Last edited by leslie; 2015-10-12 at 12:17 PM.
Again..... the best plan is one which minimizes the PV of all future taxes as well the final one. Where "taxes" refers to the T1-derived taxes (which change over time with inflation, age credits, clawbacks, etc).
Last edited by steve41; 2015-10-12 at 12:21 PM.
. Nor does it answer my queries. I am gathering though that you have chosen to not read my links from the beginning post, so I'll leave it at that.These guys don't get the 'Time Value of Money' effect, namely.... would you rather pay $200 in tax now or $300 in tax 10 years from now. Depending on the ror, it is very likely that the '10 years from now option' is preferable
Minimizing the PV of all future taxes is exactly about the time value of money.
Your post was to dispute my claim that ..." The withdrawal taxes are an allocation of principal between the accounts two 'owners' - you and the government -- not a tax on profits." Before you can understand the RRSP's net benefits you have to be disabused of the false idea that profits are taxed on withdrawal. Why this is false is explained in the last section of the paper showing the conceptual model .
Chris, While the math may go around, most people are unlikely to consider the 'contribution credit' as part of their RRSP account as you illustrate because they don't actually put that credit directly into their RRSP. Instead, they typically use after-tax employment income to make a RRSP contribution, their tax payable is reduced and they either owe less or get a larger credit (refund) in the spring. Presumably most also realize that this is not 'free' money but rather a tax deferral until withdrawl.
Which stated presumptions do you disagree with?SavingsAccounts.pngThese premises allow for a comparison of Canada’s three main savings accounts.
(i) when comparing the outcomes from using different accounts it is necessary to presume that all savings go into those accounts,
(ii) when wages and living expenses are held constant between options, any option that reduces taxes should result in larger savings,
(iii) the RRSP's benefits accrue only to the dollars in the account.
The form of the chart on page 3 of paper showing the conceptual model is universally used without anyone saying boo. It is universally agreed that savings in an RRSP come from before-tax income. This is because it takes your own personal choices out of the issue. No matter how / when you realize the contribution's reduction of taxes, every RRSP contribution triggers it. It is common to every contribution. It is not dependent on whether you get a tax refund, or what you do with any refund, or any other personal choice. Cash is fungible.
While you claim that 'the math may go around', in fact no one has ever found any argument with the math. No one has ever come up with any math to prove their own ideas of where the RRSP's benefits come from. The spreadsheet for your own variable inputs I linked at the start, challenges you to do so and gives you some help in its Box 5. There have been no takers.
Your claim that "Presumably most also realize that (tax reduction on contribution) is not 'free' money", is not correct. On all 3 web forums to which I have contributed for a decade, the most common mis-understanding invalidating some proposed strategies to maximize RRSP benefits, is this false idea that the tax reduction is a benefit. None of the regulars (other than myself) on any of these sites ever disabuses people of this idea. During RRSP season, I may have to identify this error in a thread every second day. This is the most common claim by all the official Canadian outfits - listed in the paper on page 8.
"No tax on profits" where only the profit is varying should mean no change in the tax bill, should it not?
I'll look at the paper but the math says larger profits withdrawn = bigger tax bill.
In practice, for most people I know - the decision is being made on after-tax dollars going into whatever account. This typically means that the RRSP has the same $$$ in it to grow as the TFSA (and taxable account until the taxes come due). It also typically introduces a delay where the refund $$ are not growing (or growing pitifully).
If the TFSA can absorb the RRSP refund $$$ - it is possible for the combination of the tax free TFSA growth plus a reduced future tax bill for the RRSP withdrawal ending up better than putting everything into the RRSP or spending the refund.