Anyone not using a RRSP to retire? - Page 5

andrewf · 07-20-2010, 02:15 PM

I meant at a lower income, but pushing the eligibility age back to 67 + is another possibility. Of course this would be a hell of a political fight, given that old people vote.

peterk · 07-20-2010, 09:37 PM

I keep reading that the RRSP works out to be relatively tax neutral, and it's a toss up between that and the TFSA. My own calculations don't seem to agree, and favour the TFSA considerably.
Over a 30 year time line with 6% growth and 3% dividend. You would need a tax return on income in the highest bracket (in Alberta) when you deposit, and be in the lowest tax bracket when you withdraw during retirement to make the RRSP better than the tfsa.
More realistically though, when I start working/saving out of college, I'll be in the second tax bracket, and when I retire, I'll be in the second tax bracket as well. In this case, there will be 11% more money in a TFSA than an RRSP. And I haven't even considered OAS clawback.
Am I doing this too simplistically? Can someone take a quick look at my table and see if I'm missing anything?

Edit: Can't seem to attach an excel file... oh well..

andrewf · 07-20-2010, 09:57 PM

^ Assuming dividends are reinvested gives an assumed 9% return (since dividends are not taxed in either RRSP or TFSA.

TFSA is then just 1.09^30-1=12.27 or 1227% return.

RRSP is (1-tax_ret)*(1/(1-tax_contr))*1.09^30 -1 . where tax_ret is effective tax rate at retirement and tax_contr is the rate at contribution time. As we can see using some simple algebraic manipulation, if tax_ret=tax_contr=t we get:

(1-t)*(1/(1-t))*1.09^30-1
= (1-t)/(1-t)*1.09^30-1
= 1*1.09^30-1=1227% return

You're welcome for the mathematical proof that TFSA and RRSP are identical if the tax rates are the same at contribution and retirement. The main caveat I can think of is US dividends due to the tax treaty, the dividends are treated differently between RRSP and TFSA.

peterk · 07-21-2010, 11:47 AM

Ah, I wasn't reinvesting my dividends.
Also, I'm sure you're right, but why is the new principle increased by Pnew= P/(1-t) at deposit time, and not Pnew = P*(1+t) ? If your marginal rate is 32% will you not get $320 returned in tax on $1000 deposited into an RRSP?

Thanks Andrew!

cardhu · 07-25-2010, 08:38 PM

Quote:

Originally Posted by kcowan

OAS gets clawed back starting at $63k and is totally clawed back by $110k.

Not for couples making effective use of income splitting strategies.

slacker · 07-25-2010, 11:20 PM

I think it is more complicated than this. For one, TFSA is invested via after-tax cash, where as RRSP is invested via before-tax cash. That means you start with a bigger principal with RRSP.

There's also no way to predict what actual tax rates will be when you cash out the RRSP. Whereas the government will most likely honour the "tax free" part of the TFSA.

kcowan · 07-26-2010, 09:56 AM

Quote:

Originally Posted by cardhu

Not for couples making effective use of income splitting strategies.

But then the age exemption gets clawed back for incomes over $32k.

cardhu · 08-06-2010, 02:29 PM

Quote:

Originally Posted by kcowan

But then the age exemption gets clawed back for incomes over $32k

Not for couples making effective use of income splitting strategies.

You have to remember that couples have the opportunity to split income in retirement ... there are various mechanisms for doing that ... and therefore, if there is any "clawback" that is based on individual income, a couple that has planned well can bring in up to twice that amount before reaching the threshold limit ... the incomes that I have been referring to are combined incomes, not individual incomes.

Besides, the age amount reduction is relatively insignificant in the grand scheme of things. People should certainly be aware of it, but planning one's retirement strategy around the avoidance of this minor tax effect seems like much ado about nothing.

07-21-2010, 11:47 AM	#44
peterk Member Join Date: May 2010 Posts: 31	Ah, I wasn't reinvesting my dividends. Also, I'm sure you're right, but why is the new principle increased by Pnew= P/(1-t) at deposit time, and not Pnew = P(1+t) ? If your marginal rate is 32% will you not get $320 returned in tax on $1000 deposited into an RRSP? Thanks Andrew! Last edited by peterk; 07-21-2010 at 01:25 PM.*

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07-20-2010, 02:15 PM	#41
andrewf Senior Member Join Date: Feb 2010 Posts: 466	I meant at a lower income, but pushing the eligibility age back to 67 + is another possibility. Of course this would be a hell of a political fight, given that old people vote.

07-20-2010, 09:37 PM	#42
peterk Member Join Date: May 2010 Posts: 31	I keep reading that the RRSP works out to be relatively tax neutral, and it's a toss up between that and the TFSA. My own calculations don't seem to agree, and favour the TFSA considerably. Over a 30 year time line with 6% growth and 3% dividend. You would need a tax return on income in the highest bracket (in Alberta) when you deposit, and be in the lowest tax bracket when you withdraw during retirement to make the RRSP better than the tfsa. More realistically though, when I start working/saving out of college, I'll be in the second tax bracket, and when I retire, I'll be in the second tax bracket as well. In this case, there will be 11% more money in a TFSA than an RRSP. And I haven't even considered OAS clawback. Am I doing this too simplistically? Can someone take a quick look at my table and see if I'm missing anything? Edit: Can't seem to attach an excel file... oh well..

07-20-2010, 09:57 PM	#43
andrewf Senior Member Join Date: Feb 2010 Posts: 466	^ Assuming dividends are reinvested gives an assumed 9% return (since dividends are not taxed in either RRSP or TFSA. TFSA is then just 1.09^30-1=12.27 or 1227% return. RRSP is (1-tax_ret)(1/(1-tax_contr))1.09^30 -1 . where tax_ret is effective tax rate at retirement and tax_contr is the rate at contribution time. As we can see using some simple algebraic manipulation, if tax_ret=tax_contr=t we get: (1-t)(1/(1-t))1.09^30-1 = (1-t)/(1-t)1.09^30-1 = 11.09^30-1=1227% return You're welcome for the mathematical proof that TFSA and RRSP are identical if the tax rates are the same at contribution and retirement. The main caveat I can think of is US dividends due to the tax treaty, the dividends are treated differently between RRSP and TFSA.

07-25-2010, 11:20 PM	#46
slacker Member Join Date: Mar 2010 Posts: 80	I think it is more complicated than this. For one, TFSA is invested via after-tax cash, where as RRSP is invested via before-tax cash. That means you start with a bigger principal with RRSP. There's also no way to predict what actual tax rates will be when you cash out the RRSP. Whereas the government will most likely honour the "tax free" part of the TFSA.