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TFSA vs. RRSP for physicians: 5 case studies

A person sitting at a counter, wearing glasses, and writing in a notebook, while looking at a laptop.

Should physicians contribute to an RRSP or a TFSA? There’s no one-size-fits-all answer: both these vehicles can boost savings and reduce the amount of tax you pay. But to make the most of these savings vehicles, it’s important to know how and when to use them.

The following case studies show how five physicians at different career stages can capitalize on the tax advantages of RRSPs and TFSAs.

Dr. Cruz, age 26, is a PGY1 resident earning about $60,000 a year before tax and deductions. She’s eager to pay down her student debt but also wants to start saving money.

Because Dr. Cruz will likely earn much more later in her career, she might want to delay contributing to her RRSP until she is in a higher tax bracket, when the immediate deduction will be higher, and contribute instead to a tax-free savings account (TFSA) now. At her career stage, she could benefit from the easy access to funds invested in a TFSA: unlike RRSPs, there is no tax on withdrawals from a TFSA. She could even accumulate funds in a TFSA to make an RRSP contribution later.

If Dr. Cruz has more cash to invest than her TFSA contribution room allows, she could contribute it to her RRSP but defer the deduction until she is in a higher tax bracket. Her investment will grow tax-deferred, and when she claims the deduction, she’ll capitalize on additional tax savings.

Dr. Lee, age 38, is married with one child, and her spouse stays at home. She is not incorporated and is thinking about contributing to a spousal RRSP for her husband.

A spousal RRSP would be a smart idea for this couple. Dr. Lee would use her RRSP contribution room and claim the tax deduction against her income. Her husband would own the plan and, when the time comes, he would be the one withdrawing the income.

The spousal RRSP can reduce the couple’s combined tax liability when she retires, because it can shift some income to him and level out their taxable income amounts. If Dr. Lee has more cash to invest than her RRSP contribution room allows, she could also gift money to her husband so he could contribute to his TFSA. This would increase their combined tax-sheltered investments. And because he would own the TFSA, that would also level out their taxable income in the future when they’re drawing on their investments.

Dr. Veilleux, age 40, works at a regional health authority as a salaried medical health officer. She contributes to a defined benefit plan and will have a pension at retirement. But she hopes to travel a lot when she’s no longer working, so she wants to save more. She wonders whether to save in an RRSP or a TFSA.

Dr. Veilleux’s pension contributions reduce her RRSP contribution room, but they don’t affect her TFSA contribution room. Depending how much she wants to save, this may make a TFSA a better bet.

If she were to save money in a TFSA, she could withdraw it tax-free during retirement, and it wouldn’t affect any income-tested benefits like Old Age Security (OAS).

In contrast, withdrawals from an RRSP/RRIF (registered retirement income fund) would be taxable income added to her annual pension and could affect her OAS. For 2022, the OAS starts being clawed back when income is about $80,000 and is fully clawed back by about $130,000. Dr. Veilleux is better off saving in a TFSA.

Dr. Janevski, age 45, is incorporated and invests mostly through his corporate account. He doesn’t have a spouse or children and is mainly focused on his retirement. Should he think about putting more money in either his RRSP or TFSA?

For incorporated physicians, RRSPs and TFSAs have generally become more attractive due to the 2019 tax rules around corporate passive income.

To create RRSP contribution room, Dr. Janevski would need to pay himself a salary (dividend income does not generate RRSP contribution room). Drawing a salary would also reduce his corporation’s net professional income, which would increase the corporation’s ability to earn investment income without consequence. Contributing to his RRSP would reduce the size of Dr. Janevski’s corporate portfolio, thereby generating less passive income, which would make the corporation less likely to be affected by the passive income rules.

Dr. Janevski could also invest in a TFSA. If he took the money out of the corporation to contribute to his TFSA, he would pay tax upfront. But once the money was in the TFSA, all income earned within it would be tax-free, making it a powerful savings tool. 

Over the long term, the benefits of getting tax-free earnings from a TFSA will often be greater than the current tax savings that a physician would get from retaining money in their corporation. And if Dr. Janevski had children, a TFSA would be a good legacy tool. However, in his situation, if Dr. Janevski had to choose between investing in a TFSA and an RRSP, he should go with the RRSP first.

Dr. Kandel, age 62, has been religiously contributing to his RRSP, in part to benefit from the tax deduction. But when he retires in a few years, he thinks all this RRSP/RRIF income will cause him to lose some OAS benefits, which concerns him. He has yet to open a TFSA.

Too much income is a far better problem to have than the opposite one!

It may be best for Dr. Kandel to start drawing on his RRSP now, rather than waiting until he’s 71 when it must be converted to a RRIF. By reducing the size of his RRSP, he will reduce the size of his mandatory RRIF withdrawals, and the impact on his OAS income may be reduced.

If he doesn’t need the extra money he withdraws from his RRSP, Dr. Kandel could contribute it to a TFSA (he will have years of accumulated contribution room). The TFSA will grow in value and provide a tax-free source of income. In fact, a TFSA may help smooth out income from year to year, become a non-taxable component of retirement income, and ultimately evolve into an excellent legacy tool.

Contact an MD Advisor* about making the most of your RRSP and TFSA contributions.

*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.