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
• Alices 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]

Provincially, the Ontario tax rates are as follows:

5.05% on the first $44,740 of taxable income, + 9.15% on the next $44,742, 11.16% on the next $60,518, + 12.16% on the next $70,000, + 13.16 % on the amount over $220,000[2]

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.

NOTE: All of the analysis provided by you must be your own work and reflect your own original thought.