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This is an excerpt fromThe Wealthy Barber Returns: Significantly Older and Marginally Wiser, Dave Chilton Offers His Unique Perspectives on the World of MoneyBy David Chilton. Copyright © 2011 by David Barr Chilton, released September 2011.

Remember when life was simple? You needed to save and invest for retirement, so you opened an RRSP and contributed as much as you could each year.

Sure, the saving part was tough. And, of course, investing always had its challenges. But at least we all knew that an RRSP was the way to go.

Everybody said so. The woman on TV. Your advisor. The Wealthy Barber guy. Even your know-nothin cousin.

Then in 2009, along came the TFSA totally fantastic savings account (or tax-free savings account).

Hmm. Suddenly, a second option to house our retirement dollars. What to do?

Many counsel us to put the maximum allowable amount into both our RRSPs and our TFSAs. For big-income, childless people living rent-free in their parents basements, thats unquestionably solid advice.

The rest of us are probably going to have to prioritize. We need to figure out which vehicle to focus on first.

When you make an RRSP contribution, you get to deduct that amount from your taxable income. The investments inside your RRSP grow free of tax while they stay in the plan. Down the road, however, when money is withdrawn directly from the RRSP or from the registered retirement income fund (RRIF) or annuity to which the RRSP has been converted, it will be taxable.

Im alarmed by how many Canadians still dont fully grasp that last point. Over and over again, I see net-worth statements where the full value of an individuals RRSP is listed on the Assets side, but no corresponding eventual-tax-owing amount is recorded on the Liabilities side.

You may have a $110,000 RRSP but you also have a partner the government waiting patiently for its share. Annoying, but true.

In essence, a TFSA is the mirror image of an RRSP. You contribute after-tax dollars. In other words, you dont get a deduction for your contribution. But once the money is in the plan, it not only grows free of tax, but also comes out free of tax. No tax ever! Fantastico!

If you dont love TFSAs, sorry, youre nuts. But that doesnt necessarily mean you should love them more than RRSPs.

When the federal government introduced TFSAs, it created a chart similar to this one:

* the marginal tax rate the rate of tax charged on the last dollar of income

Ive spent almost two full books trying to avoid number-laden charts, but this simple, little table is quite illuminating. It neatly shows how a TFSA contribution is made with after-tax dollars, while withdrawals are tax-free. And an RRSP contribution is made with pre-tax dollars, while withdrawals are taxable. Yes, Ive already explained that, but I thought it best to repeat.

The chart also demonstrates that if your marginal tax rate at the time of the RRSP contribution is the same as at the time of the withdrawal, TFSAs and RRSPs work out equally well.

Even the numerically challenged can understand that if the marginal tax rate is lower at the time of withdrawal than at the time of contribution, the RRSP will win. Conversely, if the marginal tax rate is higher at the time of withdrawal than at the time of contribution, the TFSA will win.

Easy, right? You just need to guess your marginal tax rate at the time of potential withdrawal and base your decision on that.

Im so disappointed that its not that simple, darn it. I love simple. But sadly, the real world is more complicated than the chart world. Quite a bit more complicated.

In the last chapter, we saw that many of us, if not most of us, contribute to RRSPs with after-tax savings and then spend the refund. I hope the previous chapter changes that, but for right now, thats the way it is. Heck, having some fun with our refund cheque is like playing this years first golf game or gardening on May 24th its an annual Canadian tradition. A rite of spring.

Lets look at a new chart that reflects that reality:

Thats not fair, you might argue. You forgot to include the $400 tax refund that the RRSP contribution generates!

No, I didnt. Its a chair now. Or half an iPad. Or a flight to Vegas.

And thats fine. Im not saying it was squandered chairs are important, especially when youre sitting. But it does mean the $400 wont help your retirement and, therefore, in this scenario, from a financial-planning perspective, the TFSA is a clear winner.

Even when we assume youll follow the first charts lead and contribute to an RRSP the pre-tax equivalent of the TFSA contribution ($1,000 to $600), the comparison is still trickier than it first seemed.

When you withdraw money from your RRSP or RRIF (or receive an income from an annuity to which your RRSP was converted), not only do you have to pay taxes on it, but your increased income could also lead to higher clawbacks of your Old Age Security pension, Guaranteed Income Supplement and other means-tested government benefits.

Yikes, the math here is more complex than the RRSP versus RESP debate. Way more. I dont even drink and I want a beer.

And talk about assumptions! Oh my. Go ahead: Take your best guess at what your taxable income will be 10, 20 and 30 years down the road. What about future tax rates? Will clawback rules be altered? In retirement, will you be able to income split with your spouse or will your spouse already have split with some of your income?

Ive checked out a dozen analyses on the Internet and all that did was reinforce how challenging this comparison is. For example, very few factored in the effect an RRSP contribution can make on the amount of the Canada Child Tax Benefit (CCTB) parents receive. Also, almost all of the researchers assumed every dollar withdrawn from an RRSP or RRIF will be taxed at the marginal tax rate. Think about that its not always the case. If I have $10,000 in government-pension income and receive a RRIF payment of $53,000, its not all going to be taxed at the marginal rate. In some cases, it would be more appropriate to use the average rate of tax on the withdrawal in the calculations.

Thats not nitpicky points like the last one cant be ignored. Theyre vital parts of the evaluation. Unfortunately.

Based on the various assumption sets I used, the TFSA won a surprising percentage of the time (though usually not by a wide margin). In fact, for most low-income earners, it was the victor under the majority of scenarios.

That said, I frankly have no idea which way you should go. At the risk of being branded The Wishy-Washy Barber, I think it would be irresponsible to give a definitive do this. Sit down with your advisor he or she will at least have the advantage of being able to customize the assumptions to your situation. Plus, Im sure there will soon be software or an app developed to help you figure this out. Try to curb your enthusiasm.

My final thought here is important (no, really!). TFSAs are very flexible. You can take money out of one at any time and then put it back in future years. Thats being trumpeted as a huge positive by many financial writers, but it scares the heck out of me.

Im worried that many Canadians who are using TFSAs as retirement-savings vehicles are going to have trouble avoiding the temptation to raid their plans. Many will rationalize, Ill just dip in now to help pay for our trip, but Ill replace it next year. Will they? Its tough enough to save the new contributions each year. Also setting aside the replacement money? Colour me skeptical. The reason I always sound so distrustful of peoples fiscal discipline is that after decades of studying financial plans, I am always distrustful of peoples fiscal discipline. And even if Im proven wrong and the money is recontributed, what about the sacrificed growth while the money was out of the TFSA? Gone forever.

Reminders: (1) If you go the RRSP route, dont spend your refund; (2) If you go the TFSA route, dont spend your TFSA; (3) Whatever route you go, save more!

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