The difference between a Tax-Free Savings Account (TSFA) and a Registered Retirement Savings Plan (RRSP) is that in a TSFA taxes are paid on the income that is contributed but the withdrawals at retirement are tax-free. In an RRSP, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement.
1. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in an RRSP? Assume your tax rate is fixed at 30%.
2. What will be your 20-year retirement consumption stream if you choose to save in a TFSA?
3. Which provides better expected results if you expect your tax rate to decrease from 30% today to 25% at retirement?