Yes. If you are contributing to your RRSP and TSFA in the same tax year, you can be said to be 'in effect' using your RRSP credit/tax refund to add to your TSFA whether you had thought of it that way or not.
Originally Posted by Eclectic12
To illustrate, the $1,500 RRSP 'contribution credit' in the example in post #18 moves to the TSFA, and your RRSP+TSFA accounts in 10 yrs are worth $1,167 more than shown ($19,323 rather than $18,156).
As you suggest, it is also likely that your tax rate will be lower during your withdrawl years. If it is 15% rather than the 30% used in the example, your RRSP+TSFA accounts in 10 yrs are worth $2,529 more after tax than shown ($20,685 rather than $18,156).
While this scenario isn't universal, it is illustrative of our situation, and it is why our RRSP and TSFA accounts have been so beneficial in saving for retirement over the years.
Of course you must read the paper before knowing why it says "The withdrawal taxes are an allocation of principal between the accounts two 'owners' - you and the government -- not a tax on profits". Why presume it has nothing to say?
Originally Posted by Eclectic12
Your other comments about people splurging their spending after contributing to an RRSP and receiving a resulting refund ..... Peoples' free disfunctional choices in life do not determine the benefits of any tax shelter account. The point of advice is to help people see the account's factually true benefits and how to maximize those benefits. The point of advice is NOT to make up false claims of benefits that hide the disfunctional choices .... so that even when people want to make the correct choices they don't have the correct knowledge to do so.
The failure of the experts to educate themselves and the public about #1 on the RRSP/TFSA differences listed at http://www.retailinvestor.org/rrsp.html#tfsa results in a number of errors, from wrongly calculating the Asset Allocation percentages, to wrongly calculating how much need be saved for retirement. But it does not change the true net benefits of the RRSP.
Last edited by leslie; 2015-10-19 at 04:10 PM.
Aren't there three parties involved.... myself, the CRA and my estate?
If I was presuming that, I wouldn't waste my time reading it.
Originally Posted by leslie
The "but" was intended to illustrate the rather large hurdle I see. Specifically - keeping all variables to the scenario the same where the profit varies results in the taxes varying.
This seems similar to saying to someone complaining about dividend income that the income tax is an allocation, not a tax on dividends.
Hopefully, the paper details will sort out if it's semantics or some factor I'm not considering is at play.
If you prefer - the potential benefits versus what is made use of.
Originally Posted by leslie
Sure ... though as stated, the real world numbers are likely different based on behaviour.
Originally Posted by leslie
I would like to thank the author for publishing this information which helps clarify a lot of frequently misunderstood concepts.
Although everyone's situation is different, there is one point that clearly stands out:
People in the lowest tax brackets (less than $44k/year) should never contribute to an RRSP.
The TFSA, touted by our new liberal government as a "tax shelter for the rich", is in fact the best way for low income earners to shelter savings from taxes.
Except that is a generalization which is not necessarily true.
Originally Posted by Jaberwock
It is true if the TSFA is sufficient to shelter all you can save (made less likely with the election of the Libs). But if youhave 'excess' that you can save then using an RRSP can still make sense if you plan and are careful not to impinge on OAS and GIS claw-backs.
Last edited by OnlyMyOpinion; 2015-10-20 at 12:40 PM.
NEW: Mark Ryan in Prince George Citizen
The last section of his article labelled "Low Income Year" is all wrong.
(i) Like many experts he wrongly thinks the RRSP's major benefit comes from a lower tax rate on withdrawal vs contribution. And concludes that you should withdraw cash when given the short-lived opportunity of a lower tax rate. While there is indeed a bonus/penalty from withdrawing at a lower/higher tax rate, the bigger RRSP benefit comes from sheltering profits from tax. When any cash withdrawn early goes into a Taxable account, all this future sheltering is lost. There is a cost/benefit trade off with this decision. Even at retirement, most people will live 20 years so there will be many years of profits to shelter. And the new smaller Minimum Required RRIF Draws keeps the cash sheltered longer than it did a year ago - for a bigger benefit.
(ii) He wrongly thinks that this money in a Taxable account lets you "take advantage of the preferred income tax treatment on capital gains, dividends, and ROC". Paying tax is never an advantage, no matter how low the tax rate. It is always better to pay 0% tax on profits in an RRSP (only one exception for dividends earned in bottom tax bracket). His mistake is to think the RRSP only 'deferrs' the tax on profits - when in fact the RRSP permanently shelter profits.
(iii) He wrongly thinks that the longer you delay paying the withdrawal tax the better (so withdrawing early is a 'prepayment' that loses the time-value-of-money'). This comes from the false idea that the benefit of an RRSP is from 'deferral of tax'. In fact the benefit of an RRSP is not impacted by any delay in paying the withdrawal taxes. Those taxes are funded by the original contribution credit. They grow at exactly the same rate as the account in total grows, and the withdrawal tax liability grows.
NEW #6 - Adrian Mastracci on HoweStreet.com
This article is on Asset Location again. The author basis his advice on the false presumptions that
* "Dividend tax credits are lost in TFSAs and capital losses can’t offset gains outside TFSAs" and
* "Investment income earned in RRSP accounts is tax deferred until withdrawn".
He concludes that
* "Equity investments are best held in Taxable accounts for tax efficiency. Canadian dividends, gains and losses received in these accounts are better taxed versus interest."
* "Interest bearing investments are more suited for RRSP accounts" and
* "TFSA is desirable as all investment income types".
His error is not understanding that profits earned in an RRSP are never taxed, not while in the account and not on withdrawal. The RRSP's benefit from sheltering profits will always exactly equal the same benefit from a TFSA. The RRSP does NOT replace a (yearly preferential tax) on profits in a Taxable account, with a (delayed but fully taxed) profit in a RRSP. So no Dividend Tax Credit or capital gains deduction is lost,
So too capital losses have the exact same impact on RRSPs and TFSAs. Losses reduce the long-run net return you earn in both Taxable and Registered accounts. In Taxable accounts you only pay taxes on the net-of-losses gains over time. So too the Registered accounts only shelter the taxes on those net-of-losses gains. You don't lose the tax-deduction-from-losses'.
He fails to understand that the benefit from sheltering profits from tax grows exponentially with the growth rate of the asset, so the %rate of tax is not the deciding factor. Low-yield debt is not best in an RRSP 'because it is highly taxed'. Debt's low growth is more important than its tax rate. High growth equities, with a lower effective tax rate, produce more benefits in a RRSP/TFSA because as they grow their income grows and the taxes that would be paid grows too.
I really enjoyed your paper. In running various scenarios for clients, I discovered myself that the "early withdrawal while in a lower tax brackets" is not nearly as beneficial as most people think, and as you pointed out can do more harm then good in some cases. Unfortunately most people want a "rule of thumb" but in reality every situation is different. The closest I've been able to come to a rule of thumb is to make early withdrawals such that your taxable income does not exceed the bottom tax bracket, provided you are expected to be somewhere around a 40% or higher marginal tax rate when your minimum withdrawals commence.
To truly have a black and white answer, on top of the other variables you would also need to know exactly when you were going to die. I like to use a long life expectancy (usually age 90) because I find the risk of paying a bit more estate tax in the event you die prematurely preferable to the risk of outliving your money.
NEW #7: Professor Arvind Jain on Canada.com
This professor of finance " likes the RRSP strategy, for example, because the capital invested reduces your taxable income. On the other hand, the earnings in TFSAs aren’t taxed at all. Plus, the interest on TFSAs is set above the expected rate of inflation, unlike other accounts where rising inflation rates may actually eat away at your capital. So a good strategy is to use both. Since you get tax returns on RRSPs, The two happen at different stages in your savings process, RRSPs come first. If you have money, put it into RRSPs. If you have more money, put it into TSFAs " He "cautions that even if you’ve invested the maximum 18 per cent of your earnings in RRSPs throughout a 40-year working life, that money has to last the 30 or so years of your retirement. At that point, it will only be giving you about 25 per cent of what you earned in salary."
I surely hope his finance courses do not include any info on the RRSP because this is all wrong from start to finish.
- The tax reduction from contributions is not a benefit, ever, to anyone, and never a 'reason' to use the account.
- The TFSA is not different in that it shelters profits from tax. The RRSP's benefit from the same sheltering of profits is always exactly equal. He obviously does not know that this is the only RRSP benefit that every one gets.
- There is no interest rate for TFSAs 'set above inflation'. Both the RRSP and TFSA and Taxable accounts can be invested in whatever type of assets you like.
- His order of use is wrong. Although only a rule of thumb, most always it is better to start saving in a TFSA and later use the RRSP, not the reverse. When young you are more likely to be in a lower tax bracket, and you are more likely to need the savings for things like a house downpayment, etc. He obviously does not appreciate the Bonus/Penalty from using the RRSP.
- His claim that saving 18% for 40 years will only fund 25% income replacement for 30 yrs of retirement is just bunk. It will fully fund a 100% replacement retirement. That 25% replacement number comes from the CPP system.
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