With or without TFSA s, Part II

The modest-income family scenario

Recently we did an analysis of a world before TFSAs vs. the world today, that took some flak online. Using a 40-year-old couple with $80,000 of income each, and $100,000 of annual expenses, we concluded they could save $1.1 million of taxes in their lifetime, compared to the world without TFSAs. Readers felt most Canadians do not have household incomes of $160,000.

So let’s see what happens to future income if you lower income to, say, $56,000 each and make the entire scenario more modest? My colleague Asher Tward at TriDelta Financial and I redid the model, in which the family looks like this:

❚ 40-year-old couple, Mary and Peter, with an eight-year-old daughter.

❚ Both working, earning $56,000 each with no pension.

❚ Spending $65,000 a year, growing with inflation. There are small adjustments downward after the mortgage is paid, and after the husband passes away.

❚ Good savers, able to contribute $10,000 each per year to their RRSP in one option, and to their TFSA in the other option.

❚ Home va l ued at $ 6 5 0, 000; $300,000 mortgage. They bought their home 10 years earlier, and put down $40,000, an inheritance from a grandparent.

❚ In the RRSP world, they each have $173,000 saved, and also have $25,000 in non-registered savings. In the TFSA world, they have $130,000 each saved in RRSPs, $43,000 each saved in TFSAs, and $25,000 of combined nonregistered savings.

❚ It is assumed that investments grow at six per cent, inflation is 2.2 per cent and real estate grows at 3.5 per cent.

❚ They both retire at age 58.

❚ Peter passes away at 79, and Mary passes away at 89.

How does it play out, in this Back to the Future scenario, Part II? Actual tax savings are significant. There is now $1.9 million of lifetime tax savings in the TFSA version vs. the RRSP version.

In both scenarios Mary and Peter live comfortably. Their modest lifestyle that they have maintained continued in retirement. While they could have spent much more, or gifted more during their lifetime, this analysis assumes they didn’t.

In 50 years in the RRSP-only model, they have an estate value of $8 million, roughly $2.67 million in current dollars. In 50 years in the TFSA-only model (after age 40), they have an estate value of $9.5 million – or $1.5 million higher in future dollars.

This results from several components, but the biggest is that, with an income of $56,000, the percentage tax savings on RR SP contributions were roughly 31 per cent in Ontario.

When the surviving spouse passes away, they still have $1.7 million of RRIF assets that will get taxed at about 48 per cent. In the TFSA version, their RRIF assets are down to $0 in their early 70s. From that point forward, their tax bill is extremely small.

In a middle class scenario, the TFSA continues to provide sizable benefits. Even if this couple could only save $5,000 each for many years, they still could end up using the full $10,000 of TFSA room if they ever downsized their home, or received an inheritance. The TFSA is not just a benefit for this year, but one for a lifetime of savings and tax benefits. When viewed from a long-term perspective, the TFSA will be of great benefit to a large majority Canadians.

Of course, one question remains – how will future government programs evolve to pay for this?