Ms. Eli has $10,000 in pre-tax income that she does not need in the current year, but will require in two years to purchase a condo. She is considering whether she should use this money to contribute to a Tax Free Savings Account (TFSA)or a Registered Retirement Savings Plan (RRSP). She expects her marginal tax rate to increase in two years. She expects her invested funds will earn the same rate of return in either account. Which of the following statements is correct with respect to her investment decision?

Question

Quizplus · Accepted Answer

Since Ms. Eli will need the funds in two years, it would not be advisable to invest in an RRSP, as withdrawals from RRSPs are taxed as income in the year of withdrawal. On the other hand, withdrawals from a TFSA are tax-free. Additionally, if Ms. Eli expects her marginal tax rate to increase in two years, investing in a TFSA would allow her to withdraw the funds tax-free when her marginal tax rate is higher. Therefore, it would be best for Ms. Eli to invest in a TFSA. Option A is incorrect, as investing in the RRSP would reduce her Net Income For Tax Purposes. Option B is incorrect, as explained above. Option D is incorrect, as both the RRSP and TFSA can offer benefits, but in this case, the TFSA is the better option for Ms. Eli's specific circumstances.

Ms Eli Has $10,000 in Pre-Tax Income That She Does