Feb 9, 2012

TFSA over RRSP? Probably Not for Game Devs

Image Source: http://chelleyc.uibcsites.com/files/2011/02/TFSA-vs-RRSP.jpg

Since TFSA is introduced a few years ago, there has been good debates on which one one should max out first between TFSA and RRSP.  And nowadays, a lot of financial advisers seem to advise TFSA over RRSP.

I don't think so, at least for game developers, who tend to get easily laid off, thus forced to be out of the job, compared to people in other industries. (TFSA over RRSP might make sense for people in other industries, but I don't really care).

Okay, here is the deal.  You can buy up to 18% of last year's income.  Let's say you make $100,000 am year. (for easy calculation)  If you don't buy RRSP, you will be taxed $25,454 in BC according to this online calculator whether you buy TFSA or not.  But if you max out your RRSP($18,000) you will only be taxed $18,623.  So $6,831 saving.

Sure, you pay tax when you withdraw the RRSP, but based on the income of the year when you make the withdrawal.  That's what makes RRSP a better choice for game developers.  Say, you get laid off next year and you are out of the job for 6 months.  Then your income and tax will be $50,000 and  $8,848.  You think this is not enough money to pay all your bills.  So you withdraw RRSP, $18,000.  Then your income and tax become $68,000 and $14,194.  It's $5,346 extra tax for you for that year.

Since you saved $6,831 last year, but paid $5,346 this year your overall saving is $1,485.  If you had put $18,000 in TFSA, do you think you can make $1,485 / $18,000 = 8.25% return?  Doubt it.  So to me, RRSP is a better choice in this industry.  Well, maybe you haven't laid off so far, but it can happen anytime even if you are super competent.  Sometimes, companies have to lay off people to show investors they are doing something to turn around.


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