**For illustration purposes only**
With Alice’s recent promotion, and the twins in school full-time, negating the need for childcare, the Smith’s found they were able to increase their monthly retirement savings by $200.
The question they had was, “where should they direct their savings, given the many choices available. Along with an RRSP, TFSA, and non-registered account, there were also other options such as an RESP, corporation, trust, or a permanent insurance policy.”
To fully appreciate the various tax and cash flow implications of these choices we have built a model that allows us to compare and contrast different strategies. This model shows how an initial $1,000 investment in each of the above options grows over time, and how much it is worth when the funds are withdrawn and the taxes are paid.
By putting all the results into a “heatmap” as pictured below, we were able to show the Smiths how the various options compare as time goes on. With this technique we can also look at potential estate implications so that the risks of taxation at life expectancy can also be considered.
In the graphic below, we compared the virtues of an RRSP, TFSA, and non-registered account for Alice. In her circumstances, the RRSP is the clear winner (greenest option for every year), with the TFSA placing a close second place (green in some years, but light red in others), while the non-registered account placed third (red in most years). Because Alice is in a high tax bracket right now, but expects to be in a lower tax bracket in retirement, it makes sense that an RRSP is a good place to contribute retirement savings, assuming the money won’t need to be accessed in the short-term.
Knowing the financial outcomes meant that we could also focus the discussion on the qualitative characteristics of the various choices, such as when Alice would need to access the savings, especially in the case of an unexpected lump sum expense. We were also able to consider how much would be available to beneficiaries after any remaining tax bill is paid.