RRSP strategies - wrong advice in the media - Page 2
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Thread: RRSP strategies - wrong advice in the media

  1. #11
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    Quote Originally Posted by steve41 View Post
    Most of 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.
    So referencing my SSRN paper from the top post, on page 3, you think you can get the money out of the RRSP by paying only the same $1,500 as you received as the tax reduction on contribution? That you get to pocket that $2,391 profits earned by the $1,500 in the interim? You disagree with page 9, showing the $3,891 withdrawal taxes always exactly equaling THE SUM of the $1,500 original contribution credit plud all the $2,391 profits earned by it (not matter what rate of return is earned)? See also.

    Quote Originally Posted by OnlyMyOpinion View Post
    So if I have $5k in fixed income and $5k in RY shares, -> Which account should I put the fixed income into and which account should I put the shares into?
    That is like thinking you can decide if a novel is good or bad by reading the last page only. What decides the matter is the actual story of the novel. First learn the RRSP's true benefits, and only then can you maximize them.

    Quote Originally Posted by newuser View Post
    The problem with most of the advice re RRSPs is that a lot of that advice made sense during times of higher interest and before the introduction of the TFSA. Lazy website contributors have be cutting and pasting that same advice even as interest rates approached 0 and after the TFSA became more useful as a savings vehicle.
    No doubt you are referring mainly to the AL of low-yielding treasury debt, that 30 years ago was pay 15% interest. But I disagree that this campaign of misinformation is just laziness. The authors, academics, gov bodies, professional organization are ALL actively teaching false information. They have all been advised of their errors, and ALL simply refuse to change. Today's errors include the very basic misunderstandings like .... 'RRSP's benefit comes from the deferral of tax'. These errors were being taught 30 years ago when I first learned this stuff.

    Last edited by leslie; 2015-10-12 at 01:17 PM.

  2. #12
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    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 01:21 PM.

  3. #13
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    Quote Originally Posted by steve41 View Post
    Again..... the best plan is one which minimizes the PV of all future taxes as well the final one.
    is completely different from your original statement ...
    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
    . 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.

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  5. #14
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    Minimizing the PV of all future taxes is exactly about the time value of money.

  6. #15
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    Quote Originally Posted by leslie View Post
    ... The withdrawal taxes are an allocation of principal between the accounts two 'owners' - you and the government,, not a tax on profits.
    It is a tax on the withdrawal amount, regardless of whether the $$ come from.

    Losing money on an investment so that 100% of the withdrawal is principal doesn't change the amount to be included for income versus 90% from profits and 10% from principal.


    Cheers

  7. #16
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    Quote Originally Posted by Eclectic12 View Post
    It is a tax on the withdrawal amount, regardless of whether the $$ come from.
    No one disputes that, or the other mechanics. But that fact does not provide any understanding of what the RRSP's net benefit is, or how it is created. All the advice I will be quoting on this thread would be perfectly valid IF the author's understanding of the RRSP's benefits were correct. But their understanding of the benefits (not the mechanics) is at fault - so their advice is at fault.

    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 .

  8. #17
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    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.

  9. #18
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    Which stated presumptions do you disagree with?
    These 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.
    SavingsAccounts.png

    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.

  10. #19
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    Quote Originally Posted by leslie View Post
    No one disputes that, or the other mechanics ...
    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."
    Yet where one contributes a set amount, let's it grow (i.e. have profits) and then withdraws from the RRSP with all variables except profit held constant - the tax bill changes based on the amount of profit.

    "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.


    Cheers

  11. #20
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    Quote Originally Posted by leslie View Post
    Which stated presumptions do you disagree with? ...
    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.
    I think I've made the same point in the past ... but as I read it, the "before-tax income" part is great from a perspective of seeing what is happening.

    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.


    Cheers


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