Here’s the Average TFSA and RRSP at Age 45

The average retirement age in Canada is 65, but some prefer early retirement or a career break at age 45, making retirement planning challenging. The Registered Retirement Savings Plan (RRSP) cannot adapt to such changes, but a Tax-Free Savings Account (TFSA) can.

The average TFSA balance of Canadians in the 45–49 age group is $24,150, as per 2023 tax year data from Statistics Canada. The median RRSP balance for Canadians in the 45–54 age group is between $70,000 to $72,600. Is it right to invest more in an RRSP than TFSA, even when you have ample TFSA contribution room?

TFSA vs. RRSP: When you want to retire at age 45

There is a misconception that only RRSPs can be used for retirement. But in reality, the RRSP balance does not matter much after retirement.

The logic behind the RRSP is that you have a high tax liability during your work life and a lower tax liability in retirement, as you earn less. The RRSP allows you to deduct your contributions from your taxable income. But after you retire, you have to transfer the money into a Registered Retirement Income Fund (RRIF), which will give you a minimum withdrawal that will be taxable.

If you retire early at age 45 and want to withdraw passive income from an RRSP, it will be subject to withholding tax.

The TFSA gives that flexibility. You contribute your after-tax income to your TFSA. Once inside a TFSA, your investments can grow tax-free, and you can withdraw your TFSA balance as per your financial needs, with no minimum or maximum limit, and no taxes.

Understanding TFSA retirement

Let’s take a hypothetical situation. You invested $15,000 in Nvidia (NASDAQ: NVDA) in 2016 and left it to grow. Today, you open your TFSA and see that the amount has become $3.4 million. That’s more than enough for you to retire. You can simply move some of this amount to dividend stocks that pay monthly or quarterly dividends. A 6% yield on $1 million comes to $60,000 annually.

The TFSA is the only account that will make these capital gains and passive income tax-free. And your withdrawals will be added to your contribution room on January 1 of next year. No obligation, but an option to contribute more to a TFSA.

Had this same investment been made in an RRSP, the $60,000 dividend income would attract 30% withholding tax, and you would be under an obligation to recontribute that amount in an RRSP. Thus, the TFSA is a better choice if your financial goal is wealth creation and financial flexibility on your invested amount.

Understanding RRSP retirement

The RRSP has more benefits before retirement than after retirement. The Canada Revenue Agency (CRA) allows you to contribute 18% of your taxable income to an RRSP up to a maximum limit. Whatever you contribute, you can deduct from your taxable income. You can deduct it today or in a future year when your taxable income is high.

A smart investor may accumulate and carry forward RRSP contributions and claim the tax deduction when they realize a major gain from the sale of property or investment. It is a good tax planning tool.

But when it comes to retirement, RRSP withdrawals are taxable. It is simply deferring tax to a date when you withdraw the amount. Technically, you are also paying tax on your investment income. Suppose you invested $15,000 in Enbridge (TSX: ENB) in 2016 through an RRSP and got 316 shares. In 10 years, those shares paid cumulative dividends of $11,074, and their value increased to $24,237.

If you withdraw $16,000 at age 45, you will get $11,200 as your financial institution will withhold 30% tax, even if you fall under the 20.05% tax bracket. While the withholding tax will be adjusted to your tax liability, you have to recontribute that amount to the RRSP as per the schedule provided by the CRA.

RRSP withdrawals are not tax-efficient nor flexible, making dividend stocks a better investment option.