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RRSPs are a better choice than TFSAs if you expect your tax rate to drop when you check out of the work force.

The Globe and Mail

I have a chunk of money to invest. Am I better off contributing to my registered retirement savings plan or my tax-free savings account?

With the March 1 RRSP deadline approaching, it's a question on the minds of many Canadians. Although everyone's situation is different, a key consideration is whether you expect your marginal tax rate to be higher, lower or about the same in retirement.

If you expect your tax rate to drop when you check out of the work force – as many people do – RRSPs are generally the preferred choice. That's because you will be handing over less tax, per dollar, on withdrawals than the tax you saved when you made your RRSP contribution. In effect, a lower tax rate in retirement supercharges the aftertax return of your RRSP.

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"This is particularly likely if you are a baby boomer in your peak earning years and expect lower income when you are no longer working," Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce, said in a recent report.

On the other hand, if you expect a higher marginal tax rate in retirement, a tax-free savings account might be the better choice. A TFSA might also be more appealing if you expect to face a clawback of your Old Age Security or Guaranteed Income Supplement benefits. That's because TFSA withdrawals are not added to your income, which determines these benefits (but remember, TFSAs, unlike RRSPs, do not generate a tax break on contributions.)

Finally, if you expect your marginal tax rate to be the same in retirement as it is now, then the aftertax return of an RRSP and TFSA will be identical (all else being equal). One area where I would give the TFSA the edge is in flexibility: You can make tax-free withdrawals from a TFSA at any time, and your contribution room will be restored the following year, in addition to receiving your new annual allotment (currently $5,500).

But, all things considered, "RRSPs are, for many individuals, the best way to save for retirement," Mr. Golombek says. (Read his PDF In Defense of RRSPs or view it online.)

I have a U.S.-dollar trading account where I have traded stocks for many years and occasionally added funds in U.S. dollars. I know that I have to convert the buy and sell amounts into Canadian funds to establish my capital gains/losses using the exchange rate on the settlement dates. My question is: what happens when I eventually close my account and convert it all back to Canadian dollars? Do I have to establish if there was a currency gain/loss from the day I opened the account in U.S. dollars to the day I convert all the funds into Canadian dollars?

No. If you have been buying and selling U.S. stocks and reporting the capital gains and losses along the way in Canadian dollars, then you do not need to go back to the beginning and report currency changes a second time when you close your account. When you eventually sell your current U.S. holdings, you would do what you have always done: report the capital gains or losses based on the purchase and sale prices of those securities in Canadian dollars. Technically, you are also supposed to report any currency-related capital gains or losses on U.S. cash when it is converted back to Canadian dollars, but for currency transactions the Canada Revenue Agency only requires you to report the amount of your net gain or loss for the year that is more than $200. "If the net amount is $200 or less, there is no capital gain or loss and you do not have to report it on your income tax and benefit return," the CRA says. (For more on this topic, read my two-part columns here. Part 1 and Part 2.

Where can I find an update of your model Yield Hog Dividend Growth Portfolio?

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Globe Unlimited subscribers can view monthly updates at tgam.ca/dividendportfolio (it sometimes takes a day or two after the end of the month to get the results up). I also write about the portfolio occasionally in my weekly Yield Hog column.

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