#1 Canada Tax Tip TFSA vs RRSP

Editor's note: from http://network.nationalpost.com/

by Jonathan_Chevreau

With the annual RRSP season well under way PLUS the second year of the new Tax Free Savings Account (TFSA) program, it's natural enough to ask the question whether one or the other is more suitable. Such is the nature of an "advisory" issued this morning by BMO Financial Group.

We'll get to their arguments in a second, and below reproduce the gist of BMO's analysis, but let me start with my own view that Canadians should do BOTH, with only a few exceptions. I was chatting earlier this week with David Chilton, author of The Wealthy Barber [pictured below] and he emphasized more than once that he thinks Canadians just aren't saving enough. We need to save till it hurts and it makes sense to maximize what little tax-sheltered vehicles that Ottawa sees fit to grant us.

Still, BMO does come to the surprising conclusion that "Canadians are saving more today than they have at any point in the last decade."  Since its introduction a year ago, the TFSA has made great strides: BMO says more than 3.5 million Canadians opened a TFSA in the first six months of 2009, and you have to think the figure is considerably higher today.

Choose Self-Directed TFSAs if you want to double your money in under a century

Saving is a nice start but if you want to have a shot at the retirement of your dreams -- RBC noted earlier this week that only one in four Canadians expects to achieve their dream retirement -- then you have to go beyond just saving and become an Investor, with a capital I. Unfortunately,  something like 90% of TFSAs opened last year were savings account or GIC TFSAs: perhaps because the S stands for Savings, Canadians don't realize that it could just as easily be an I for Investment: i.e. a Tax Free Investment Account or TFIA that could hold stocks, bonds, equity mutual funds or exchange-traded funds and the whole gamut of investment possibilities.

What  you want is a Self-Directed TFSA, which is analogous to a Self-Directed RRSP. This doesn't mean you HAVE to take on stock market risk: you're still free to hold GICs and interest-bearing investments in a self-directed TFSA but you also gain the possibility of investing in a broader range of securities -- including bond ETFs. 
As we noted earlier this week with Franklin Templeton's findings, too many Canadians missed out on the stock market recovery last year -- including all those new TFSA account holders who accepted a paltry return of 1 or 2%, perhaps a tad more, in interest-bearing investments. And money market funds? You don't want to know how many centuries it will take to double your money at their current tiny yields. Yes, centuries, in the plural. More on that in an upcoming column on Saturday.
Herewith a chart produced by the inimitable Tina Di Vito, BMO Financial's director of retirement strategies: