A clear winner in the RRSP vs.TFSA debate

There are lots of musings about whether TFSAs are better than Registered Retirement Savings Plans (RRSPs) for retirement savings.

RRSP : Every year, you can contribute the lesser of 18 per cent of your earned income or that year's maximum (currently $20,000 for 2008, and $21,000 for 2009).  If you don't maximize your contribution in any one year, the unused portion carries forward and gets added to your maximum for the subsequent year.

When you file your tax return, you get to deduct the amount you contribute to an RRSP from your income, thus saving the marginal taxes you'd have otherwise paid on your contribution amount. You won't pay any tax on the return you earn while your money remains in your RRSP, but when you take money out it will be added to your income in the year of withdrawal. That's a key characteristic: an RRSP gives you a tax deduction for contributions, but you'll pay tax when you take money out later.

TFSA: allows you to contribute up to $5,000 per year regardless of income, starting in 2009. Any unused contribution amount can be carried forward to future years. You won't pay tax on any return you earn on the money in your TFSA. and although you won't get a tax deduction for the contributions you make, there is no tax payable when you take money out of a TFSA. In that way, it's the opposite of an RRSP. No deduction on the way in, no tax on the way out. It's beautifully simple.