# RRSP or TFSA for our pension situation



## Snafzg (Feb 11, 2016)

Please help me with this math and decide whether its better to invest in RRSPs or TFSAs. 

I'm not sure how indexing for inflation affects my numbers. I also have no clue exactly how much we will be earning over the next 25 years of employment salary-wise or what the tax rates will be, therefore, I'm using today's numbers for calculations.

My pension is with OMERS (indexed) and my wife's is with OPTrust (non-indexed). 

We both plan to retire at our unreduced factors with 60% income.

I'm currently making $96,000 per year at a marginal tax rate of 43.41%. If we fast-forward to retirement age using the same numbers, I'll have a $57,600 annual pension, which puts my tax rate at 29.65%. Add in my projected $1,662 CCP + OAS monthly income, that puts my retirement salary at $77,544 at a 31.48% tax rate. To me, it looks as if investing in RRSPs will work 11.93% in my favour. How much will indexing affect my retirement income? Will it be boosted, therefore, reducing the gap in income tax rates? Will I be affected by any clawbacks?

My wife is currently at $74,000 per year at 31.48% income tax. Fast forward to a 60% pension using these numbers and she'll be at a $44,400 salary taxed at 21.45% rate. Adding the CCP and OAS, boosts her salary to $64,344 or 29.645. Looks like RRSPs put her ahead by only 1.835%.

Using these numbers, it appears that I would benefit more from RRSPs than, while its more of a toss up for her.

If we invested $5500 each into retirement savings annually, would you recommend me investing in the RRSP (and then re-investing the kickback into a TFSA) and her solely into a TFSA to maximize the benefits of both? What I dislike about the RRSP is that it could have a couple hundred thousand dollars in it taxed heavily to my estate in the event that both of us die -- or her being taxed quite heavily on it if I die sooner.

It might look like we have more money than that to invest, but we put into RESPs and want to pay off our mortgage quicker. We also like to enjoy our family time together with a summer property as well as a sunny vacation every year or two.

Thanks in advance!


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## lonewolf (Jun 12, 2012)

Pay off mortgage first then RRSP & TFSA unless you think you will loose high paying job in the down turn. The bank will tell you put in RRSP to collect interest from mortgage & make money off your investments.


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## Eclectic12 (Oct 20, 2010)

Snafzg said:


> What I dislike about the RRSP is that it could have a couple hundred thousand dollars in it taxed heavily to my estate in the event that both of us die -- *or her being taxed quite heavily on it if I die sooner.*


I will look at the other details later but for now, I'd say get off your butt and have her named as the RRSP beneficiary. It won't help for the situation where you both die but it will mean that your RRSP will pass to her *with no tax implications*.



> Your spouse as the beneficiary
> 
> The spousal rollover provision allows a spouse that is listed as the beneficiary to *rollover the amount of the deceased’s RRSP into their RRSP without any tax consequences.* Obviously for planning purposes, it is wise in most cases to list a spouse as a beneficiary.


http://retirehappy.ca/what-happens-your-rrsps-when-die/


Sorry if it sounds like I am attacking you ... but I find it mind boggling that this info has been true for a long time, has been available for a long time and yet a step that seems basic has not been investigated.


Cheers 


*PS*

Make sure you have named your wife as "successor annuitant" or at least as beneficiary for your TFSA to avoid similar tax issues.
http://www.theglobeandmail.com/glob...ay-tax-on-my-tfsa-after-i-die/article4574575/


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## lonewolf (Jun 12, 2012)

I also like to save TFSA room for high confidence low risk high potential trades which are not on the table for 2016 unless you can play the bear.


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## Eclectic12 (Oct 20, 2010)

Snafzg said:


> ... If we fast-forward to retirement age using the same numbers, I'll have a $57,600 annual pension, which puts my tax rate at 29.65%. Add in my projected $1,662 CCP + OAS monthly income, that puts my retirement salary at $77,544 at a 31.48% tax rate.


Is there going to be some time before you start CPP and before OAS starts?

For example, does the OMERs pension start at age 58 where CPP is planned to be started age 65, leaving around seven years where income might be lower?
With the 60% OMERs pension, is there a bridge benefit that would add more $$$ to the pension for those seven years, until CPP starts?
http://www.financialpost.com/Sooner+later+When+start/1667318/story.html




Snafzg said:


> ... To me, it looks as if investing in RRSPs will work 11.93% in my favour.


Are you factoring in the increasing RRSP/RRIF minimum withdrawals?
http://www.taxtips.ca/rrsp/rrifminimumwithdrawal.htm




Snafzg said:


> ... How much will indexing affect my retirement income? Will it be boosted, therefore, reducing the gap in income tax rates?


Check the OMERs pension details ... for example, my DB pension is only something like 30% indexed, unless I contribute extra money to a supplementary plan to buy full indexing.
I suspect OMERs is fulling indexed but have not looked into it.




Snafzg said:


> ... Will I be affected by any clawbacks?


I suspect there will be no way to avoid GIS being eliminated but OAS is not so clear.

Then too, do you have any taxable investments as this will also add to one's income. Eligible dividends are partially an issue as one dollar received from this type of income counts as something like one dollar thirty eight cents for the income tests, before the dividend tax credit reduces the taxes assessed.

Beyond that ... there are not enough details to do more than guess at this point.


Cheers


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## Snafzg (Feb 11, 2016)

Eclectic12 said:


> I will look at the other details later but for now, I'd say get off your butt and have her named as the RRSP beneficiary. It won't help for the situation where you both die but it will mean that your RRSP will pass to her *with no tax implications*.


Sorry, she is definitely the beneficiary already. What I meant is that the difference in her marginal tax rates from now to retirement looks to be quite low, therefore, withdrawing extra from my RRSP would be taxed at a higher rate, correct?

As for the other questions, we're sitting at about $15,000 in each RRSP account that we contributed to when we were younger and roughly $9,000 in each TFSA (about $46,500 cap room left). We have a $365,000 mortgage at 2.59% fixed for the next 4 years and 6 months, but we put 20% down to avoid CMHC fees, so have some equity there. We're sitting on about $16,500 in cash in our checking account and unsure where to put it. We have about $800 per month extra for investments combined.

I come from a family that is pretty anti-market investment and strongly urge that we pay off our mortgages ASAP and invest in real estate instead of giving other people our money and riding the market roller-coaster... My father and his friends are quite jaded after investing into RRSPs for about 40 years and seeing pitiful returns on their money -- granted that was due to either bad timing or bad advisors imho.


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## Snafzg (Feb 11, 2016)

Eclectic12 said:


> Is there going to be some time before you start CPP and before OAS starts? For example, does the OMERs pension start at age 58 where CPP is planned to be started age 65, leaving around seven years where income might be lower? With the 60% OMERs pension, is there a bridge benefit that would add more $$$ to the pension for those seven years, until CPP starts?
> 
> Are you factoring in the increasing RRSP/RRIF minimum withdrawals?
> 
> ...


We can both retire at 58 years old unreduced. I will have to look into bridge benefits. I suspect there are none.

I was not factoring in RRSP/RRIF minimum withdrawals. I will check those numbers, thank you.

Again, I am not too up to date on my pension details, so I will check for full indexing. I have heard from my coworkers that it is fully indexed though.

I doubt we will qualify for GIS. OAS seems to be on the borderline for me.

We have no further taxable investments at this time, though we are considering foregoing RRSPs and TFSA's both an investing in a rental property instead, but that's an entirely different bees nest.

Thanks for your advice and resources.


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## Eclectic12 (Oct 20, 2010)

Snafzg said:


> Sorry, she is definitely the beneficiary already. What I meant is that the difference in her marginal tax rates from now to retirement looks to be quite low, therefore, withdrawing extra from my RRSP would be taxed at a higher rate, correct?


I am having trouble understanding what the question is. The text referred to your death, which if she is the beneficiary where your RRSP rolls into hers ... there won't be "your estate" or "from my RRSP" involved. 

I suspect the better question is "won't her RRSP doubling or whatever in value cause tax issues"?


If her tax rate is going to be lower in retirement, why would she want to start withdrawing from her larger combined RRSP before retirement?
Then too, if her pension pays less and for example, does not pay a bridge benefit to cover from a say age 55 retirement to age 65 CPP starting to be paid ... why wouldn't she consider retiring early, allowing the larger combined RRSP to be drawn down at a low income level?


If she waits until *her* retirement, then the baseline pension income is lower than yours ... so other than thinking through how to work out any remaining years of employment, I'm not sure the tax rate differential is what should be the primary concern.

Worst case ... after maxing the TFSA then likely tax preferred investments (CG or eligible dividends) until retirement then (CG as much as possible) is likely the way to go.
Then too, she could do what my mom has done, take some of the after-tax dollars that are considered excess to pass on to kids, grand-kids etc., avoiding income tax as well as possibly probate taxes down the road.

Or one can investigate setting up a trust so that after death, loved ones or charities are provided for in a tax advantaged way (not sure this makes sense but it is an available choice).


While it does require planning ... is there really a problem big enough to consider "her RRSP doubles or so on my death" as a huge tax issue?




Snafzg said:


> I come from a family that is pretty anti-market investment and strongly urge that we pay off our mortgages ASAP and invest in real estate instead of giving other people our money and riding the market roller-coaster... My father and his friends are quite jaded after investing into RRSPs for about 40 years and seeing pitiful returns on their money -- granted that was due to either bad timing or bad advisors imho.


That's where IMO one has to take as much info as possible into one's situation but I'd rather be working off a plan I'm comfortable with ... not what others are worried about. It's great to have a relative point out that maxing RRSPs in GICs and savings accounts over approximately forty years gave pitiful returns (my relatives comments) but I am not avoiding GICs/bonds/HISA's based on that tidbit.

Then too, my father was anti-market, did buy several houses for rent but was a lot of work that the last two properties didn't turn out (losses and a sale that was blocked by court order because of issues on the buyer's end). It has made me aware of the work as well as some risk but it does not push me away from investing in the markets or RE.


Cheers


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## NotJustDreaming (Oct 20, 2013)

*Bridge Benefit*
Your OMERS pension statement shows the amount of pension earned to date that you'll receive at your Normal Retiremnt Age (NRA) until age 65. That amount includes a Bridge Benefit. The OMERS statement also provides the pension amount you'll receive from age 65 onward which is less the bridge benefit. The two pension numbers are because OMERS is completely integrated with the CPP. OMERS bridges the gap between your NRA and age 65 when CPP is often taken.

Of course you have early retirement benefits as well with OMERS. You can retire within 10 years of your NRA. The bridge benefit starts as soon as you retire.

Given the numbers you provided (96,000 income with 57,600 pension) it looks like you're just multiplying 30 years service X 2% per year X 96K. You can obtain a pension estimate from the myomeres.com website. 

Assuming your NRA is age 65, you can leave as early as age 55 minus a possible penalty.

*Indexing*
OMERS pensions are fully indexed up to 6% in a given year. If inflation is over 6% the indexing will be carried forward to a year with lower inflation for 'catch up'.

*Pension Splitting*
Your OMERS pension qualifies for pension splitting. That is, you can split up to 50% of your pension with your spouse thus reducing overall taxes. I think you should factor that into your tax calculations.

*Spousal RRSP*
You didn't mention them and from your posts I assume you don't have them. So long as she is expected to stay in a lower income and non indexed pension, IMO you should contribute any of your own RRSP contribution room to a Spousal RRSP. This will allow some future income splitting. You get the RRSP tax deferral and the cash is withdrawn and taxed by your wife.

*P.S.*
RRSPs are just a vessel that you put investments, cash etc in. RRSPs were not responsible for the poor performance experienced by your family. 

I think it's great that you're investing outside your pension. Very few of my coworkers have assets aside from their house. They're just planning on working until they reach a full pension and rely on that income alone.


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## Eclectic12 (Oct 20, 2010)

Snafzg said:


> We can both retire at 58 years old unreduced. I will have to look into bridge benefits. I suspect there are none.


I expect OMERs will have a bridge benefit (which the link below seems to confirm), the OPTrust I suspect not.


> While your lifetime pension is paid for life, the month after you turn 65 OMERS bridge benefit ends and will be taken off your pension payment. Just before you turn 65, you will receive a notice from OMERS detailing the change to your pension.


http://www.omers.com/pension/Turning_65.aspx

*Edit:*
If I have right web link, then OPTrust is an OPSEU pension which seems to have the bridge.


> With this type of early retirement, your pension is calculated using the pension formula, *including the CPP bridge up to age 65.* This amount is then reduced by 5% for each full and partial year you are under age 65.


http://www.optrust.com/Publications/Booklets/Its-Your-Pension/when-can-you-retire.asp




Snafzg said:


> I was not factoring in RRSP/RRIF minimum withdrawals. I will check those numbers, thank you.


All part of the pension, taxable investments, TFSA tax free and pension income puzzle.




Snafzg said:


> I doubt we will qualify for GIS. OAS seems to be on the borderline for me.


Possible ... but I am not sure it is for sure. Today, the clawback of OAS benefits starts with a net income of $67,668 and it completely eliminates OAS with income of $109,764. There should be at least part of the time some will be paid. Then too, a move here or there could extend how long it is.




Snafzg said:


> We have no further taxable investments at this time, though we are considering foregoing RRSPs and TFSA's both an investing in a rental property instead, but that's an entirely different bees nest.


It looks like there's an emergency fund of cash but nothing else. If this is the same in retirement, there looks like there is headroom even when CPP and OAS are being paid to end up at the same income level as today (though the wild card is what income tax rates are at).


Your mortgage interest is not tax deductible so the earlier it is paid off, IMO the better.


Cheers


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## Snafzg (Feb 11, 2016)

Thanks for all the thought-provoking advice. I clearly have a lot more research to do. Goes to show that a little knowledge can hurt a lot, hah.


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## Eclectic12 (Oct 20, 2010)

From what I observed ... the part that can hurt is discovering one could have made better moves but as it is too late, one is locked into paying the gov't more than one needs to in taxes.

Don't get me wrong, I am not looking to gyp the gov't but at the same time, enough is paid so that I want to do what I can to ensure I pay no more than necessary. :biggrin: 



Cheers


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## OhGreatGuru (May 24, 2009)

FYI: like most government and many large private pension plans, OMERS features "Coordination of Benefits" with CPP. If you retire before age 65, part of your pension will be a "bridge benefit" that will approximate your CPP entitlement if most of your work history has been with OMERS. This bridge ends at age 65. (They aren't robbing you - your contribution rates to OMERS take into account your contributions to CPP) So don't count on adding CPP on top of your pension at age 65.


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## supperfly17 (Apr 18, 2012)

Would this statement be true?

"Anyone with a DB pension is better off putting money into the TFSA first, and anything left-over can go in to the RRSP"


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## NorthernRaven (Aug 4, 2010)

Eclectic12 said:


> Today, the clawback of OAS benefits starts with a net income of $67,668 and it completely eliminates OAS with income of $109,764.


Is this current? 2015 tax year clawback threshold seems to be $72,809.



supperfly17 said:


> Would this statement be true?
> 
> "Anyone with a DB pension is better off putting money into the TFSA first, and anything left-over can go in to the RRSP"


It would depend on the marginal tax rate now and anticipated at retirement withdrawal, wouldn't it? There could be advantages to getting the tax refund now in a high bracket, and getting compounded returns on it for many years, then withdrawing it at a lower marginal.


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## Eclectic12 (Oct 20, 2010)

supperfly17 said:


> Would this statement be true?
> "Anyone with a DB pension is better off putting money into the TFSA first, and anything left-over can go in to the RRSP"


My co-worker's pension that would start paying $30K means "go TFSA first is best?" 
Keep in mind he is in the 40+ % tax range at the moment.

He seems a poster child for using the RRSP first (actually, Spousal RRSP first, RRSP second, TFSA third and taxable last). 


Meanwhile, my former co-worker who made big $$$ as an actuary then switched over to be a teacher early in his career so that the DB pension and goodies are going to be large is likely the poster child for "TFSA then taxable and skip RRSP". 


That is the trouble with general statements ... great to give one ideas but the real world may shift the picture. Little things like employment history, DB pension benefits earned, other sources of income and such are important.


DB pensions are like mortgages ... the term gets thrown around as if they are identical but reading the details can paint a completely different picture.


Cheers


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## Eclectic12 (Oct 20, 2010)

NorthernRaven said:


> Eclectic12 said:
> 
> 
> > Today, the clawback of OAS benefits starts with a net income of $67,668 and it completely eliminates OAS with income of $109,764.
> ...


Reviewing the thread .... I don't see this quote so it is hard to reconcile the date. The 2011 threshold was that number so I assume I posted it in 2011.

The threshold is indexed so for 2015, your figure is accurate and higher.




NorthernRaven said:


> It would depend on the marginal tax rate now and anticipated at retirement withdrawal, wouldn't it?


Yes ... but the DB pension benefit as well as the other sources of income (ex. gov't pension, investments) are all going to play into the situation.

Some of my co-workers have changed jobs so their DB pension won't have all that much of a payout but the proceeds from their other pensions mean they have a fair amount in the RRSP.

Or as indicated in post # 16, having big $$$ flowing into the RRSP then joining a high paying DB pension early enough to max out likely fits the "TFSA first" situation.

I know someone else who in theory, should also avoid the RRSP due to a high paying DB pension. Switch "RRSP" for "Spousal RRSP" where their spouse has nowhere near the same income then a spousal RRSP jumps to the front.


This does not seem a cookie cutter situation to me as I know of so many variations ... just for the DB pension (ex. DB pension where only the employer contributes).


Cheers


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## supperfly17 (Apr 18, 2012)

Eclectic12 said:


> My co-worker's pension that would start paying $30K means "go TFSA first is best?"
> Keep in mind he is in the 40+ % tax range at the moment.
> 
> He seems a poster child for using the RRSP first (actually, Spousal RRSP first, RRSP second, TFSA third and taxable last).
> ...


All good points, thank you. My line of thinking is that I would rather pay more tax now in my working years hence going with TFSA. Also easier to use the funds from the TFSA and not have to pay it back, etc.

But i guess its situation dependent. 

Cheers.


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## Eclectic12 (Oct 20, 2010)

supperfly17 said:


> All good points, thank you. My line of thinking is that I would rather pay more tax now in my working years hence going with TFSA.


Use TFSA only ... contribution $5K, where at a 30% tax rate, this was $6.5K of taxable income.

Use RRSP + TFSA ... contribute $5K to the RRSP, get the tax previously paid of $1.5K back then contribute to the TFSA ... assets are $6.5K which matches the same $6.5K of taxable income.


What is it worth to have the use, tax free going forward of the $1.5K in exchange for a future tax bill that likely is when one's income is lower?

How likely is it that when withdrawn in retirement, all sources of income (ex. investment income plus pensions [including CPP, OAS, company] ) will be higher than when the contribution was made, where one has no choice but to withdraw the full amount?


Keep in mind that where one is like my co-worker - his RRSP contribution is being taxed at 40+%, his spouse is at 20% so the spousal RRSP pretty much is locking in around a 20% drop in the taxes (based on today's rates, which is all we have), where the full $$ can be invested.




supperfly17 said:


> Also easier to use the funds from the TFSA and not have to pay it back, etc.


This is why I use both ... no need to mess with the RRSP rules or with holding taxes or pay back schedules unless the need is so great it is worth it. But for the need to be that great ... the income should be much lower than while employed so it should work out to one's benefit.




supperfly17 said:


> But i guess its situation dependent.


Situation plus income changing over time dependent ... I can only think of a few people who are making the same or less close to retirement age than they were when they started out.

IMO the key is to keep familiar with how it works, any small changes and keep checking ... the TFSA may be better today (ex. build emergency fund, need something expensive in a couple of years) but nothing prevents the RRSP to be a better choice in the future or a split.


The assumptions are great to explain how each plan works ... but real life tends to change far more dramatically.

Cheers


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## supperfly17 (Apr 18, 2012)

Eclectic12 said:


> supperfly17 said:
> 
> 
> > All good points, thank you. My line of thinking is that I would rather pay more tax now in my working years hence going with TFSA.
> ...


That was well explained. 

I have strictly been using a TFSA.

My income 90-95k with a DB pension (HOOP) 
Wife income 65-70k with a DC pension (Sunlife)

Age: 31 and 30.

Certainly income will be less at retirement. My line of thinking is that i wanted to pay less tax at retirement and keep more $, hence why we are using the TFSA. And also loved the agility of the TFSA ie can withdraw anytime.

Perhaps I need to look at the #s again.


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## Eclectic12 (Oct 20, 2010)

supperfly17 said:


> That was well explained.


Thanks ... at times I've used too much detail but it seemed appropriate.




supperfly17 said:


> I have strictly been using a TFSA.
> 
> My income 90-95k with a DB pension (HOOP)
> Wife income 65-70k with a DC pension (Sunlife)


I believe HOOP is one of the better paying pensions so the spousal RRSP may be a better choice. Another poster said that the pension splitting makes the spousal RRSP less of a benefit ... but IMO, the pension splitting is more likely to be changed in the future than the Spousal RRSP. I don't know enough about the pension splitting as most of my co-workers have talked about the spousal RRSP.




supperfly17 said:


> Certainly income will be less at retirement. My line of thinking is that i wanted to pay less tax at retirement and keep more $, hence why we are using the TFSA. And also loved the agility of the TFSA ie can withdraw anytime.
> 
> Perhaps I need to look at the #s again.


With the spouse's income lower as well as the DC pension subject to investment fluctuation ... I would want to be using it.

Another choice to investigate/consider ... can you retire early, delay starting the pension and still receive all the medical benefits?
If so, this would give a window to withdraw from the RRSP at a lower income level.

Don't forget to include any taxable investments as well as consider CPP ... unless you have been able to put everything into registered accounts.


Cheers


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