics and numerous studies suggest no one is saving enough money for retirement in the first place.

If it were too easy for people to access their retirement funds, we might start seeing an even bigger case of retirement anxiety developing in this country. Some say that the RRSP are better vehicles for retirement savings simply because of the psychological tax wall that keeps people from withdrawing RRSPs prior to retirement. In a video interview with Investment Executive, Golumbek argues that this psychological tax wall does not seem to be working since 80% of withdrawal transactions are done before the age of 60 while people are still working. While this may be true, my question is how many more withdrawals might happen if there was no barrier at all?

2. The limits are manageable but many not be enough for retirement

Remember that the TFSA limits are much smaller than the RRSP limits. The limits for TFSAs are $5000 per year per person over the age of 18. They started in 2009 so this year, your total accumulated limit is $15,000. To properly save for retirement, the TFSA alone may not be enough. The first book I ever read on personal finance was the Wealth Barber which said you should invest 10% of your income. For those making more than $50,000 per year, you can’t save more than 10% with the TFSAs alone. And really, maybe this is a non-issue given that savings rates are currently well below 5% let alone 10%.

Retirement planning is personal

The bottom line is retirement planning is personal and I think it is dangerous for anyone to use simple rules of thumb and apply them universally to their lives. I’ve worked with many people where the advice was “Don’t buy anymore RRSPs for retirement. If you want to save, the TFSA is a much better place”.

I’ve also worked with lots of people where my recommendation was “Keep plugging money into the RRSPs. The benefit of the deduction when the money goes into the RRSP outweighs the cost of deduction when the money comes out of the RRSP”. I call this the one formula approach to RRSPs.

RRSPs and TFSAs both have a place for retirement savings. My advice is to start with the RRSPs and see if the tax implications now and in retirement work in your favour. If not, then move to the TFSA. Maybe the best thing to do is buy both the RRSPs and the TFSAs.

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