Your TFSA and RRSP are both very powerful engines that can build serious wealth over the long run. Over the years and decades, the two vehicles can really help you take your compounding to the next level, provided you use the right account for the right job. Of course, I’d look to position both one’s TFSA and RRSP for growth.
And while I do heavily favour the TFSA over the RRSP, especially for younger Canadians who are just getting started in their careers and whose income will be rising as expected over time, I still think that it could make sense to take advantage of both vehicles. Though one must understand the nuances of the RRSP and the strings attached, so that no nasty tax surprises hit at potentially the worst possible moments.
Indeed, nobody wants to be forced into a situation where they have to draw down from their RRSPs due to an emergency expense, only to get dinged come tax time. As the name suggests, it’s built for retirement, and when in retirement, your income tends to move lower. Though passive income amounts can certainly change that for some.
Source: Getty Images
If you’re looking for an income engine, the TFSA is my preferred pick
Why? Nobody wants to add to their ordinary taxable income in any given year by drawing an investment down. Of course, the RRSP could make more sense if you’re looking at American dividend payers (think about its ability to side-step the 15% U.S. dividend withholding tax). Yet, at the end of the day, I think it’s most optimal to go for U.S. names for growth and Canadian stocks for value and dividends.
When you consider the Canadian dividend tax credit, a non-registered account also makes a lot of sense, especially for those who’ve maxed out their TFSAs. In any case, for the TFSA, you won’t have to worry about any sort of tax surprises, and if you’re older and retired, you won’t have to fret over the potential for those nasty OAS clawbacks.
Dividend ETFs could be a great fit for a TFSA
Any way you look at it, it’s just simpler and more efficient tax-wise to use the TFSA as an income engine and not your RRSP, which should probably be left alone until you need the cash or you’re officially retired or, at the very least, semi-retired. Flexibility and control matter, and you’ll get that with the TFSA over the RRSP. As for the kinds of stocks to drive TFSA income, I think simplicity is king.
The iShares Core MSCI Canadian Dividend Index ETF (TSX: XDIV) stands out as a quality way to get income and growth. It’s a low-cost one-stop shop for investors who want to set and forget.
With a respectable 21% in year-to-date gains in the books and a promising 3.2% yield powered by some of the TSX Index’s most impressive dividend payers, I’d look no further than the name if you’re looking for balance and a nice amount of income on the side that’s free from the effects of taxation when held within your TFSA.
