# To RRSP or not?



## prollywrong (Dec 17, 2010)

Hi all

First time poster. Great forums! So...about those RRSP's. I'll start with our financial situation: me, in grad school full time and soon to be a stay at home father for the next four years or so. Wife's annual income 100,000 in healthcare so there is a good pension (fingers crossed). Both thirty-three. Zero debt (no mortgage - we're renting for a number of reasons). We save around 1800.00 a month (and have for a while), but this will decrease during my wife's maternity leave. 

We currently have 120,000 in savings...all of it the in the bank at something ridiculous like 2%. I know - terrible spot for it. I've been 'voluntold' by my better half to research our investment options, so expect a few posts in the investment section on that.

For now, though, I've run the tax savings calculators, and if we max her RRSP with our savings it works out to about 9000 a year in tax savings. This we would put into a TFSA with appropriate investments. My concerns, though, are as follows:

1) Considering the possibility of a good pension from my wife's employer, I'm worried about getting dinged in retirement for withdrawing the RRSPs.

2) Liquidity. We may want to purchase a home down the road (at no more than 2x income, our personal debt tolerance threshold), and having a significant chunk of our possible DP locked into RRSP's worries me. Simply put, I like having a big cash 'cushion' hanging around.

So, any thoughts would be appreciated. Are RRSP's really a good vehicle for someone with a strong pension? Or would we do better to max out the TFSA (currently empty for us both) and start testing the investment waters?

Thanks!


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## MoneyGal (Apr 24, 2009)

You will get a diversity of opinions with respect to both questions. 

I will jump in with two of my own: 

1. Your wife should set up a SPOUSAL RRSP for you with her available contribution room (she may not have a ton of room). If you are worried about leaving funds in the RRSP long-term, you can do some tax arbitrage whereby you remove funds from the RRSP (and have them taxed at your marginal rate) after the 3-year holding period for attributions purposes has passed. 

2. Separate and apart from that, you can set up RRSPs for both of you to hold funds that are later used for a downpayment. This will not be very (if at all) tax-efficient for you, but may be tax-efficient for your spouse. 

In fact, you should check whether withdrawals from a spousal RRSP, established by your wife for you, and used for a downpayment via the HomeBuyer's Plan *and then not repaid* are taxable in YOUR hands or hers. If the non-repaid withdrawals are taxable in your hands (and you remain in a very low or non-tax bracket), you can do tax arbitrage - i.e., shift income from her to you - without waiting for 3 years to elapse. I believe this is how non-repayments to the HBP are taxed but you would need to confirm. 

Finally, RRSPs are not subject to liquidity constraints. There is a big thread on that topic somewhere here (where you will also get a variety of opinions) but the classic definition of liquidity risk is that the funds are not available when you need them. An RRSP held in cash, mutual funds, or ETFs can be liquidated with about 3 days' notice - there's no way that falls into the category of liquidity risk.


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## prollywrong (Dec 17, 2010)

Thanks for your response MoneyGal.

After your suggestion I did a bit of searching on this site for spousal RRSP information. It's an interesting option considering I will likely still be in a non-tax bracket in three years time.

What I like about the RRSP is that it would potentially give us an additional 36,000 (9000 in tax savings over four years of max contributions) to invest. 

Not too gung-ho on buying a house just yet so haven't looked into the HBP; we've had great success keeping expenses low renting and watching savings grow and we're not all that interested in tying up what we have available in a single asset. 

As for liquidity, I guess the real concern was taking a big tax hit if the RRSP's were in my spouse's name and we wanted, for whatever reason, to free up some cash. That risk may not apply if the RRSPs are spousal.


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## steve41 (Apr 18, 2009)

MoneyGal said:


> You will get a diversity of opinions with respect to both questions.
> 
> I will jump in with two of my own:
> 
> ...


 Bingo.


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## GeniusBoy27 (Jun 11, 2010)

I would at least, hope that you have your cash in TFSAs at a minimum.

But at a 2% gain, you're missing out a lot on multiple investment vehicles that generate far more than that. It depends on risk tolerance, but if you've been in the equity market over the past 2 years ... the markets have mostly recovered; and if you timed it, semi-right ... you've made 40% by the TSX.

I don't see why there is a risk adverseness to the RRSP. I would be trying to maximize my tax returns from the RRSP, and in your scenario, put it under a spousal RRSP.


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## MoneyGal (Apr 24, 2009)

prollywrong said:


> As for liquidity, I guess the real concern was taking a big tax hit if the RRSP's were in my spouse's name and we wanted, for whatever reason, to free up some cash. That risk may not apply if the RRSPs are spousal.


You can think of it this way: you would not be subjecting the funds to any *more* taxation than they would otherwise have been subject to had you NOT made the contribution. (That is a pretty terrible sentence, but if you can follow it all the way through, it makes sense.) 

Put another way, you are ALREADY in the situation you say you would want to avoid by virtue of the fact that you are not making RRSP contributions now. In fact, you are in a worse situation, because not only do you face full taxation (because you are not sheltering any of her salary income from taxation by contributing it to an RRSP), you are also paying tax on any gains. 

So one way to look at the RRSP "gamble" is to realize that (ceterus paribus) you will not be any WORSE off by contributing should you need to withdraw funds than you already are. At the very least you will have deferred taxation on those dollars from the time of contribution to the time of withdrawal and (again, ceterus paribus) you will be ahead by the time value of money for the time during which the income was sheltered. 

(I'm kind of barreling along here, using terms like "time value of money" and assuming that if I'm not clear, you will ask for clarification.)


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## prollywrong (Dec 17, 2010)

Thanks for the replies all.

GeniusBoy: Maxing the TFSA and finding investments we can sleep with is absolutely the next step. 

MoneyGal: I think I understand, despite the strange double negative on that first sentence! You've helped a lot with my liquidity concerns.


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## steve41 (Apr 18, 2009)

MoneyGal said:


> (I'm kind of barreling along here, using terms like "time value of money" and assuming that if I'm not clear, you will ask for clarification.)


Example.... would you rather pay $100 in tax now or $200 in tax 10 years from now?


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## steve41 (Apr 18, 2009)

Oh, and BTW.... this has nothing to do with inflation.


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## prollywrong (Dec 17, 2010)

I love Wikipedia:

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.

For example, 100 dollars of today's money invested for one year and earning 5 percent interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.[1] T


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> You can think of it this way: you would not be subjecting the funds to any *more* taxation than they would otherwise have been subject to had you NOT made the contribution. (That is a pretty terrible sentence, but if you can follow it all the way through, it makes sense.)
> 
> Put another way, you are ALREADY in the situation you say you would want to avoid by virtue of the fact that you are not making RRSP contributions now. In fact, you are in a worse situation, because not only do you face full taxation (because you are not sheltering any of her salary income from taxation by contributing it to an RRSP), you are also paying tax on any gains.
> 
> ...


Good point. There is one cost however, you lose the contribution room in this case. For most people, that cost is insignificant since they have too much available.


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## jamesbe (May 8, 2010)

The tax rates are different as wel are they not? 

I was reading about this just the other when I was debating if I should put the money in my RRSP or keep it for my home closing costs.

From what I understood from the gov website.

You lose the contribution room x 2 (the amount you took out and an equivalent amount) this was a HUGE deterent to me. Basically you can't just put it back....

Taxes depend on the amount you withdraw not your income for that year.

I'd have to dig up the numbers again but it was something like:
15% for the first $5000
20% for $5000 - 15000
and 
25% for > 15000

Those numbers are incorrect but it was something of the sorts.

Unless I totally understood their document incorrectly.


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## MoneyGal (Apr 24, 2009)

jamesbe said:


> The tax rates are different as wel are they not?


This is incorrect. Withdrawals from an RRSP are subject to a mandatory withholding tax which may or may not be the correct rate for you for that year. 

If you withdraw from an RRSP, taxes are withheld by the institution and transmitted to CRA on your behalf. Then, just as if this was your paycheque, you record those taxes paid on your T1 when you file your taxes for the year.

If the withholding amount is LESS than you ultimately owe, you will pay and owe the outstanding amount. 

If the withholding amount is MORE than you owe, your final balance will be adjusted downwards by the amount of the overage.


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## jamesbe (May 8, 2010)

Okay thanks for clearing that up.

So really you just lose the contribution room (and potentially some money until you file your taxes although the potential to gain is also there).

The contribution room was a huge one for me as my room is nearly at zero now so I was afraid to lose it and didn't investigate too much further.


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