Identify any assumptions made

Reference no: EM133430598

Question: Three friends, Jenna, Michael & Alice are debating whether an RRSP or a TFSA would be a better choice for them. Each of them is the same age (e.g. 40 years old) and is saving for a goal that is 15 years into the future (retirement). Jenna has an income of $100,000, Michael has an income of $70,000 and Alice's income is $40,000. After the target date, Jenna expects to have an income of $70,000, Michael expects to be earning about the same and Alice expects to be earning $70,000. Assume they planning to contribute $5,000, and they face different income tax brackets based on their income levels. For example, the Federal Tax Rates for 2020 are as follows:

Federal tax rates for 2020

15% on the first $48,535 of taxable income, plus
20.5% on the next $48,534 of taxable income (on the portion of taxable income over 48,535 up to $97,069), plus
26% on the next $53,404 of taxable income (on the portion of taxable income over $97,069 up to $150,473), plus
29% on the next $63,895 of taxable income (on the portion of taxable income over 150,473 up to $214,368), plus
33% of taxable income over $214,368[1]

Assuming they use the tax refund generated from RRSP contributions to re-invest into their RRSP, which vehicle would be the best choice for each of Jenna, Michael and Alice? Assume they live in Ontario and will earn the same return (e.g. 5 percent) in both vehicles. Identify any assumptions made. Your conclusions should focus on the reason(s) for selecting a RRSP or TFSA, including tax implications of a changing income level, and not just focused on calculations.

Reference no: EM133430598

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