Blogs & Comment

When RRSPs are better for the young

Answers to financial questions like Where should I invest now? and Should I invest in an RRSP or TFSA? often depend onpersonal circumstances — as a timely post by Mark Barnicutt at the Wealth Stewardhighlighted last week. Articles in the media and blogosphere including mine, no doubt! — often contain generic statements that are applicable to many investors, but not necessarily to all. And as Barnicutt says in his post, the same can be true of recommendations provided by investment professionals.
It thus seems to me there is a risk many investors could end up following advice that may not be appropriate to them. So its a good idea, I believe, for investors to keep in mind that they need tothink things through carefully for themselves. And to consider several different sources of information when scoutingfor answers.
Perhaps one illustration is the argument that young and/or low-income persons should contribute to TFSAs instead of RRSPs. Gordon Pape in The Ultimate TFSA Guidedescribes some situations where the reverse could be true.
1) Young people saving fortheir first home are advised to use an RRSP instead of TFSA. An RRSP allows you to reach your financial goal more quickly because you do not pay tax on RRSP contributions (you get an offsetting tax deduction) and your money therefore accumulates faster.” Papeshows in a table how$3,500 in pre-tax income annually over 6 years yields nearly $8000 more in an RRSP than a TFSA (5% return, 30% tax bracket).
2) Someone under 18 with earned income would open an RRSP (thetax deduction would be deferred until the child is an adult working full time) instead of a TFSA. That’s because there is no age requirement for RRSPs whereas one has to be at least 18 to open a TFSA. I got a kick learning about this: Ive been wondering what to do with the $1,000 my 7-year-old won in a LEGO invention contest last year.