# RRSP strategies - wrong advice in the media



## leslie

I have decided to start this thread to post links to articles in the media that give commonly heard but wrong RRSP advice. These result from a wrong understanding of the RRSP's benefits, by all the official players in the industry and government and media. When you misunderstand the RRSP's benefits, your strategies to maximize those benefits will also frequently be wrong. I have published the math proofs and the conceptual model that explains the RRSP's net benefits at .....

(i) The conceptual model of all the independent benefits/costs.
(ii) Common decisions that will be decided differently because of the contrarian understanding.
(iii) A spreadsheet for your own variable inputs, that calculates and deconstructs the RRSP net benefits

I won't be re-arguing the information in these links - but just referencing their conclusions.

*edit Dec 2, 2015* It seems from the comments that I should give the complete list of *Reasons/Excuses People Use To Dismiss* the documents above. Needless to say I don't think any of these arguments has any merit in the least. Notice that no one at all has ever found any faults in my math, found any faults in the logic of my conceptual model, or offered any math to support the received wisdom.

*(1) * The most common reason is because they simply refuse to read the evidence. This is sadly very, very, very common. 
(a) Some use the reason 'that I am a flake' and they cannot afford to waste their time. They are often proud of this stance and publicly state their refusal.
(b) Some have a 'how dare you claim that everyone else is wrong' response. Yes, I do dare, and I am proud of daring. In my books being 'right' or 'wrong' is not determined by popularity. It is not determined by the credentials of any backer. It is determined by the scientific method. 
(c) Some refuse to read, even while claiming they have. Once you have read the paper it is easy to identify these people by their comments - which clearly indicate they have no idea what has already been argued.
(d) Some take a passive aggressive approach and continue repeating the false claims while stating that .."I am not saying you are wrong". Either (i) they have either not read the material, or (ii) they have read the material, not been able to find any faults, but cannot admit they are wrong. Either way they are refusing to think. 
(e) Some believe that there are no absolute 'right' and 'wrong' statements about the RRSP's benefits. No claims need to be proven with math. Everyone can pick whichever selection of claims they want. This is probably a result of modern education systems where every participant gets a prize and 'we are all winners'. ​ 
*(2)* The second most common reason to stop reading very quickly, is because people refuse to think conceptually. They cannot distinguish between the attributes of the RRSP itself, and their own personal cash flows and personal choices how/when to realize the RRSP's tax impacts. They don't accept that cash is fungible - that the cash in their wallet cannot be considered to have any history or source. They do not agree with the 3 premises listed on the SSRN paper's page 2. But the choices they make personally are not necessarily the same choices made by other people, and do not define the RRSP system itself. If they had continued reading they would have found that the 'Penalty From Delay In Claiming Deduction' factor provides the math that represents the effects of their personal cash flow choices.

*(3)* A large number of people stop reading in the middle of the analysis of the 1st benefit (from sheltering profits) - because it presumes no change in tax rates between cont and w/drawal. They believe the RRSP's benefit comes from that change in rates. They seem to not have noticed their pet benefit listed in the table of contents, and never read far enough to see it is discussed next in line.

*(4) *Many people fixate on the terms I use, and conclude that because they don't like the term, the math and concepts are wrong.
(a) Some object to my claim that the different sources of net benefits are independent and ADD together ---- because some of those factors always reduce the net benefit, and should be said to be subtracted, not added. I could not care less. You can think of the 'Penalty From Delay in Claiming Deduction' as being a positive that is subtracted , or you can think of the Penalty as being a negative in itself which is added. 
(b) Some people stop reading when I first use the term 'Contribution Credit' because they feel it is a 'Tax Deduction' not a 'Tax Credit'. Therefore I must be an idiot. Of course tax deductions refer to adjustments to the income on which $$ of tax are calculated. Tax debits and tax credits refer to the actual $$ of tax - which are just percentages of the deduction. So it is not me who is the idiot. 
(c) Some object to my use of the term 'Penalty' for all those factors that are negative (reduce the net benefit). They use a dictionary giving only one usage (penalties are sanctions for breaking rules), and feel that any other usage is wrong. Of course they never offer any suggestion of a better word. And of course better dictionaries allow for my usage. 
(d) Some people try to dismiss all the factors, other than their own pet benefit, by dismissing them as only 'opportunity costs'. All financial choices result in your experiencing one outcome, and NOT experiencing another. So yes, one could consider the latter to be an 'opportunity lost'. But those outcomes are measured in hard cash wealth. If you want to end up with poorer because you dismissed a factor as only an 'opportunity cost', go ahead.​
*(5)* A large number of people refuse to acknowledge the difference between the mechanics of the RRSP system, and it benefits. They quote mechanics as if they are proof of benefits. They refuse to acknowledge that any cash going into the RRSP system must pass through all the steps before you can spend it - it is the net effect of all steps combined that matter. They refuse to admit that tax effects at one step are cancelled by tax effects at another step.

*(6)* Many dismiss everything because they don't agree with the variable inputs used as examples. Somehow they cannot understand that once you have proved that A + B = C, it does not matter what A equals, or what B equals, because the point is that when added they always equal C. 
(a) Lots of people get irate when my example of the 'Bonus/Penalty From Tax Rate Change' used a higher tax rate on withdrawal. They have a lack of imagination and feel that is impossible. But who cares? The math calculation of the Bonus/Penalty remains the same and applies to any assumption.
(b) A minority of people (thankfully) think they will be able to withdraw RRSP funds without paying any tax. Therefore they argue that the Contribution Credit to a Benefit. Yes the math does support that claim --- for only this particular assumption. It does not work in any other situations. It does not disprove my model. In contrast, my model works in all situations - even this one. 
(c) Almost all other variables used for examples have been used as reasons to dismiss my math - whether it is the # years to withdrawal, or the Asset Allocation percentages, or the effective tax rate on investment income, etc etc. People do not understand that when a model is correct, it works for ALL situations, with all assumptions, all variable inputs.​
*(7) * A few people object to any disclosure of the true benefits because they feel this makes the RRSP look less attractive (of less benefit). Most of these people start from the idea that there is no permanent sheltering of profits in an RRSP. They fail to look at the math showing just how huge this benefit is. They hear me refute the false claims, and presume this means I am saying there are less benefits. But no one should tell lies just to 'sell a product'. False claims should be attacked every time. The true net benefits of the RRSP are huge, and are sufficient to 'sell the product' truthfully.

*(8)* Some people actually argue that the true benefits of an RRSP should not be taught, because they feel that in real life people do not actually realize those benefits. They fail to appreciate that any failure to realize those benefits is because they have made wrong choices - often because they were given wrong advice - which most always was because the advisor had a wrong understanding of the RRSP. The point of the advice industry should be to help people make the correct choices. To do that they need to correct their own understanding and correct their advice.


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## leslie

NEW - Mike Grenby in the NorthShore News

This article is about the Asset Location AL choice - which assets are best held in RRSPs. 

The first error here is the idea that profits in the RRSP are taxed on withdrawal - so that its benefit comes from only 'deferral, and even that may not be a benefit because the eventual tax is at full rates (not the preferential rates of dividends and capital gains). But profits are not taxed, ever, in an RRSP. The RRSP's major benefit, the only benefit that everyone gets, is its permanent sheltering of profits from tax. This $benefit will always exactly equal the same benefit from a TFSA. The withdrawal taxes are an allocation of principal between the accounts two 'owners' - you and the government,, not a tax on profits. 

The second error here is the idea that the RRSP's benefit is relative to the tax %rate that would apply to the income - so sheltering highly taxed interest income is better than sheltering preferentially taxed dividends. In fact the RRSP's benefit from sheltering profits from tax is most strongly determined by the asset's growth rate, and time. The $ tax that would be paid in year one, does not determine the long-term benefit. Faster growing assets (higher total return) produce faster growing $profits and more $taxes, no matter how small the tax %rate (unless really, really small), given time. 

Yes the tax %rate does have an impact, but no one 'loses' the dividend tax credit. The tax rate used for the AL decision is the net effective tax rate. The DTC, capital gains reduction, any delay in claiming capital gains with long-term holds, lowers the effective % tax on common stocks but does not make it zero. And even with low effective rates common stocks can give bigger benefits in an RRSP. than low-yield Treasury debt.


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## steve41

My complaint is that 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.


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## leslie

NEW - Joel Schlesinger inn Winnipeg Free Press

Quote: "Yet perhaps the biggest benefit is professional money management would help ensure their assets are invested in the right account -- be it an RRSP, TFSA or non-registered -- to create an income stream that is tax-efficient to make their money go further. For example, their dividend-yielding Canadian stocks would be mostly held in non-registered accounts because Canadian dividends and capital gains are taxed more favourably than interest from fixed income, and dividends and capital gains from foreign equities."

This again is the Asset Location AL decision. He thinks the decision is decided by the tax % rate on the asset's income. But percentages don't pay the bill. $$ pay the bills. It is the tax $$ saved that decision the AL decision. And not only the $$ tax in year one, but the compounding tax savings over time. Unless the tax rate is 0% (which it is for dividends in the bottom tax bracket) it is the growth rate of the asset that determines the benefit of an RRSP over time. Given time, the higher growth assets will generate higher $tax bills no matter how small their tax %rate.


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## leslie

NEW - Jamie Golombek in the Financial Post

"One strategy to consider if you turned 71 this year is making a deliberate, one-time over-contribution to your RRSP in December before conversion ........ You can then choose to deduct the over-contributed amount on your 2016 (or a future year's) return."

This strategy is correct, but many readers may disregard the qualifying "if you turn 71 this year", and think "what a good idea for me". This strategy only works for people who do not have the choice to delay their contribution until that later date when they plan to take the deduction. For normal people, the delay in claiming a deduction comes with a growing penalty that equals the missing profit that would have been earned by the contribution credit during the period of the delay. This is covered in the SSRN paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2616276


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## OnlyMyOpinion

leslie said:


> NEW - Joel Schlesinger inn Winnipeg Free Press Quote: "Yet perhaps the biggest benefit is professional money management would help ensure their assets are invested in the right account -- be it an RRSP, TFSA or non-registered -- to create an income stream that is tax-efficient to make their money go further. For example, their dividend-yielding Canadian stocks would be mostly held in non-registered accounts because Canadian dividends and capital gains are taxed more favourably than interest from fixed income, and dividends and capital gains from foreign equities."
> 
> This again is the Asset Location AL decision. He thinks the decision is decided by the tax % rate on the asset's income. But percentages don't pay the bill. $$ pay the bills. It is the tax $$ saved that decision the AL decision. And not only the $$ tax in year one, but the compounding tax savings over time. Unless the tax rate is 0% (which it is for dividends in the bottom tax bracket) it is the growth rate of the asset that determines the benefit of an RRSP over time. Given time, the higher growth assets will generate higher $tax bills no matter how small their tax %rate.


So if I have $5k that I am going to invest in fixed income and $5k that I am going to invest in RY shares, and I am going to put one of them into my non-registered account and the other into my RRSP account -> Which account should I put the fixed income into and which account should I put the shares into?


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## OnlyMyOpinion

leslie said:


> NEW - Jamie Golombek in the Financial Post "One strategy to consider if you turned 71 this year is making a deliberate, one-time over-contribution to your RRSP in December before conversion ........ You can then choose to deduct the over-contributed amount on your 2016 (or a future year's) return."
> 
> This strategy is correct, but many readers may disregard the qualifying "if you turn 71 this year", and think "what a good idea for me". This strategy only works for people who do not have the choice to delay their contribution until that later date when they plan to take the deduction. For normal people, the delay in claiming a deduction comes with a growing penalty that equals the missing profit that would have been earned by the contribution credit during the period of the delay. This is covered in the SSRN paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2616276


I found this Jamie Golombek article very confusing and of limited applicability. I'd use the newspaper it is on to light the fireplace


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## andrewf

I have made the same argument about AL. It doesn't make a great deal of sense to shelter 1.7% interest income while paying tax on 3.5% foreign dividend yield.


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## leslie

NEW - Kay Ng in Motley Fool

Here the author repeats the false claim that profits earned in the RRSP are taxed at full rates on withdrawal. She makes the claim to put debt in the RRSP - probably as a result of this idea of full tax rates on both choices but the RRSP deferring that tax. But the RRSP's main benefit is its permanent sheltering of profits from tax. A $benefit that will always exactly equal the same benefit from a TFSA. The RRSP does not generate any benefit from 'deferral'.

The second error is to conclude that capital losses are 'lost' inside an RRSP. In reality the RRSP protects from tax all profits (net of losses) over time, just like in a Taxable account you pay tax on all profits (net of losses) over time. It is illogical to advise NOT using the RRSP for stocks just because sometimes they will have gains and sometimes they will have losses. It is the net profit over time that matters. Since no one invests with the presumption of losing money over time (even when 'experimenting'), this is not a criteria for Asset Location. 

The third error is to advise holding Cdn dividend stocks in a Taxable account because of preferential tax rates on their incomes. This might be correct advise if all the room in registered accounts is taken up with foreign common stock, but the author does not specify that. If there IS any extra room, then Canadian dividend stocks should be in an RRSP in preference over low-yielding Treasury debt. The preferential tax % rate is of less importance in measuring the compounding value over time of the RRSP's income sheltering, than the growth rate of the asset.


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## newuser

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.


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## leslie

steve41 said:


> 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.



OnlyMyOpinion said:


> 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.



newuser said:


> 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.


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## steve41

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).


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## leslie

steve41 said:


> 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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## steve41

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


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## Eclectic12

leslie said:


> ... 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


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## leslie

Eclectic12 said:


> 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 .


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## OnlyMyOpinion

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.


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## leslie

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.











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.


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## Eclectic12

leslie said:


> 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


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## Eclectic12

leslie said:


> 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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## OnlyMyOpinion

Eclectic12 said:


> ...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.


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. 

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.


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## leslie

Eclectic12 said:


> I'll look at the paper but .......................


 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?

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.


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## steve41

Aren't there three parties involved.... myself, the CRA and my estate?


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## Eclectic12

leslie said:


> 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?


If I was presuming that, I wouldn't waste my time reading it.

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.




leslie said:


> 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.


If you prefer - the potential benefits versus what is made use of.




leslie said:


> The point of advice is to help people see the account's factually true benefits and how to maximize those benefits.


Sure ... though as stated, the real world numbers are likely different based on behaviour.


Cheers


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## Jaberwock

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.


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## OnlyMyOpinion

Jaberwock said:


> *People in the lowest tax brackets (less than $44k/year) should never contribute to an RRSP.*


Except that is a generalization which is *not necessarily true*.
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.


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## leslie

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.


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## leslie

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.


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## Nerd Investor

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.


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## leslie

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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## Nerd Investor

leslie, I'm curious: in your calculations have you come up with any scenarios where it is preferable not to make an RRSP contribution even if you have the funds available and your TFSA is maxed out? Essentially I'm asking about a scenario where the "penalty" of using the RRSP more than wipes out the benefits of the tax sheltered profits (ie: someone in the lowest tax bracket, at a marginal tax rate of say 20-25% who expects to be paying marginal tax of 46%+ upon withdrawal). I see this situation come up (and I think it will become more common) when people "semi-retire". High income earners who built up substantial RRSPs but now work do some consulting or part time work in the $30K a year range.


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## amack081

leslie said:


> 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,
> 
> .


RRSPs and other pensions are tax deferred since the taxpayer reduces a deduction from income when contributions are made and since any income earned in the RRSP is earned tax-free. However, tax is paid when the RRSP, including any accumulated income, are withdrawn from the tax-deferred plan. Hence, tax is deferred until the funds are withdrawn from the RRPS. 

Any funds withdrawn from an RRSP are included in the taxpayer's net income for tax purpose as ordinary income (i.e RRSP income) in the year of the withdrawal (Income Tax SS.56(1)(b) and 146(8). 

Taxpayers must withdraw all funds from their RRSP by the end of the year in which they turn 71. If they do not, all the RRSP funds will be included in their income in the following year. Instead of withdrawing all funds all at once, taxpayers can convert their RRSP to a RRIF or another annuity. A RRIF can also earn income tax-free but a taxpayer cannot add more funds to a RRIF after converting an RRSP to a RRIF. 

Transfers from an RRSP to a RRIF or an annuity can occur on a ta-free basis, hence converting an RRSP to a RRIF or annuity will not trigger immediate tax consequences. However, over your life you will be paying on the earnings from the RRIF/annuity.


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## leslie

To amack081 - Your response proves you have not read the links I provided in the very top post. To understand why your reasoning does not work you have to read them.

To Nerd Investor - Sure it is easy to model such a situation in the extreme. You contribute in Feb as a contribution for the previous year, taxed at 25%. You withdraw the next day to be claimed in the current year at 45%. So there is no profits earned that benefit from sheltering, yet you pay the 20% Penalty from the larger withdrawal rate. The trade off is between the compounding $ benefit from income sheltering that grows with time, vs the $ Penalty from a higher rate that also grows as the account grows over time but not as fast. 

Use the spreadsheet to input your assumptions. 
Change only the variables for the 25% cont rate and 45% withdrawal rate and you see the Taxable account has a better outcome. 
But increase the length of time from 20 years to 30 years and the relative outcomes switch because the compounding of profit sheltering compounds faster given time. 
Drop the Rate of Return variable from 8% to 5% and the outcomes switch again because there are less profits to protect from tax.


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## leslie

NEW #8 - Nelson Smith on The Motley Fool

He thinks that ..."_One of the big perks of investing in an RRSP over a TFSA is the former’s tax benefits_ (by which he is referring to the Contribution Credit). _ Putting the tax refund right back into the RRSP ensures a guaranteed return of whatever the marginal tax rate works out to be. No other investment will do as well_."

This author fails to understand the #1 difference between an RRSP and a TFSA. $1,000 in one does NOT equal $1,000 in the other. *The RRSP's contribution credit is never a benefit to anyone*. It is more like a loan - a loan that must be repaid along with all the profits it earned in the interim. To save the equivalent of $600 in a TFSA , you must contribute $1,000 to an RRSP (when in the 40% tax bracket). Although the account balance shows $1,000 not all that money is 'yours'. Before you can get you hands on it, you must pay $400 withdrawal taxes. If your investments double the size of the account, your withdrawal tax will now equal $800. You repay the loan plus all the income it earned. 

Whether you get a refund, or what you do with any refund is irrelevant. What matter in the choice between the accounts it that you do not increase your personal spending just because you reduce your taxes by using an RRSP contribution. All else equal, if your income is the same, and your spending is the same ..... if your taxes are lowered by contributing to an RRSP, you should be able to save more to fund a bigger contribution.


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## Eclectic12

Nerd Investor said:


> ... (ie: someone in the lowest tax bracket, at a marginal tax rate of say 20-25% who expects to be paying marginal tax of 46%+ upon withdrawal). I see this situation come up (and I think it will become more common) when people "semi-retire".
> 
> High income earners who built up substantial RRSPs but now work do some consulting or part time work in the $30K a year range.


So what you are saying is the high income earner put in the bulk of their large RRSP in the past, when they were at says 25%. Then they put almost nothing into the RRSP while at a much higher income. When semi-retired - they then pull out enough to bump them up from $30K to say the $150K income level.

Odd ... most people I know who put money in while at a 25% tax rate were not putting a lot of money into an RRSP. Then when they became a high income earner, their RRSP contributions increased.

I can see where forgetting about OAS, other pension money, investment income and possibly CPP can push their income higher than they thought. It is important to look at but I suspect the real world is far more complicated than 25% versus 46%.


Cheers


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## leslie

NEW #9 : The Hon. Bill Morneau, Minister of Finance for Canada in his book

Since this guy was in the Employment Benefits industry before being elected you would hope he correctly understands the RRSP's benefits. Since he is now in charge of government's changes to the retirement system my hope was even stronger. But not so. He spouts the same errors as everyone else. There is no hope for the country.

1) His introduction to account choices for retirement funds puts RRSPs front and center, but does not even mention TFSAs - nor in the Appendix referenced. He brings up TFSAs only in a subsequent section as the fall-back position for situations he had identified where the RRSP should not be used.

2) In the first section talking generally about all the account-types he gives a math example of tax-free compounding of profits - a correct benefit of all account-types. But he wrongly labels this benefit from "_tax deferral"_, not 'permanent profit sheltering.' Obviously he is still not including the TFSA in the discussion - because everyone agrees the TFSA shelters profits permanently. The word 'deferral' refers to the passage of time. But 'Time' has nothing to do with sheltering profits from tax -neither in the TFSA or the RRSP or other DBPPs. 

3) Later in the section it become obvious that the _'tax deferral_' comment comes from his idea that "_Dividends and capital gains that are earned inside an RRSP are taxed at the same rate as ordinary income when the monies are withdrawn._", This is the same false claim published everywhere - in spite of the generally accepted fact that the RRSP and TFSA benefits are always equal when the withdrawal tax rate has not changed. Since everyone accepts the TFSA benefit comes from permanent profit sheltering - it just common sense that the RRSP's benefit must always be the same. . 

4) The second benefit of RRSPs he lists is "_You receive a tax deduction when you make a contribution. This is one of the most attractive features of RRSPs_". This too is a universal, but false claim. The contribution credit is never a benefit. It is a loan - a loan that must be repaid along with all the profits earned by it. 

5) Then he talks about withdrawals at tax rates higher than contribution, and the clawback of GIS benefits - both correct Penalties of an RRSP. But he concludes _"You could be better off investing outside the RRSP and paying tax as the investment income was realized"._ Granted he gives himself wiggle room by using the word 'could' instead of 'will'. But it reads as if that is the best choice. He makes no reference to a TFSA. And of course he is wrong. Even when low income savers face GIS clawbacks it is better to use an RRSP than a Taxable account. 

Use the default assumptions of the spreadsheet to compare outcomes of using TFSA, RRSP, or Taxable. The (A) RRSP choice ends with $1,818,719 and the (D) Taxable account ends with $699,375. Conclusion - even when faced with GIS clawbacks, the benefit from profit-sheltering is far greater. Using the RRSP is still the better choice. 
Add a $500,000 inheritance to cells Q43 and AF43 so that his additional income in retirement pushes him into the second tax bracket as well as clawing back GIS and OAS. The (B) RRSP choice ends with $3,352,795 and the (D) Taxable account ends with $3,270,115. Conclusion - the Penalties from withdrawing at a higher tax rate, and clawbacks, combined are not as large as the benefit from profit sheltering. Using the RRSP is still the better choice.
The proof that these false understandings (and subsequent advice) are widely held shows in the big 'names' that promote this book - Rick Carrick, Ellen Roseman, Jack Mintz, Bill Robson (CDHowe), Jonathan Chevreau. Most all these people have been advised of their errors over that last 6 years - without any of them attempting to find fault with my analysis. They just continue giving wrong advice.


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## Rebecca

I have read your links and this entire thread, but still don't understand how RRSP profits are sheltered from tax. If I contribute $10,000 per year for 10 years ($100,000) but after profits my account is worth $200,000, how do I pay CRA for tax on only the $100,000 when I withdraw the money?


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## Nerd Investor

Eclectic12 said:


> So what you are saying is the high income earner put in the bulk of their large RRSP in the past, when they were at says 25%. Then they put almost nothing into the RRSP while at a much higher income. When semi-retired - they then pull out enough to bump them up from $30K to say the $150K income level.
> 
> Odd ... most people I know who put money in while at a 25% tax rate were not putting a lot of money into an RRSP. Then when they became a high income earner, their RRSP contributions increased.
> 
> I can see where forgetting about OAS, other pension money, investment income and possibly CPP can push their income higher than they thought. It is important to look at but I suspect the real world is far more complicated than 25% versus 46%.
> 
> 
> Cheers


No, maybe I didn't explain it this well. 
So our hypothetical engineer has been earning 6 figures for years and has always maxed out his RRSP as it was a no-brainer. 
Now he has retired, so his 6 figure salary is gone, but he is continuing to do some consulting in "semi-retirement" and earning $30-$40K a year and is wondering if she should be continuing to make RRSP contributions. 

That's the scenario where maybe he shouldn't (even if he has the cash available) because he's built up so much already that the penalty between the withdrawal and contributions may outweigh the tax sheltered profits. Whether he should or not will depend on a number of other factors captured in the spreadsheet that leslie provided.


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## Nerd Investor

leslie said:


> To amack081 - Your response proves you have not read the links I provided in the very top post. To understand why your reasoning does not work you have to read them.
> 
> To Nerd Investor - Sure it is easy to model such a situation in the extreme. You contribute in Feb as a contribution for the previous year, taxed at 25%. You withdraw the next day to be claimed in the current year at 45%. So there is no profits earned that benefit from sheltering, yet you pay the 20% Penalty from the larger withdrawal rate. The trade off is between the compounding $ benefit from income sheltering that grows with time, vs the $ Penalty from a higher rate that also grows as the account grows over time but not as fast.
> 
> Use the spreadsheet to input your assumptions.
> Change only the variables for the 25% cont rate and 45% withdrawal rate and you see the Taxable account has a better outcome.
> But increase the length of time from 20 years to 30 years and the relative outcomes switch because the compounding of profit sheltering compounds faster given time.
> Drop the Rate of Return variable from 8% to 5% and the outcomes switch again because there are less profits to protect from tax.


Thank you!


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## Eclectic12

Nerd Investor said:


> No, maybe I didn't explain it this well.
> 
> So our hypothetical engineer has been earning 6 figures for years and has always maxed out his RRSP as it was a no-brainer.
> Now he has retired, so his 6 figure salary is gone, but he is continuing to do some consulting in "semi-retirement" and earning $30-$40K a year and is wondering if she should be continuing to make RRSP contributions.


This makes much more sense ... mentioning the tax rate made it sound like contributions in question were from years gone by, at a much lower tax rate.


Cheers


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## FI40

I'm not sure this criticism is entirely fair.



leslie said:


> 2) In the first section talking generally about all the account-types he gives a math example of tax-free compounding of profits - a correct benefit of all account-types. But he wrongly labels this benefit from "_tax deferral"_, not 'permanent profit sheltering.' Obviously he is still not including the TFSA in the discussion - because everyone agrees the TFSA shelters profits permanently. The word 'deferral' refers to the passage of time. But 'Time' has nothing to do with sheltering profits from tax -neither in the TFSA or the RRSP or other DBPPs.


The RRSP does defer taxation. You forego it now, but have to pay it back later. I guess this is just semantics.



leslie said:


> 3) Later in the section it become obvious that the _'tax deferral_' comment comes from his idea that "_Dividends and capital gains that are earned inside an RRSP are taxed at the same rate as ordinary income when the monies are withdrawn._", This is the same false claim published everywhere - in spite of the generally accepted fact that the RRSP and TFSA benefits are always equal when the withdrawal tax rate has not changed. Since everyone accepts the TFSA benefit comes from permanent profit sheltering - it just common sense that the RRSP's benefit must always be the same. .


Read his quote though...it is accurate information. I think you're drawing other conclusions from it. Any money withdrawn from the RRSP is added to income, simple as that. Part of that is going to be dividends, interest, or capital gains... so it's correct to say that they are taxed as ordinary income. He is not saying, as far as I know, that TFSA and RRSP benefits are always equal when tax rate is held constant.



leslie said:


> 4) The second benefit of RRSPs he lists is "_You receive a tax deduction when you make a contribution. This is one of the most attractive features of RRSPs_". This too is a universal, but false claim. The contribution credit is never a benefit. It is a loan - a loan that must be repaid along with all the profits earned by it.


Read his quote - it is NOT a false claim! It IS an attractive feature of the RRSP - it's tax deferral! For many people, tax rates in retirement are lower (sometimes much lower) than tax rates during the working years. For example, to high income earners who don't intend to spend very much in retirement, this is hugely attractive! You can think of it as a loan if you like, but that doesn't change the fact that the quotation you chose is accurate information, and is not misleading at least to me.



leslie said:


> 5) Then he talks about withdrawals at tax rates higher than contribution, and the clawback of GIS benefits - both correct Penalties of an RRSP. But he concludes _"You could be better off investing outside the RRSP and paying tax as the investment income was realized"._ Granted he gives himself wiggle room by using the word 'could' instead of 'will'. But it reads as if that is the best choice. He makes no reference to a TFSA. And of course he is wrong. Even when low income savers face GIS clawbacks it is better to use an RRSP than a Taxable account.


I'm genuinely not sure about this - what about someone 70 years old in a low tax bracket, about to enter a higher one as they turn 71? Investing in cash/fixed income, and don't expect to live much more than 5-10 years. Should they put 10k in an RRSP? It's not so clear to me. I think for younger people earning decent money, it's a great decision. Very old folks not earning much? Less clear for sure.


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## Jaberwock

If you take the time to understand the author's reasoning in the original post of this thread, you will see that he is correct in saying that income inside an RRSP is not taxed.

Here is the reasoning:

If you invest $10,000 in an RRSP, and you have a 30% tax rate, then the investment costs you $7,000, the government contributes the other $3,000

If the value then grows from $10,000 to $20,000 by the time you withdraw the funds, and you are still in a 30% tax bracket, then on withdrawal you get $14,000 (double your original cost) and the government gets $6,000 (double their original cost).

Your initial investment of $7,000 has grown to $14,000, tax free. You would have the same $14,000 if you had made the same investments in a TFSA, with an original cost of $7,000. The tax is not deferred, it is eliminated.

The gain and loss in a TFSA versus an RRSP only comes if you are in a different tax bracket when you withdraw the funds, than you were in when you contributed. 

Assuming the value of the original investments rises, the TFSA and RRSP will always beat the same investments in a taxable account. The only exception being a short term investment in an RRSP where the investor expects to be in a higher tax bracket on withdrawal. The GIS clawback, which bumps you up from a 20% bracket to a 70% bracket is one example where investing in a taxable account might be better than an RRSP.


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## leslie

*@ Rebecca *- Did you understand the first chart? What did you disagree with? Did you understand the second chart? What did you disagree with? As which specific point did you lose the argument?

*@F140* - You really have to read the links at the top post in order to understand why the received wisdom is wrong.

*@ Jaberwock *- Thanks for assuming my work load, I have found that people are very resistant to changing their POV until you have shown them why their current thinking is wrong. The last section of the paper is essential for that process - and it is impossible to distill into a forum post. That is why I just direct people to the actual paper.


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## FI40

leslie said:


> *@F140* - You really have to read the links at the top post in order to understand why the received wisdom is wrong.


I am not arguing that the links in the top post are incorrect about anything. I'm saying the criticism in your post wasn't really fair, because some of the quotes you had from the book are just facts. Let's take one as an example: 

"Dividends and capital gains that are earned inside an RRSP are taxed at the same rate as ordinary income when the monies are withdrawn."

This is correct. It doesn't say anything about the overall tax effect vs. a TFSA in the special case where tax rates remain constant. It's correct on its own.

Maybe you can pick other quotes from the book that give dubious advice, I don't know, I haven't read the book. But these quotes in particular are just stating facts.


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## FI40

Jaberwock said:


> If you take the time to understand the author's reasoning in the original post of this thread, you will see that he is correct in saying that income inside an RRSP is not taxed.


I did not say he was wrong about that. Just that his criticism of those excerpts seemed unfair.


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## Rebecca

leslie said:


> *@ Rebecca *- Did you understand the first chart? What did you disagree with? Did you understand the second chart? What did you disagree with? As which specific point did you lose the argument?
> 
> *
> No, I didn't understand either chart (just went back and re-read them too). I don't disagree with anything, because I don't know what the charts mean. I just wanted to understand what you meant by saying that profits aren't taxed, even at withdrawal time. As an example, if I saved $10,000 per year for 10 years for a total contribution of $100,000, and then that money grew (profits) to $200,000, what happens when I withdraw it? I thought that if I withdraw from my RRSP, I am taxed on it all, not just the amount I originally contributed ($100,000).*


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## FI40

Rebecca said:


> leslie said:
> 
> 
> 
> *@ Rebecca *- Did you understand the first chart? What did you disagree with? Did you understand the second chart? What did you disagree with? As which specific point did you lose the argument?
> 
> *
> No, I didn't understand either chart (just went back and re-read them too). I don't disagree with anything, because I don't know what the charts mean. I just wanted to understand what you meant by saying that profits aren't taxed, even at withdrawal time. As an example, if I saved $10,000 per year for 10 years for a total contribution of $100,000, and then that money grew (profits) to $200,000, what happens when I withdraw it? I thought that if I withdraw from my RRSP, I am taxed on it all, not just the amount I originally contributed ($100,000).*
> 
> 
> 
> *
> 
> You are taxed on it all, your understanding is correct. It's just semantics. The article at the beginning is saying that you effectively aren't taxed on the profits, because of the deduction you got when you contributed. It goes on to point out that had you invested in a TFSA instead, you would end up with the same taxable amount at the end, under the huge assumption that your tax rate remains the same. It sounds like your understanding is fine.*
Click to expand...


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## Rebecca

Thanks, FI40. It sounded too good to be true, and since my parents paid tax on their full RRIF's, I would have hated to think that they hadn't needed to.


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## steve41

> under the huge assumption that your tax rate remains the same.


 Duh..... It is real hard to source a "_now I'm working/now I'm not_" plan in which the tax rate in retirement is the same as (or higher than) it is during work.


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## Jaberwock

steve41 said:


> Duh..... It is real hard to source a "_now I'm working/now I'm not_" plan in which the tax rate in retirement is the same as (or higher than) it is during work.


In most cases, the marginal tax rate after retirement would be lower, but there are exceptions, which are by no means unusual:

People in the lowest tax bracket (below $40k/yr) will always have an equal or higher marginal tax rate after retirement. Anyone who is unfortunate enough to fall into the range where GIS is clawed back will have an effective marginal tax rate of over 70%, versus a 20% rate when working.

Someone whose working life was spent at the upper end of the middle bracket (up to 72k in Ontario) who saves diligently and who might invest extra income from, for example, downsizing and the sale of a house, or from an inheritance, could easily be pushed into a higher bracket and also into the range where OAS is clawed back.


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## FI40

Jaberwock said:


> In most cases, the marginal tax rate after retirement would be lower, but there are exceptions, which are by no means unusual:
> 
> People in the lowest tax bracket (below $40k/yr) will always have an equal or higher marginal tax rate after retirement. Anyone who is unfortunate enough to fall into the range where GIS is clawed back will have an effective marginal tax rate of over 70%, versus a 20% rate when working.
> 
> Someone whose working life was spent at the upper end of the middle bracket (up to 72k in Ontario) who saves diligently and who might invest extra income from, for example, downsizing and the sale of a house, or from an inheritance, could easily be pushed into a higher bracket and also into the range where OAS is clawed back.


That's right. The RRSP favours high income earners with low aspirations for retirement spending, and is nowhere near as good of a benefit (and indeed can be a waste) for those with low incomes that somehow manage to have a higher income during retirement. They get a triple whammy of not much of a deduction at the getgo, big penalty at withdrawal, and OAS clawback. It's obvious that for low income earners, since they probably can't fill both the RRSP and TFSA, they should definitely contribute to the TFSA first (well, RESP first if they have kids who they want to help through school, but that's another argument).


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## amack081

Jaberwock said:


> In most cases, the marginal tax rate after retirement would be lower, but there are exceptions, which are by no means unusual:
> 
> People in the lowest tax bracket (below $40k/yr) will always have an equal or higher marginal tax rate after retirement. Anyone who is unfortunate enough to fall into the range where GIS is clawed back will have an effective marginal tax rate of over 70%, versus a 20% rate when working.
> 
> Someone whose working life was spent at the upper end of the middle bracket (up to 72k in Ontario) who saves diligently and who might invest extra income from, for example, downsizing and the sale of a house, or from an inheritance, could easily be pushed into a higher bracket and also into the range where OAS is clawed back.


This is correct.
Just to add: For 2015, if you earn $117,909 in retirement, you lose all your OAS.


A couple of strategies to "de-claw"
1) Defer taking OAS.
2) Tax efficient investments reduce clawbacks such as capital gains and return on capital. 
3) Withdrawal of RRSPs prior to turning 65 so you have less income when you start claiming OAS.
4) Incorporate non-registered investments so investments will be taxed at the corporate level.


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## leslie

*@ Rebecca* - You are confusing the mechanics of the account with its benefits. No one disputes that all withdrawals are fully taxed. The first paragraph of the Abstract says "_Its rules and mechanics are well known not only by professionals but also by the public_" .The first chart shows that the $12,969 account total get 30% tax ($3,891) withheld on the full amount at withdrawal. That is just the application of the rules - the mechanics. So your parents quite correctly paid that tax. I started this thread to dispute the understanding of the RRSP's benefits -and the resulting advice given - not the mechanics which no one disputes. My claim that profits are not taxed on withdrawal is correct. and not _'too good to be true_' and not '_just semantics_'.

*@ F140* - You cannot claim that "_I am not arguing that the links in the top post are incorrect about anything_", and yet repeat the claim that profits are fully taxed on withdrawal. The paper linked at the top disproves that claim. You cannot claim one while claiming the other. Your decision to not read it it guarantees you will never change your mind, but does not make you correct.


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## FI40

leslie said:


> *@ F140* - You cannot claim that "_I am not arguing that the links in the top post are incorrect about anything_", and yet repeat the claim that profits are fully taxed on withdrawal. The paper linked at the top disproves that claim. You cannot claim one while claiming the other. Your decision to not read it it guarantees you will never change your mind, but does not make you correct.


I did read the first paper you linked to in the original post. It states some obvious facts about the RRSP and I don't believe the math is wrong at all. I haven't argued that it is incorrect. It uses weird language, but it seems correct.

RRSP withdrawals are fully taxed. Profits are part of any withdrawal from an account that has gained value. Therefore profits are fully taxed. I can't be any clearer than that. That's how pretty much everybody else would understand profit if you asked them. Profit: "a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something."

You are making up a different definition of "profit", which is fine - your method of thinking about the RRSP works for you, so great! But you confused Rebecca for instance and probably others in this thread, because you're changing the definition of words they thought they knew.


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## leslie

*@ F140 *- Please read the paper.


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## Eclectic12

FI40 said:


> ... They get a triple whammy of not much of a deduction at the getgo, big penalty at withdrawal, and OAS clawback.
> It's obvious that for low income earners, since they probably can't fill both the RRSP and TFSA, ...


I understand the clawbacks being an issue (GIS and OAS) but I'm not following what the big penalty is at withdrawal.

If they are low income earners, that can't fill the small RRSP contribution room granted and larger TFSA contribution room - where are the boosts in retirement income coming from that result in the "big penalty"? 

Assuming there is a company pension, it's usually around 60% of employment income. CPP and OAS will make up some of that but not a ton.


Cheers


----------



## FI40

leslie said:


> *@ F140 *- Please read the paper.


Did you read what I wrote??? The first line of what I said was: "I did read the first paper you linked to in the original post." I feel I am being trolled here.


----------



## FI40

Eclectic12 said:


> I understand the clawbacks being an issue (GIS and OAS) but I'm not following what the big penalty is at withdrawal.
> 
> If they are low income earners, that can't fill the small RRSP contribution room granted and larger TFSA contribution room - where are the boosts in retirement income coming from that result in the "big penalty"?
> 
> Assuming there is a company pension, it's usually around 60% of employment income. CPP and OAS will make up some of that but not a ton.
> 
> 
> Cheers


That's why I said "for those with low incomes that somehow manage to have a higher income during retirement" - it would be a weird case where let's say they had a business that all of a sudden took off once they got really old, or something. I don't know. It's hard to imagine, but it is possible. Anyway, that's the case where the RRSP is really garbage - an extremely low chance case, with the mitigating factor that at least the person's income is higher so it's kind of a first world problem at that point.


----------



## Jaberwock

FI40 said:


> That's why I said "for those with low incomes that somehow manage to have a higher income during retirement" - it would be a weird case where let's say they had a business that all of a sudden took off once they got really old, or something. I don't know. It's hard to imagine, but it is possible. Anyway, that's the case where the RRSP is really garbage - an extremely low chance case, with the mitigating factor that at least the person's income is higher so it's kind of a first world problem at that point.


A person earning $40k per year, living frugally in an area where rents are relatively low could easily have enough money left over to contribute to an RRSP. He/she would get a tax credit of 20% on contribution.

After retiring, that person might have only CPP, OAS, GIS plus his RRSP. 

RRSP withdrawals would put him into a bracket where his GIS is being clawed back at 50%, which combined with his marginal tax rate of 20%, would mean that he would be losing 70% of his RRSP withdrawal.

This is not a low chance case, nor is it a case where income is higher after retirement.

Low income people should always use up their TFSA allowance before contributing to an RRSP.


----------



## FI40

Jaberwock said:


> A person earning $40k per year, living frugally in an area where rents are relatively low could easily have enough money left over to contribute to an RRSP. He/she would get a tax credit of 20% on contribution.
> 
> After retiring, that person might have only CPP, OAS, GIS plus his RRSP.
> 
> RRSP withdrawals would put him into a bracket where his GIS is being clawed back at 50%, which combined with his marginal tax rate of 20%, would mean that he would be losing 70% of his RRSP withdrawal.
> 
> This is not a low chance case, nor is it a case where income is higher after retirement.
> 
> Low income people should always use up their TFSA allowance before contributing to an RRSP.


The person I was replying to was referring to the "big penalty at withdrawal" I mentioned which was separate from the GIS clawback, so I was only talking about the penalty from higher income during retirement than while working, here. That is the low chance thing: someone earning a low income during their whole working career, and then somehow having a much higher income during retirement. Of course good tax planning would have low income folks use the TFSA first, as they should pay less total tax that way and also it will help them make the most of govt. assistance benefits.


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## steve41

A 30 yo grossing 40K, retiring at 65, dying broke at 95, with normal CPP/OAS, taxed in BC and making 5% ror would be better off to the tune of $46 per year if he TFSAed rather than RRSPed.

Whoopdeedo


----------



## My Own Advisor

steve41 said:


> A 30 yo grossing 40K, retiring at 65, dying broke at 95, with normal CPP/OAS, taxed in BC and making 5% ror would be better off to the tune of $46 per year if he TFSAed rather than RRSPed.
> 
> Whoopdeedo


LOL


----------



## steve41

Just so I don't give the wrong impression.... that same guy grossing $80K would be better off maxing his RRSP rather than his TFSA.....to the tune of $544 per year .

$10 bucks a week buys a few extra beer on Friday nite.


----------



## RBull

Interesting information steve41. And a bonus, amusing as well.


----------



## Jaberwock

steve41 said:


> A 30 yo grossing 40K, retiring at 65, dying broke at 95, with normal CPP/OAS, taxed in BC and making 5% ror would be better off to the tune of $46 per year if he TFSAed rather than RRSPed.
> 
> Whoopdeedo


He would lose guaranteed income supplement of up to $774/month using an RRSP versus a TFSA, that works out to a lot more than $46/yr


----------



## steve41

GIS is included in the calc, along with all the other clawbacks, credits etc.


----------



## leslie

NEW #10: Nancy Woods in Globe and Mail 

This author has repeated wrong advice for years. Here she was asked which asset classes to withdraw first in retirement. Her answer was based essentially on her mistaken ideas about the Asset Location issue. Her advice is the reverse of the correct choice .....

(1 ) She says to leave "_Any fixed-income instruments that pay you interest should stay in the registered plans as long as possible_". This wrong idea has a few 'reasons' behind it - all of which are bogus. 
E.g Because interest is taxed at the highest rate .... But it is not the tax %rate you are tying to shelter. It is the tax $$. The rate of return is most important in determining the compounding benefit from $tax sheltering.
Eg. Because for the past 30 years debt has had a return equal to equity therefore it IS the tax %rate that decides the issue .... But going forward no one thinks debt will have those same high returns. 
Eg. Because the Tax-Efficiency metrics show that debt is most in-efficient .... But the the Tax Efficiency metrics do NOT measure which asset creates the biggest benefit in an RRSP. They measure $taxes in year 1 only, and ignore the compounding benefits from growth.
_
(2) She says that “Canadian dividend-paying stocks would be my first choice to withdraw because once in a non-registered account the dividends will qualify for the dividend tax credit_". Here again she mistakenly thinks the AL decision is decided by the tax %rate. In fact the high return assets grow much faster, creating faster-growing profits, that would attract faster-growing $taxes, IN SPITE of their lower effective tax %rate.


----------



## peterk

leslie said:


> E.g Because interest is taxed at the highest rate .... But it is not the tax %rate you are tying to shelter. It is the tax $$.


This is something I've had to relearn. When I first started reading about personal finance 5 or so years ago I really got it beat into my head that it's correct to "keep interest income tax sheltered because it pays the highest tax rate".

This advice seemed to go hand in hand with good advice like "pay your high rate credit cards off first before your low rate LOC or mortgage, even if the balance is lower on the credit card, because the % is what matters".

I was thoroughly convinced that the above two scenarios were equivalent. Thanks to your postings over the past 6 months leslie I've realized the mistake.

It seems obvious now. A $10,000 investment in a 4% dividend stock needs sheltering more than a $10,000 investment in a 1% interest account. As the tax $$ payable on the former are higher than the latter.


----------



## FI40

leslie said:


> NEW #10: Nancy Woods in Globe and Mail
> 
> This author has repeated wrong advice for years. Here she was asked which asset classes to withdraw first in retirement. Her answer was based essentially on her mistaken ideas about the Asset Location issue. Her advice is the reverse of the correct choice .....
> 
> (1 ) She says to leave "_Any fixed-income instruments that pay you interest should stay in the registered plans as long as possible_". This wrong idea has a few 'reasons' behind it - all of which are bogus.
> E.g Because interest is taxed at the highest rate .... But it is not the tax %rate you are tying to shelter. It is the tax $$. The rate of return is most important in determining the compounding benefit from $tax sheltering.
> Eg. Because for the past 30 years debt has had a return equal to equity therefore it IS the tax %rate that decides the issue .... But going forward no one thinks debt will have those same high returns.
> Eg. Because the Tax-Efficiency metrics show that debt is most in-efficient .... But the the Tax Efficiency metrics do NOT measure which asset creates the biggest benefit in an RRSP. They measure $taxes in year 1 only, and ignore the compounding benefits from growth.
> _
> (2) She says that “Canadian dividend-paying stocks would be my first choice to withdraw because once in a non-registered account the dividends will qualify for the dividend tax credit_". Here again she mistakenly thinks the AL decision is decided by the tax %rate. In fact the high return assets grow much faster, creating faster-growing profits, that would attract faster-growing $taxes, IN SPITE of their lower effective tax %rate.


I agree her advice is confusing as hell.

The guy in the article said he already had most of his assets in registered accounts though. Let's assume it's all fixed income, and that's the asset allocation he wants. I think in most cases he should leave it all in the registered accounts, unless it's going to cause big clawbacks past 71, in that case he should try to reduce the size of the RRSP beforehand (i.e. roll it into the TFSA each year) but he has to be careful not to pay too much tax while doing so.


----------



## leslie

NEW #11 : Your Bottom Line in The Province

This author advises teens and young adults to start saving in an RRSP as soon as they get a job. What bad advice1 Young people will rarely be earning enough income to fully use up their $11,000 personal exemption. So any RRSP contribution will create a $0.00 tax reduction. Leaving the kid facing a probably 72% tax bill on withdrawal (of the first $10,000 RRIF draws) that will ALL come out of their own pocket, because the government won't have funded ANY of it.

As well the benefit from permantly sheltering profits from tax is also useless because in the 0% tax bracket there would be no taxes on investment profits anyways. Even in the 1st tax bracket (22.5%) dividends are taxed at 00% so only the capital gains would attract tax at half-rates. So the benefit would only be the sheltering of about tax at 5% of profits. 

Low income people should start their savings inside a TFSA.


----------



## leslie

NEW #12 : CRA in EIN News 

When the government itself is misleading you there is no hope for us. In this article he repeats that totally false and misleading, but repeated over and over and over and over ...... "_The investment income earned in an RSP is not taxed until it is withdrawn" _ 

In fact, profits earned in an RRSP are NEVER taxed, not while in the plan and not on withdrawal. Taxes paid on withdrawal are an allocation of principal between the account's two owners (you and the gov). It is NOT a tax on profits. The main RRSP benefit - the only one that everyone gets - is the exact same $$ permanent sheltering of profits from tax that you get from a TFSA.

The article also promises that withdrawals will be made at lower tax rates. It fails to mention the Penalty that will be paid by the 50% of wage earners who would be withdrawing at HIGHER tax rates.


----------



## steve41

leslie said:


> It fails to mention the Penalty that will be paid by the 50% of wage earners who would be withdrawing at HIGHER tax rates.


 Are you sure that many wage earners will be withdrawing at a higher tax rate after retirement?


----------



## none

steve41 said:


> Are you sure that many wage earners will be withdrawing at a higher tax rate after retirement?




If they die prior to emptying their RRSP then probably yes.


----------



## none

peterk said:


> It seems obvious now. A $10,000 investment in a 4% dividend stock needs sheltering more than a $10,000 investment in a 1% interest account. As the tax $$ payable on the former are higher than the latter.


Excellent point. I keep my bonds in my TFSA and some Canadian equities in a non-reg account (TFSA & RRSP are full); maybe I should rethink that. Of course, with how well the Canadian market has done this year this actually turned out well. I have A LOT of capital losses banked. It's like having a second TFSA!


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## leslie

*@ steve41 * The back up is in the paper linked in the first post. It has nothing to do with dying early with a big pot.


----------



## steve41

leslie said:


> *@ steve41 * The back up is in the paper linked in the first post. It has nothing to do with dying early with a big pot.


 OK..... so it's about dying on the year of your life expectancy with a modest pot?


----------



## leslie

NEW #13 : Jason Heath in MoneySense

Here again is the false idea that profits are taxed on withdrawal. He says ... "_Indirectly, capital gains will give rise to tax someday, because your RRSP value will be higher and your tax on withdrawal during retirement may be higher_". From this he concludes that capital gains should be Asset Located better to either a TFSA or a Taxable account. 

Pure garbage. Profits in an RRSP are permanently sheltered from tax. The $ benefit from this sheltering is always exactly equal to the same benefit in a TFSA. 0% tax in an RRSP is always better than x% tax in a Taxable account. In fact, since capital gains usually comes with high-growth assets, and assuming you expect a lower tax rate on withdrawals, then you maximize the Bonus from that lower withdrawal rate (= difference in rates * $$ withdrawn) by maximizing the RRSP account balance ---- with high growth (ie capital gains) assets.


----------



## leslie

NEW #14 : Andrew Walker in Motley Fool

This guy claims that you get to keep the profits earned by the Contribution Credit, in between receiving the tax reduction on contribution, and paying withdrawal taxes. This is the essence of the claim that '_you gain from the deferral of taxes_'.

Of course that is garbage. You repay both the original Contribution Credit PLUS all the profits it earns. There is never any benefit from deferral. No matter what rate of return your investments earn, your liability to pay the withdrawal tax increases at the exact same rate. A lot of detractors name-drop "THE TIME VALUE OF MONEY" as a justification of this false claim - as if it proves they are educated in the intricacies of finance. Common sense shows their error. 

E.g. You earn $50,000 today and contribute $9,000 to an RRSP, earning a tax reduction at 30% = $2.700.
This contribution grows until in retirement it is enough to fund a $50,000 withdrawal to pay for one year's living costs. That is 5.5 times larger (= 50,000/9,000)
Who in their right mind thinks they will be able to withdrawal the $50,000 and pay only $2,700 in taxes ?????
At withdrawal the government is repaid the same % portion of the account as it funded ($50,000 * 30% = ) $15,000. That too is 5.5 times larger (= 15,000/2,700).


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## steve41

If I am 30, grossing $50K and retire at 64, while working my effective tax rate is 18-21%, when retired it levels out at 12% and just runs out at age 95.


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## cainvest

steve41 said:


> If I am 30, grossing $50K and retire at 64, while working my effective tax rate is 18-21%, when retired it levels out at 12% and just runs out at age 95.


What's the effective rate if you live to 81 with nothing remaining at that time?


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## Eclectic12

none said:


> If they die prior to emptying their RRSP then probably yes.


Maybe ... but then again, I was sure my Dad's non-empty RRSP passed tax free over to my Mom.
She's now approaching surviving him longer than he's been retired so there's a long string of RRSP withdrawals emptying it out.

Then too, as Dad picked the option to keep paying her a pension - the amount paid is less than the 60% of top salary. 
He may well have been withdrawing from his retirement date at a lower level.


Cheers


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## steve41

Tax rate creeps up to about 13%.


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## leslie

NEW #15 : Robyn Thompson CFP in Battleford News Optimist

This author is advocating people consider their holdings and asset allocations in the whole - including all accounts and account-types together. Although I agree with that, her how-to process is wrong because she does not understand how the RRSP works. She treats each $ in an RRSP exactly equally to a $ in a TFSA or Taxable account --- adds them together -- and calculates the AA as percentages of the total.

Once you understand the RRSP, you realize that not all the $$ in the account are 'yours'. Part of the account was funded, and continues to be 'owned' by the government. The account's value has been 'fluffed up' by the government's portion that must be repaid on withdrawal. So when you add up your total wealth, you must remove the government's portion from your total. When you Asset Allocate, you include only the amount of the RRSP's assets AFTER the government's portion has been deducted. The government's assets simply go along for the ride, and get whatever AA you decide for the remaining assets that 'are yours'. You don't need to be exact in forecasting your tax% on withdrawal - any estimate is good-enough, and WAY better than none at all.

See how in the first section on this webpage. It is almost certain that outfits like WealthSimple and other software advisors use for simplifying AA are making the same mistake as this author.


----------



## OnlyMyOpinion

While I find this thread interesting, I really hope it does not confuse people or cause people to step away from investing in RRSP's in cases where they should.

According to this thread, essentially everyone is either lying, misleading or misunderstands RRSP's except you. 
But when we look at your link we see some assumptions that could be misleading as well:
For example, you assume a rate on withdrawl of 33%. Really? 
We see the assumption that a $100k taxable account balance is 'all mine' when I may very well have taxable capital gains in it that are not yet 'crystalized'.
We see an across-accounts allocation that proposes 75% Equity / 25% Fixed Income (you prefer calling it debt) in an RRSP, and 100% FI in the taxable account. But I depend on dividend income to pay bills, so is that an optimal allocation? 
Are you really proposing that people should guess what their tax rate will be in the distant future and physically adjust their RRSP asset allocation based on that? 
The articles you diss are making assumptions and generalizations - and so are you. 
I would characterize your math proofs as unnecessarily convoluted. They risk confusing or causing people to defer an RRSP decision.

I think it would go a long way if people were simply reminded that an RRSP is a tax-deferred account, that withdrawls from it will be eventually be taxed as income at the tax rate of the day, and that their account total is a before-tax balance. Or am I out-to-lunch as well?


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## steve41

OnlyMyOpinion said:


> For example, you assume a rate on withdrawl of 33%. Really?


 My thoughts exactly.


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## leslie

OnlyMyOpinion said:


> At your link we see some assumptions that could be misleading as well:


 Your post references the variable assumptions I used for the section on How To Asset Allocate when you have multiple accounts that include an RRSP. At http://www.retailinvestor.org/rrsp.html#aa . That section concerns only that specific process. It was not concerned with proving the generalized benefits of an RRSP. 

(1) You did not like the 33% variable I chose for the withdrawal rate. Who cares? Variables are variable. An example needs to make some assumption. The process is not wrong because you would like another variable. When you apply the process to your own accounts you use the same math process, but your own personal variables. You will see in the SSRN paper that I assumed a 30% withdrawal, and then 20% for the second example.. The NittyGritty webpage used a 44% and 34% for the second. The spreadsheet uses the default assumption of 40% and allows you to input whatever you like. The point you must have missed in the discussions is that is makes absolutely no difference to my conclusions WHAT assumption you use. My conclusions always hold true.

(2) In the same section on How To Asset Allocate, you point out that ...._"We see the assumption that a $100k taxable account may very well have taxable capital gains in it that are not yet 'crystalized'_. That is a valid point, but does not change the process I advise. That wrinkle would make the traditional AA calculations wrong as well. You cannot exactly correct for it using either method. You could reduce the value of the Taxable account by (say) half the amount of the accrued tax - to account for both the tax and also the compounding growth before the tax is paid. Your point does not change my point - the need to discount the RRSP's balance because it is 'not all your money'.

(3) You ask whether I expect _"that people should guess what their tax rate will be in the distant future and physically adjust their RRSP asset allocation based on that?"_ Yes that is exactly what I am saying. Any guess is better than none. Because we now have the choice between RRSP and TFSA, I would think that most people have come to some kind of conclusion about their eventual tax bracket. It is necessary for the RRSP/TFSA choice. 

(4) You complain about the AA percentages I used in some example ( 75% Equity / 25% Fixed Income). I could not find where that was, but regardless...... My response is exactly the same above in (1). The assumptions used are irrelevant. The process hold true regardless of what variables you choose for your own calculations. 

You broaden the subject to my generalized argument that the RRSP's benefits have been falsely presented, along with the resulting wrong advice. You claim that ..._"The articles you diss are making assumptions and generalizations - and so are you"_. But the articles I diss are making false claims that would be false no matter which variable assumptions they use in their examples. My claims hold true no matter which variable assumptions are used. I included a link to a spreadsheet that allows for your choice of any inputs you like.

I am sorry that you have not been able to understand my arguments, but I don't accept that is any reason to NOT present to others who may understand it.


----------



## leslie

NEW #16: The Mortgage Gal on Castanet

This article on the HBP mostly assumes that savings have already been put into an RRSP. But at the end it says_ "If you’re thinking ahead to use your RRSP for your home, consider meshing your RRSP strategy with your down payment savings. Putting away funds in your RRSP not only saves you the current income tax, but the tax saved translates into more dollars towards your down payment."_

This results in the most common misunderstanding of the HBP. Most people think the benefit equals the withdrawal tax not paid (or Contribution Credit). But because the loan must be repaid, the benefit is limited to only the INCOME earned by the w/d tax not paid - and only until repaid. So instead of a benefit = $25,000 * (say) 30% tax = $7,500, the benefit is only $25,000 * 30% tax * 3% mortgage interest = $225 per year until repaid.

Obviously her claim that there is a double benefit is false in anyone's books. The Contribution Credit is the same $$ as the withdrawal taxes not paid.


----------



## OnlyMyOpinion

leslie said:


> ............. I am sorry that you have not been able to understand my arguments, but I don't accept that is any reason to NOT present to others who may understand it.


Thanks for your exhaustive response. I believe I do understand your arguments.
My concern remains - that someone reading this thread might conclude RRSPs are not the optimum way to save for retirement for the majority of Canadians. 

Please be careful around those windmills.

View attachment 7178


----------



## FI40

OnlyMyOpinion said:


> Thanks for your exhaustive response. I believe I do understand your arguments.
> My concern remains - that someone reading this thread might conclude RRSPs are not the optimum way to save for retirement for the majority of Canadians.
> 
> Please be careful around those windmills.
> 
> View attachment 7178


I would echo your sentiments about the confusion that can result from reading this thread. Slightly disagree about how RRSPs are necessarily best for the majority, but I think that's beside the point that it's important everybody understand the registered accounts and decide what's best for their situation. In that vein I think talking about them in an unambiguous and correct way is important. leslie, to provide a specific example of what I mean, I would reference this post:



leslie said:


> NEW #14 : Andrew Walker in Motley Fool
> 
> This guy claims that you get to keep the profits earned by the Contribution Credit, in between receiving the tax reduction on contribution, and paying withdrawal taxes. This is the essence of the claim that '_you gain from the deferral of taxes_'.
> 
> Of course that is garbage. You repay both the original Contribution Credit PLUS all the profits it earns. *There is never any benefit from deferral. * No matter what rate of return your investments earn, your liability to pay the withdrawal tax increases at the exact same rate. A lot of detractors name-drop "THE TIME VALUE OF MONEY" as a justification of this false claim - as if it proves they are educated in the intricacies of finance. Common sense shows their error.
> 
> E.g. You earn $50,000 today and contribute $9,000 to an RRSP, earning a tax reduction at 30% = $2.700.
> This contribution grows until in retirement it is enough to fund a $50,000 withdrawal to pay for one year's living costs. That is 5.5 times larger (= 50,000/9,000)
> Who in their right mind thinks they will be able to withdrawal the $50,000 and pay only $2,700 in taxes ?????
> At withdrawal the government is repaid the same % portion of the account as it funded ($50,000 * 30% = ) $15,000. That too is 5.5 times larger (= 15,000/2,700).


(emphasis added)

It is easy for people to get confused because you did not mention a VERY specific assumption here that tax rates are exactly equal at contribution and withdrawal. Someone who hasn't read a bunch of this thread may miss that and misunderstand (it has happened earlier in this thread).

All that said I enjoy many of your other posts, you're obviously very knowledgeable and it's great that you care about the details. I just find this thread is too aggressive and confusing.


----------



## leslie

FI40 said:


> You did not mention a VERY specific assumption here that tax rates are exactly equal at contribution and withdrawal .... (in when you say "*There is never any benefit from deferral*").


 You cannot claim I am too blunt, yet fail to hear what I am saying. I am saying ... "*There is never any benefit from deferral.*" Never, for anyone, in any situation, no matter what the withdrawal tax rate. This is proven in the SSRN paper and on the NittyGritty webpage and by the Excel file. It is proven with math along with a conceptual model to provide the understanding of the math. It is proven by specifically disproving F140's claim that there is an exception. 

Please read the SSRN paper.


----------



## leslie

OnlyMyOpinion said:


> Someone reading this thread might conclude RRSPs are not the optimum way to save for retirement for the majority of Canadians.


 I have never presented any argument that generalizes a position that the RRSP is good/bad, or optimal/not, etc. I would consider that generality to be ludicrous. If other contributors have come to that conclusion, that is their responsibility.


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## cainvest

leslie said:


> You cannot claim I am too blunt, yet fail to hear what I am saying. I am saying ... "*There is never any benefit from deferral.*" Never, for anyone, in any situation, no matter what the withdrawal tax rate. This is proven in the SSRN paper and on the NittyGritty webpage and by the Excel file. It is proven with math along with a conceptual model to provide the understanding of the math. It is proven by specifically disproving F140's claim that there is an exception.
> 
> Please read the SSRN paper.


Is that the paper that uses the 33% now to expected 39% later example?
If so, how would that play out if the withdrawal tax rate was at 33%?


----------



## FI40

leslie said:


> You cannot claim I am too blunt, yet fail to hear what I am saying. I am saying ... "*There is never any benefit from deferral.*" Never, for anyone, in any situation, no matter what the withdrawal tax rate. This is proven in the SSRN paper and on the NittyGritty webpage and by the Excel file. It is proven with math along with a conceptual model to provide the understanding of the math. It is proven by specifically disproving F140's claim that there is an exception.
> 
> Please read the SSRN paper.


I believe this is the third time I've mentioned now, I have read the paper. I've also mentioned that the language is very specific and different than what people are used to, hence the confusion.

If I contribute 10k directly (i.e. I don't pay the tax on it) to the RRSP today, at a tax rate of over 40%, and withdraw it in 10 years when I have 0 income to report and am not taxed because it's less than the personal exemption, I call that tax deferral because I'm deferring to pay tax on the 10k until later.

In the paper, you say there's no tax deferral, but there's a bonus or penalty. I don't think the CRA defines it as a bonus. That's the definition of the product we are talking about here. We should use the language they use, which is that you don't pay tax on contribution, you do pay it upon withdrawal. That's a deferral of tax by definition. I know you understand exactly what I'm saying, I don't know why you are being so picky about the language.


----------



## cainvest

cainvest said:


> Is that the paper that uses the 33% now to expected 39% later example?
> If so, how would that play out if the withdrawal tax rate was at 33%?


It would also be nice to see what deferral would do if the person knows they'll be two tax brackets higher next year. So using the papers tax numbers as the example change, it would be 33% now and 43.5% next year. This example holds true for a few commission based sales people I know, they would jump two tax brackets from one year to the next and then back down again the year after. Would deferral be a benefit for them?


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## steve41

The income tax brackets (Fed and Prov) are indexed to inflation folks! This means that 100K is currently taxed at $27,000. In 45 years time it will be taxed at $17,000.

That was 2% inflation.... at 3% inflation, tax would be $13,000, halved in 45 years.


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## leslie

It seems necessary, so I have added a section to my post at the very top. It list all the reasons/excuses I have run into during the last 6 years - for dismissing the true facts about the RRSP's benefits.


----------



## peterk

Leslie, I think this thread is great, but I'm having a hard time reading it all and am unclear as to your purpose with it anymore. You are now at 16 case studies and counting, I'm not sure what you hope to accomplish by continuing to post them here. You should be contacting the author/publisher and demanding the articles be corrected.

Would you be able to start a new thread with a very few brief sentences that distill your findings and examples regarding RRSPs down to something that is easy to understand and quick to read?

It's getting quite clear that many of us readers who already know the RRSP rules and can do math are becoming overwhelmed and confused by your lengthy writing style. I fear that if you are hoping to teach those who are financially illiterate about the workings of RRSPs, they will not comprehend what you are talking about and ignore it. Myself I'm getting confused now, but am hesitant to go back and re-read all of your massive posts...


----------



## leslie

NEW #17: Andrew Walker in The Motley Fool 

This is another article trying to get young people to use RRSPs - even at the expense of TFSAs. This author claims that TFSA _"has distracted young people from contributng to their RRSP"_ .... when in fact they may have been making very rational and correct choices. 

He lists the RRSP benefits as ..."they reduce taxes today and ideally grow to become much larger amounts that can be used to pay the bills in retirement. Yes, the money is taxed when it is withdrawn, but the tax rate in retirement might be lower than the current rate savers pay on their income. If it isn’t, that means the funds have probably grown substantially during the years they were invested."


It should be obvious that savings will grow equally in a RRSP and TFSA and Taxable account. So all that stuff about growth is not any benefit of the RRSP.
He identifies the possible Bonus from withdrawals at a lower tax rate, but fails to warn that a higher tax rate is possible, creating a Penalty --- a high probability for young people. 
He claims that the Contribution Credit is a benefit - a reason to use the accounts. This is false. It is never a benefit to anyone in any situation.
He fails to identify the RRSP's biggest benefit - permanent sheltering of profits from tax.


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## Charlie

from my experience, this bit from the Motely Fool is spot on.....even for those older than millennials:



> Another reason for using the RRSP is the fact that investors are more likely to leave the funds alone. Penalties for tapping money in the RRSP act as a good incentive to let the money grow. Money invested in a TFSA is much more accessible, as it should be, but that isn’t good if the savings are earmarked for retirement.


I do find that the recent 'wait...don't contribute to RRSPs until you're earning more', has discouraged RRSPs for some of my younger cohorts. And they're not loading up the TFSAs either.

I read the article as a very brief call to save and the importance of time/compounding. Only argument I might have is whether div stocks are necessarily the way to go. Otherwise, good enough article for what it was?


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## FI40

leslie said:


> *edit Dec 2, 2015* It seems from the comments that I should give the complete list of *Reasons People Use To Dismiss* the documents above. Needless to say I don't think any of these arguments has any merit in the least.
> 
> ...


I've read through your arguments and none of them apply to me. Number 4 is close though. I don't like the terms you use, because they can be very confusing. It's better to use language everyone is used to if your goal is actually to get people to understand you. I never said your math or concepts are wrong.


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## steve41

> He identifies the possible Bonus from withdrawals at a lower tax rate, but fails to warn that a higher tax rate is possible, creating a Penalty --- a high probability for young people.


Give me an example.... current salary, retirement age, current savings and type, ror and inflation. I will see if I can manufacture a similar or higher tax rate in retirement.


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## Charlie

I plugged numbers in the spreadsheet linked in the first post, and break even RRSP/Taxable was 15 yrs with an increase in rate from 30% on contribution to 40% on withdrawal, an 8% return and 15% investment taxes in the taxable. Any hold greater than 15 yrs is a win for the RRSP given these parameters. 

So I'm missing something -- and am not about to re-read this thread or break down the 10 page pdf.


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## steve41

In all probability the spreadsheet is wrong/badly approximated. Give me the parameters you used.


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## peterk

Charlie said:


> I plugged numbers in the spreadsheet linked in the first post, and break even RRSP/Taxable was 15 yrs with an increase in rate from 30% on contribution to 40% on withdrawal, an 8% return and 15% investment taxes in the taxable. Any hold greater than 15 yrs is a win for the RRSP given these parameters.
> 
> So I'm missing something -- and am not about to re-read this thread or break down the 10 page pdf.


There's nothing wrong with that. It's only the TFSA that beats RRSP when the withdrawal tax rate is higher than the contribution. Even in that situation RRSP is better than taxable, up to a certain point, as you have calculated.


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## Charlie

yup. I'm with you Peter, and that's been my understanding of RRSP. I've spent the last few moments trying to understand Leslie's posts instead of just meritlessly dismissing them. But I can't. Still stuck on deferral being the greatest advantage of RRSPs. Even in just 15 yrs with a rate increase and lowish investment tax rate.

Steve -- your calculation are much more involved. Parameters used were per my post and Leslie's spreadsheet, which is a simple present value calculation that understates the deferral advantage, and doesn't challenge the assumption of a higher rate on withdrawal. Even at that I think I'm still at odds with what Leslie's saying -- but quite possibly I'm completely missing his point -- and I'm wading into this thread very late. So apologies if this has been hashed through already. I do like understanding different points of view....just not getting it here.


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## peterk

Question Leslie (and others),

Common advice is to place your high-flyer stock picks in the TFSA first instead of the RRSP, because the potential of scoring a 10-bagger in the TFSA with tax-free growth is appealing. Is this advice incorrect?

You've now demonstrated how as the RRSP grows profits are also entirely tax free, so is there in reality no good reason to advise that one invest their "aggressive" stock picks in the TFSA and their "conservative" stock picks in the RRSP? As is often described as the correct thing to do...

I still think the above advice is sound (put 10-baggers in the TFSA first), but now you are making me doubt if this is in-fact correct...I'm very confused.


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## FI40

peterk said:


> Question Leslie (and others),
> 
> Common advice is to place your high-flyer stock picks in the TFSA first instead of the RRSP, because the potential of scoring a 10-bagger in the TFSA with tax-free growth is appealing. Is this advice incorrect?
> 
> You've now demonstrated how as the RRSP grows profits are also entirely tax free, so is there in reality no good reason to advise that one invest their "aggressive" stock picks in the TFSA and their "conservative" stock picks in the RRSP? As is often described as the correct thing to do...
> 
> I still think the above advice is sound (put 10-baggers in the TFSA first), but now you are making me doubt if this is in-fact correct...I'm very confused.


To make things simpler let's consider we have exactly the same amount of contribution room in each of an RRSP and a TFSA, and no other assets. We want to invest half our money in a security with low expected return, and the other half in something with high expected return.

In the case where contribution and withdrawal tax rates are the same, it doesn't matter which one you put which type of asset in, as in both scenarios you end up with the same amount of withdrawn cash.

In cases where contribution tax rate > withdrawal tax rate, put the high return assets in the RRSP, and low return assets in the TFSA.
In cases where contribution tax rate < withdrawal tax rate, put the low return assets in the RRSP, and high return assets in the TFSA.

I verified this with real numbers to be sure, but the intuition is as follows: In the first case, you're amplifying the tax deferral benefit of the RRSP by putting the high return asset there. In the second case, you're minimizing the tax deferral penalty of the RRSP by putting the low return asset there.

EDIT: This is only true in a very specific case where you only are allowed one asset type in each type of account...it doesn't consider the actual position sizes of each type. This is a stupid case to consider, so probably people should disregard what I'm saying here.


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## OnlyMyOpinion

Another probable scenario is that your portfolio of "high-flyer" stocks also ends up with some losers.
In an RRSP and TSFA those capital loses can't be used to offset gains. 
It raises the question of whether someone who only has the capacity to maximize their RRSP and/or TSFA (and has no savings left for a trading account) should be investing in "high-flyers" at all. Solid companies or etf's as long term holds - yes, risky stocks - no.
But that's OMO.


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## peterk

FI40 said:


> To make things simpler let's consider we have exactly the same amount of contribution room in each of an RRSP and a TFSA, and no other assets. We want to invest half our money in a security with low expected return, and the other half in something with high expected return.
> 
> In the case where contribution and withdrawal tax rates are the same, it doesn't matter which one you put which type of asset in, as in both scenarios you end up with the same amount of withdrawn cash.
> 
> In cases where contribution tax rate > withdrawal tax rate, put the high return assets in the RRSP, and low return assets in the TFSA.
> In cases where contribution tax rate < withdrawal tax rate, put the low return assets in the RRSP, and high return assets in the TFSA.
> 
> I verified this with real numbers to be sure, but the intuition is as follows: In the first case, you're amplifying the tax deferral benefit of the RRSP by putting the high return asset there. In the second case, you're minimizing the tax deferral penalty of the RRSP by putting the low return asset there.


I guess what confuses me, is that isn't the whole premise behind the equality of the two accounts based on the fact that "you reinvest the RRSP tax credit/refund back in the RRSP"? But what does that really mean? You have already built up assets in each account over a number of years and received the tax refund in those years, and money is fungible so who cares where it came from and if/where it is reinvested? What if you have already maxed both registered accounts?

I think the question of where to put high vs. low returning assets should really only consider money that is actually in the accounts, not adding in the nebulous "tax refund", which is really just extra money (and presumably you already have more extra money of your own in unregistered savings/investments).

Say you have two accounts that you've been contributing to for years, maxing out and investing/saving each year, 50k in each RRSP and TFSA. Who cares how the RRSP was funded, with tax return money or not, either way what's in there is what's in there and anything outside the two accounts doesn't matter.

Now you must decide how your asset allocation should go in each account...

If the TFSA earns 10% for 20 years and the RRSP earns 5% for 20 years, after the RRSP is melted (@35% tax), your total is $422,000.

If the RRSP earns 10% for 20 years and the TFSA yearns 5% for 20 year, after the RRSP is melted (@35% tax), your total is $350,000.

It seems clear to me from above that the aggressive investment should go in the TFSA and the conservative in the RRSP. Is there something I'm missing?


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## peterk

OnlyMyOpinion said:


> Another probable scenario is that your portfolio of "high-flyer" stocks also ends up with some losers.
> In an RRSP and TSFA those capital loses can't be used to offset gains.
> It raises the question of whether someone who only has the capacity to maximize their RRSP and/or TSFA (and has no savings left for a trading account) should be investing in "high-flyers" at all. Solid companies or etf's as long term holds - yes, risky stocks - no.
> But that's OMO.


For sure that's a legitimate consideration in making the decision. But I'm trying not to muddy up what is already a confusing discussion for myself with anything outside the base-case.


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## FI40

peterk said:


> I guess what confuses me, is that isn't the whole premise behind the equality of the two accounts based on the fact that "you reinvest the RRSP tax credit/refund back in the RRSP"? But what does that really mean? You have already built up assets in each account over a number of years and received the tax refund in those years, and money is fungible so who cares where it came from and if/where it is reinvested? What if you have already maxed both registered accounts?


I think calling it a reinvestment is more complicated, because then you need to factor in the time of reinvestment and the fact that the reinvestment generates its own tax refund, which is invested next year and generates its OWN refund, etc. ad infinitum. If you are employed, you are able to get the full effect of this infinite series of reinvestments in the current year by simply filing a tax form so that you are not taxed on that money in the first place. So that’s how you achieve the ideal case of an untaxed RRSP contribution, and it’s what I’ve used for my calculations since it’s cleanest/easiest. The approximation of reinvesting the refund the next year (and the year after, etc) is reasonable when talking about a long term investment.


peterk said:


> I think the question of where to put high vs. low returning assets should really only consider money that is actually in the accounts, not adding in the nebulous "tax refund", which is really just extra money (and presumably you already have more extra money of your own in unregistered savings/investments).
> 
> Say you have two accounts that you've been contributing to for years, maxing out and investing/saving each year, 50k in each RRSP and TFSA. Who cares how the RRSP was funded, with tax return money or not, either way what's in there is what's in there and anything outside the two accounts doesn't matter.
> 
> Now you must decide how your asset allocation should go in each account...
> 
> If the TFSA earns 10% for 20 years and the RRSP earns 5% for 20 years, after the RRSP is melted (@35% tax), your total is $422,000.
> 
> If the RRSP earns 10% for 20 years and the TFSA yearns 5% for 20 year, after the RRSP is melted (@35% tax), your total is $350,000.
> 
> It seems clear to me from above that the aggressive investment should go in the TFSA and the conservative in the RRSP. Is there something I'm missing?


I disagree, I think the asset allocation decision should be made at the beginning for the most optimal results, but sure you can correct any mistakes later and it would be better than not having done so.
In your example you gave, you should be looking at overall return. Funding the TFSA was expensive; it cost 1/(1-(tax rate)) dollars to fund each dollar in it. So when you compare returns to the RRSP after tax, keep in mind the TFSA still has a tax liability, just at the beginning. What I’m saying is, it’s not fair to compare balances on a one-to-one basis in TFSA accounts and RRSP accounts. In my mind, it’s fair to compare post-tax withdrawal – pre-tax contribution, as that’s the total profit measure.
If you insist on asking the question, given equal sized RRSP and TFSA, and a desire to hold only one asset class in each, sure, the high return asset should go in the TFSA. But that’s not a fair comparison – you basically are ignoring the extra money that was spent to fund the TFSA. These decisions should be made at the outset.
Overall comment regarding this issue: lest we lose sight of what’s important, asset allocation among security types should be the first priority, asset location (i.e. which registered account to use) the second.


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## peterk

FI40 said:


> I think the asset allocation decision should be made at the beginning for the most optimal results, but sure you can correct any mistakes later and it would be better than not having done so.
> ...
> In your example you gave, you should be looking at overall return. Funding the TFSA was expensive; it cost 1/(1-(tax rate)) dollars to fund each dollar in it. So when you compare returns to the RRSP after tax, keep in mind the TFSA still has a tax liability, just at the beginning. What I’m saying is, it’s not fair to compare balances on a one-to-one basis in TFSA accounts and RRSP accounts. In my mind, it’s fair to compare post-tax withdrawal – pre-tax contribution, as that’s the total profit measure.


Hmm I think I've got the confusion figured out. All of this complicated pre-post tax contribution consideration applies only when you aren't able to fully utilize your registered accounts. None of this talk applies when on can readily max out and-then-some both registered accounts! Funding the TFSA _and_ RRSP are done with post-tax dollars... Then you get a tax refund the following year for the RRSP contributions...

I'll use roughly my own situation as an example.

Say I have 10k TFSA and 10k RRSP room per year (RRSP room reduced significantly due to DB pension). That's 20k/year into registered accounts that I can contribute. Additionally, I can save an extra 20k/year that goes into unregistered savings/investments. Finally, I get a $3,500 RRSP tax refund that goes into unregistered (because registered is maxed). So that's $43,500 per year that is saved/invested. Repeat each year with new savings from new income. There is no decision to be made here. You _must_ max out registered accounts first, then you _must_ save the RRSP tax refund and additional savings in an unregistered account. What else could you possibly do?

This is the reality of the situation. There is no "1/(1-(tax rate))" calculation to be made that makes the RRSP exactly equivalent to the TFSA...

Now the question comes, where do you put the assets you expect the highest return from vs. the lowest return from? The TFSA has no tax burden from here on, the unregistered account has a ~50% tax burden from here on (cap gains + dividends) and the RRSP has a full marginal tax burden from here on. From this it is apparent that your highest return investments should be fully sheltered in TFSA, your medium returns in unregistered, and your lowest returns in RRSP.

For the love of god if Leslie shows up here again and tells me I'm all wrong my head is going to explode! :biggrin:


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## FI40

peterk said:


> Hmm I think I've got the confusion figured out. All of this complicated pre-post tax contribution consideration applies only when you aren't able to fully utilize your registered accounts. None of this talk applies when on can readily max out and-then-some both registered accounts! Funding the TFSA _and_ RRSP are done with post-tax dollars... Then you get a tax refund the following year for the RRSP contributions...
> 
> I'll use roughly my own situation as an example.
> 
> Say I have 10k TFSA and 10k RRSP room per year (RRSP room reduced significantly due to DB pension). That's 20k/year into registered accounts that I can contribute. Additionally, I can save an extra 20k/year that goes into unregistered savings/investments. Finally, I get a $3,500 RRSP tax refund that goes into unregistered (because registered is maxed). So that's $43,500 per year that is saved/invested. Repeat each year with new savings from new income. There is no decision to be made here. You _must_ max out registered accounts first, then you _must_ save the RRSP tax refund and additional savings in an unregistered account. What else could you possibly do?
> 
> This is the reality of the situation. There is no "1/(1-(tax rate))" calculation to be made that makes the RRSP exactly equivalent to the TFSA...
> 
> Now the question comes, where do you put the assets you expect the highest return from vs. the lowest return from? The TFSA has no tax burden from here on, the unregistered account has a ~50% tax burden from here on (cap gains + dividends) and the RRSP has a full marginal tax burden from here on. From this it is apparent that your highest return investments should be fully sheltered in TFSA, your medium returns in unregistered, and your lowest returns in RRSP.
> 
> For the love of god if Leslie shows up here again and tells me I'm all wrong my head is going to explode! :biggrin:


Yup, I think you understand. I edited my other post as well, which I realized was talking about a really special case that doesn't really matter. If we're only talking about the RRSP and TFSA, I agree the high return stuff should always go in the TFSA first.

About taxable though, I think that starts to depend more on tax rates, and it can make more sense in some scenarios to have the high return stuff in the taxable. Simply because the alternative (putting interest bearing bonds in your taxable instead) can be worse over time depending on your tax rate during accumulation and at withdrawal.


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## leslie

NEW: #18 Evelyn Jacks in News Optimist

This article prioritizes sources of funding to repay debt. It puts RRSP funds last on the list - which I don't disagree with generally - but the reason she uses is false ... _"Least attractive options include any withdrawal that generates taxes: money taken out of an RRSP, for example, or a capital asset with a large accrued gain."_ 

The taxes paid on RRSP withdrawals are of a completely different quality than taxes you pay on wages, or profits, or rents, etc. The RRSP taxes paid on withdrawal are an allocation of principal between the RRSP account's two owners - you and the government. You are only repaying the % of the account that was never yours - neither at the start when you got the contribution tax reduction, or during the account's growth which is shared between you and the government. The repayment does not decrease your net worth. It is not a cost like triggering capital gains tax. 

The necessity to pay the w/d tax is not a reason to NOT use RRSP funds to repay debt. The reason to NOT use RRSP funds to repay debts is because you lose forever contribution room. Later savings *in excess of other tax shelter options* would then have to be kept in a taxable account - so the RRSP's benefit from permanently sheltering profits would be lost. For many people, losing this contribution room has no cost, because they will never HAVE any excess savings. The tax-free home ownership, and TFSA, and RESP are all they will need, and all they will make use of. For these people, the use of RRSP funds to repay debt is about on a par with using TFSA funds. 

It is misleading to claim that the taxes you pay on RRSP withdrawal are a 'cost' to you, or reduce your net worth.


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## leslie

NEW #19: Mariska Loeppky in MoneySense 

This article references the tax rate change (higher) for next year and advises .... _"People (in top tax bracket) may also want to defer claiming this year’s RRSP contribution until the 2016 tax year to maximize the benefit."_ This is just one application of the false advice to delay claiming the RRSP contribution's tax deduction when you expect your future marginal tax rate to be higher. 

This advice is never optimal. When expecting a higher tax rate, you should not make the RRSP contribution in the first place. The best options is to use a TFSA instead for the interim. And even if the TFSA is full, paying tax on profits in a Taxable account in the interim is the second best choice - depending on how long it will be before you face that higher tax rate (in this case just next year). 

You can see the comparable outcomes of your choice using the tax rate 43.5% now and 49.5% later in the spreadsheet http://www.retailinvestor.org/RRSPdelayDeduction.xls . The discussion is at .http://www.retailinvestor.org/rrsp.html#delay


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## Eclectic12

leslie said:


> The taxes paid on RRSP withdrawals are of a completely different quality than taxes you pay on wages, or profits, or rents, etc.
> The RRSP taxes paid on withdrawal are an allocation of principal between the RRSP account's two owners - you and the government ...


Aren't the taxes paid on wages and rents the same allocation of income between you and the gov't?

It won't affect whether it makes sense to leave money in the RRSP or not but I don't see a difference.


Cheers


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## leslie

NEW #20: Dale Jackson on BNN

This article presents various ways to minimize taxes. He treats the RRSP's contribution credit as if it were the same as tax deducitons/credits from sports fees, donations, transit passes, education costs, and health costs ..... _"You can avoid the tax by putting it in your Registered Retirement Savings Plan."_

But the RRSP's contribution credit (CC) never makes you more wealthy, or prevents tax that would otherwise make you poorer (like those listed above). The CC is a loan from the government that must be repaid, along with any profits earned by it - so it is never a benefit in itself, or from any deferral in repayment. It cannot be compared to those other tax reductions that permanently add to your wealth ((or prevent reductions to your wealth). 

He then compounds his error by equating a $$ TFSA contribution to the same $$ RRSP contribution. He fails to appreciate that $100 in a TFSA does not equal $100 in an RRSP. To be equal you need to contribute MORE to the RRSP, because you will have to pay tax to get the money out at the end. The higher contribution is not a hardship because the CC funds the difference. His idea .... "_That tax return could come in handy paying holiday bills in the new year. _" ignores this reality that the refund must be used to gross up the RRSP contribution before it can be considered 'equal' to his option to contribute to a TFSA.


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## cainvest

leslie said:


> This advice is never optimal. When expecting a higher tax rate, you should not make the RRSP contribution in the first place. The best options is to use a TFSA instead for the interim. And even if the TFSA is full, paying tax on profits in a Taxable account in the interim is the second best choice - depending on how long it will be before you face that higher tax rate (in this case just next year).
> 
> You can see the comparable outcomes of your choice using the tax rate 43.5% now and 49.5% later in the spreadsheet


I think saying the "advice is never optimal" is misleading, it could very well be optimal depending on the individuals situation.


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## steve41

Again...... there is no such animal as a tax rate, average tax rate, marginal tax rate. There is only the T1 which is a (sort of) complex amalgam of (time dependant) progressive rates, clawbacks, age credits, surtaxes, penalties.... The only metric that has meaning to an individual is the amount left over after all taxes, savings/withdrawals, loan pmts are made. In other words, spending on beer, groceries and gas, each and every year- out to some horizon age 90-95-100.

Of secondary importance is our net-to-estate.... what our heirs see should we die along the way.


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## peterk

cainvest said:


> I think saying the "advice is never optimal" is misleading, it could very well be optimal depending on the individuals situation.


I think this is one that leslie has got nailed down, and is one of the few things he's said that I actually understood! To clarify he is saying that the "not optimal" part is only in reference to the advice that you should purposely invest in the RRSP with the _intent_ of delaying the deduction. I think his math shows that this is not optimum in _all _marginal tax rate increase and rate-of-return scenarios.

Of course, _if_ one has already made the RRSP contribution, and is now faced with the decision on whether or not to deduct when faced with a higher tax rate in the future, then careful calculation should be made to determine the optimum strategy.


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## cainvest

peterk said:


> I think this is one that leslie has got nailed down, and is one of the few things he's said that I actually understood! To clarify he is saying that the "not optimal" part is only in reference to the advice that you should purposely invest in the RRSP with the _intent_ of delaying the deduction. I think his math shows that this is not optimum in _all _marginal tax rate increase and rate-of-return scenarios.


Given the numbers given it does look correct, not doubting that but ... are there real world examples that deferring works?

I gave this example before ...



cainvest said:


> It would also be nice to see what deferral would do if the person knows they'll be two tax brackets higher next year. So using the papers tax numbers as the example change, it would be 33% now and 43.5% next year. This example holds true for a few commission based sales people I know, they would jump two tax brackets from one year to the next and then back down again the year after.


So given that the assumed withdrawal rate is 33% (a 10.5% tax gain for the deferred year) isn't waiting to claim a good thing here?


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## peterk

Yes the bigger the tax bracket jump the more beneficial it is to wait in the situation where the money is already in the RRSP.

But the key point is not the difference in marginal rates. It is that letting the money grow in a tax-advantaged way (non-registered) for the time period, then putting it in and claiming the RRSP later, is always better than letting it grow non-tax advantaged in the RRSP first for a time, then taking the tax credit a certain number of years later.

You end up with that extra amount of unregistered growth with favorable tax-rates that gets added onto your RRSP deposit + refund, which is greater than RRSP growth + deposit + refund, because the RRSP growth is fully taxable.

At least that is my convoluted understanding? AMIRITE leslie?


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## Eclectic12

peterk said:


> But the key point is not the difference in marginal rates. It is that letting the money grow in *a tax-advantaged way (non-registered)* for the time period, then putting it in and claiming the RRSP later, is always better than letting it grow non-tax advantaged in the RRSP first for a time, then taking the tax credit a certain number of years later.


First off ... I suspect you mean "registered" instead of "non-registered" for the account. Last I checked, only registered accounts were Canadian tax free or tax deferred.

Secondly ... since the plan is to use the TFSA dollars to fund the RRSP, likely one is going to stick with something liquid (the higher tax bracket is just around the corner in the situation cainvest is talking about). At that point is the benefit that great? 

Thirdly ... the assumption here is that one has enough TFSA contribution room to fit the RRSP contribution being considered. Those that don't fit this profile are really deciding between the RRSP or a taxable account.

There's a post in "General Personal Finance" where a guy says he is sitting on $200K in cash in a taxable account, he expected to make $170K but the deal crapped out so that he was eventually paid more like $32K. 

Does it really make sense to keep holding $160K or so in a taxable account after maxing his TFSA?
Does it make sense to take an RRSP deduction in a $32K income year when a future gig could zoom his income back to the top?


It's all well and good in a situation that fits the assumptions ... the question is whether one's situation fits it as well.


Cheers


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## cainvest

peterk said:


> But the key point is not the difference in marginal rates. It is that letting the money grow in a tax-advantaged way (non-registered) for the time period, then putting it in and claiming the RRSP later, is always better than letting it grow non-tax advantaged in the RRSP first for a time, then taking the tax credit a certain number of years later.


If ones delays investing the "refund" money (because you didn't claim it) for one year (link example uses an 8% yearly gain which I believe would be considered kind of high for a balanced portfolio by a couple of %) and gets a 10.5% gain the next year isn't waiting good, as in a 2.5% gain? Is it that simple or am I missing something here?


edit: Just to add to this, I'm assuming the example person is a good saver and first maxes out their TFSA.


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## Eclectic12

AFAICT ... the benefit of an RRSP deduction in a year of higher income has been agreed to by all parties.

The point of discussion is whether it is always the case that it is better for one to put the RRSP contribution into the TFSA to grow tax free and then make the RRSP contribution/deduction at the same time, at a future date.


Where one is choosing between the RRSP early contribution and a similar TFSA contribution ... the tax free growth makes the TFSA route win (though maybe not by a lot and assuming there is no anticipated RRSP withdrawal bonus).

Where one has enough $$$ to do both ... likely doing both is better than allowing the funds in a taxable account to be whittled down to a lower amount.


Cheers


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## peterk

Nooo, I mean unregistered (I double checked this time :biggrin, as in tax advantaged capital gains, losses, and dividends. I'm sure I checked leslie's math several months back when he first brought this up because it didn't sound right to me either. But as it turns out, it makes sense. This all assuming that the TFSA is already maxed. Obviously the TFSA should be maxed before any of this is implemented...

Simplified, consider 40% tax rate.

1) $1000 invested in unregistered + $100 gain - $20 tax (capital gain) + $400 tax credit after 1 year (switch to RRSP) = $1480

vs.

2) $1000 invested in RRSP (now) + 400 Tax credit after 1 year (deferred) + $100 gain - $40 tax ( full tax rate) = $1460


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## peterk

In essence, by contributing to an RRSP but deferring the deduction to a future year, you are getting a disbenefit of the RRSP (growth taxed at marginal rates) now but none of the benefit (tax refund) until later. Why start with the disbenefit now and take the benefit later when you can just take both later?


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## Eclectic12

peterk said:


> Nooo, I mean unregistered (I double checked this time :biggrin, as in tax advantaged capital gains, losses, and dividends ...


Problem is ... the tax variables are misleading as #1 does not include anything for RRSP withdrawal taxes where #2 does.

The "switch to RRSP" means before RRSP withdrawal taxes kick in so that #1 has an RRSP value of $1480 where #2 has an RRSP value of $1500.

Since the "after RRSP withdrawal" is using the same 40% tax rate ... the RRSP still wins without some other factor such as an OAS clawback to tilt the field.


Cheers


----------



## peterk

Hmm, you are right I didn't present that right, but I think it's still correct.. In #1 there is no gain in the RRSP, the gain happened unregistered. It is just $1000. in #2 the gain happens in the RRSP and now has $1100 in it. If you melt both RRSPs fully at that point you get $1080 in #1 and $ 1060 in #2. 1 wins.

Check out leslie's spreadsheet a few posts back it does the math better than I can speak about it without confusing myself...


----------



## Eclectic12

Okay ... I get that the $400 contribution credit applies to both so removing it simplifies things. Let's say both RRSP owners spend it on a vacation to Barbados, okay?

RRSP #1 has nothing in it for a year, then the net of the taxable investment, $1080 is contributed ( I think we agree on this one).

RRSP #2 has the original $1K contributed a year ago + $100 growth during the year for a total of $1100 after one year ( I thing we agree on this as well).


Where we disagree is that for some reason, there's $40 deducted from RRSP #2 *before* the RRSP meltdown. Unless you can explain why the $40 tax applies only to RRSP #2 ... it looks to me that you've replaced one unfair treatment (i.e. only RRSP #2 is taxed on RRSP withdrawal) with another unfair treatment (only RRSP #2 is being charged $40). 

There seems to be a lot of work going into forcing the math to match the preferred conclusion instead of trusting what it is showing.


Cheers


----------



## OnlyMyOpinion

Please, one Don Quixote is enough. Leave the imaginary windmills in peace. eaceful:


----------



## peterk

I'll give it another shot without the $40 screw up this time.

Scenario 1: Use taxable account while waiting until high tax year (1 year in the future) to contribute and deduct.

Start - $1000 invested in taxable
Gain - $100
Tax - ($20)
After 1 year transfer $1000 to RRSP
Receive $400 tax credit.

Total: $1000 in the RRSP and $480 outside the RRSP
*After Tax: $600 + $480 = $1080*

Scenario 2: Use RRSP account while waiting until high tax year (1 year in the future) to deduct.

Start - $1000 invested in RRSP
Gain - $100
Tax - $0 (sorry for bringing that $40 into the equation last time, it wasn't treating things fairly as you pointed out.)
After 1 year deduct and receive $400

Total: $1100 in RRSP and $ 400 outside RRSP.
*After tax: $660 + $400 = $1060*


----------



## cainvest

peterk, how about scenario 3 which I described previously.

Same as your scenario 2 but the "After 1 year deduct and receive $400" would be "After 1 year deduct and receive $442".


----------



## Eclectic12

peterk said:


> I'll give it another shot without the $40 screw up this time ...


That works ... BTW, the problem with our scenario was that that the contribution credit in scenario #1 didn't match the full RRSP contribution of $1080.

So at the end of the day - the one year benefit is something like a 2% benefit. There's a lower benefit when the contribution credit is added to the RRSP but then the future tax will be better funded.

Where I was doing this over such a short period ... I'd want to have more than one investment providing the capital gain as I'm not sure I'd be able to pick one stock that will provide a positive return.


The other part I wonder about is how realistic setting the return in the taxable account the same as the RRSP early contribution. Don't get me wrong, I understand that to properly compare one needs them set the same but the RRSP likely has a substantially longer time horizon than the one year delay period. Unless as mentioned early - there are other choices to provide the capital gain.

Note that should interest be used - then the two go back to even (i.e. no advantage to either choice).


To return to the question of whether delaying the one year is worthwhile ... in both scenarios, taking the contribution credit at the lower tax rate pulls up the rear.


Cheers


----------



## Eclectic12

cainvest said:


> peterk, how about scenario 3 which I described previously.
> Same as your scenario 2 but the "After 1 year deduct and receive $400" would be "After 1 year deduct and receive $442".


Correct me if I'm missed something ... but I believe scenario 3 would be:

Start - $1K invested in RRSP
Gain - $100
Tax in RRSP - $0
After 1 year deduct and receive $435

Total: $1100 in RRSP and $435 outside RRSP
*After tax: $621.5 + $435 = $1056.50* 


Of course part of the challenge is deciding whether this contrived setup will match the real world. 

Is a 10% gain from only capital gains realistic when one knows the $$$ will be needed in a year?
The typical advice is to use a HISA or GIC ... which means the arbitrage of the CG tax rate is lost where the early RRSP contribution (with early withdrawal) become identical.

Is it realistic to expect the RRSP withdrawal taxes will be the same (i.e. no tax bonus when withdrawn)?
That may shift the risk profile as well as the final tax situation.


Cheers


----------



## cainvest

Did up some quick numbers for my previous scenario for a delayed RRSP deduction.

Three columns, TFSA, RRSP deduction each year, RRSP delayed deduction one year.
Person expects a 10% increase in taxes for the next year.










Do these numbers look correct?


----------



## peterk

Eclectic12 said:


> Correct me if I'm missed something ... but I believe scenario 3 would be:
> 
> Start - $1K invested in RRSP
> Gain - $100
> Tax in RRSP - $0
> After 1 year deduct and receive $435
> 
> Total: $1100 in RRSP and $435 outside RRSP
> *After tax: $621.5 + $435 = $1056.50*
> 
> 
> Of course part of the challenge is deciding whether this contrived setup will match the real world.
> 
> *Is a 10% gain from only capital gains realistic when one knows the $$$ will be needed in a year?
> *The typical advice is to use a HISA or GIC ... which means the arbitrage of the CG tax rate is lost where the early RRSP contribution (with early withdrawal) become identical.
> 
> Is it realistic to expect the RRSP withdrawal taxes will be the same (i.e. no tax bonus when withdrawn)?
> That may shift the risk profile as well as the final tax situation.
> 
> 
> Cheers


But the money is not "needed" after 1 year, it is all funds allocated to long term investing, you are simply playing with the timing of moving it about between different types of accounts. The risk profile or investment choices won't change because of this.


----------



## peterk

cainvest, I'm playing around with your and my own spreadsheet now to try and make sense of it. I am, again, thoroughly confusing myself. I am trying to fairly compare the Unregistered-->RRSP scenario with yours. I'll post it once I hopefully figure it out. IANA-Accountant

leslie, wanna jump in here to provide some clarity?


----------



## Eclectic12

peterk said:


> But the money is not "needed" after 1 year, it is all funds allocated to long term investing ...


The concern is when the money *is* needed ... the RRSP contribution after a year for scenario #1. 

Both scenarios can buy the same blue chip stock where a year later, the stock is 5% down. 

Scenario #1 is going to care because the RRSP contribution with it's corresponding contribution credit (cc) are now lower due to FMV. Scenario #2 won't care from a cc point of view as, the value has already been locked in where it does not change with the FMV of the investment.




peterk said:


> ... The risk profile or investment choices won't change because of this.


It will for those who want to be guaranteed the full $$$ are available to contribute to the RRSP for scenario #1. The same investor may be comfortable in scenario #2 buying an investment that returns far more in dividends plus an unknown capital gain.

Certainly those providing feedback that "for short time horizon, pick a HISA or GIC" seem to fit this profile (hence my questioning what the real world is going to look like).


Cheers


----------



## cainvest

peterk said:


> cainvest, I'm playing around with your and my own spreadsheet now to try and make sense of it. I am, again, thoroughly confusing myself. I am trying to fairly compare the Unregistered-->RRSP scenario with yours. I'll post it once I hopefully figure it out. IANA-Accountant


Yes, it was a bit confusing at first and I tried to use a real world example with more realistic average portfolio returns. Of course with many examples there are a number of individual variables so everyone should run their own numbers. I just wanted to show delaying one's RRSP deduction claim can benefit some people.

I don't think there is any winning scenario for unregistered vs RRSP UNLESS your tax rate is higher on withdrawal than when you claimed. As with all these projections, future returns and/or tax rates can shift the numbers a fair bit so at best these are simple guidelines.


----------



## steve41

cainvest said:


> I don't think there is any winning scenario for unregistered vs RRSP UNLESS your tax rate is higher on withdrawal than when you claimed. As with all these projections, future returns and/or tax rates can shift the numbers a fair bit so at best these are simple guidelines.


 I have seen tons of detailed financial plans, and I can truly say that tax rates never go up in retirement unless there is some strange off-the-wall financial circumstance occurring.


----------



## leslie

New #21 : Canada Press article pulished by CBC and Benefits Canada and CTV News

Although the article's advice "to made the choice between RRSP and TFSA based on your " future financial needs ... How much will you be making throughout your career, what stage are you at in your career and where will you be in retirement?" is correct, it is not helpful in the least. 
* Why does 'future financial needs' make a difference? They should just say that withdrawals from RRSP permanently lose contribution room - but TFSAs not. 
* What is all that stuff about careers? They should just say that the RRSP creates an additional bonus/penalty for withdrawals at tax rates that are lower/higher than the rate at contribution. So you choose a TFSA when you expect higher tax rates. 

The article's description of the comparable benefits of the RRSP vs TFSA are the common false claims ... " The benefit of an RRSP is that you deduct contributions today and defer taxes until your retirement, when you will likely be earning less money and may be in a lower tax bracket. In contrast, TFSA contributions don't generate a tax deduction, but any investment income you earn with the money isn't taxed."

In fact both accounts always create the exact same $benefit from "investment income you earn with the money isn't taxed". 
In fact the RRSP's contribution credit is never a benefit, ever, to anyone, without exception, no matter what your tax rates, etc, etc 
Nor is there any benefit from 'deferal of taxes', ever, for anyone, without exception. All profits earned during any deferral are necessary to fund the eventual withdrawal taxes.
Nor is there any guarantee that your tax rate in retirement will be lower. For 50% of working people your effective tax rate will be higher.

To understand these claims you must of course have read the links given in the first post of this thread.


----------



## steve41

Things that need to be considered....

1. Taxes are lower in retirement (age 65 credit, $1000 pension tax credit).

2. The fact that the tax brackets are now indexed to inflation. i.e. tax on 50K is currently $10800 in 20 years it will be $9015, in 40 years it will be $7268. Based on 2% inflation.

3. The ‘time-value of money’ effect (i.e. the size of the tax paid in 2030 has to be
looked at in present-value terms)


----------



## FI40

leslie said:


> New #21 : Canada Press article pulished by CBC and Benefits Canada and CTV News
> 
> Although the article's advice "to made the choice between RRSP and TFSA based on your " future financial needs ... How much will you be making throughout your career, what stage are you at in your career and where will you be in retirement?" is correct, it is not helpful in the least.
> * Why does 'future financial needs' make a difference? They should just say that withdrawals from RRSP permanently lose contribution room - but TFSAs not.
> * What is all that stuff about careers? They should just say that the RRSP creates an additional bonus/penalty for withdrawals at tax rates that are lower/higher than the rate at contribution. So you choose a TFSA when you expect higher tax rates.
> 
> The article's description of the comparable benefits of the RRSP vs TFSA are the common false claims ... " The benefit of an RRSP is that you deduct contributions today and defer taxes until your retirement, when you will likely be earning less money and may be in a lower tax bracket. In contrast, TFSA contributions don't generate a tax deduction, but any investment income you earn with the money isn't taxed."
> 
> In fact both accounts always create the exact same $benefit from "investment income you earn with the money isn't taxed".
> In fact the RRSP's contribution credit is never a benefit, ever, to anyone, without exception, no matter what your tax rates, etc, etc
> Nor is there any benefit from 'deferal of taxes', ever, for anyone, without exception. All profits earned during any deferral are necessary to fund the eventual withdrawal taxes.
> Nor is there any guarantee that your tax rate in retirement will be lower. For 50% of working people your effective tax rate will be higher.
> 
> To understand these claims you must of course have read the links given in the first post of this thread.


I read the links in the first post. I have an MSc in Financial Mathematics and a bachelors in engineering (math/electrical). I did very well in school and especially always in math. I'm only 30 so I think my mental facilities are still intact. I find the claims you make very confusing, as I've discussed at length in this thread. Maybe I'm just an idiot.


----------



## steve41

FI40 said:


> Maybe I'm just an idiot.


 You are not an idiot.


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## cainvest

FI40 said:


> I read the links in the first post. I have an MSc in Financial Mathematics and a bachelors in engineering (math/electrical). I did very well in school and especially always in math. I'm only 30 so I think my mental facilities are still intact. I find the claims you make very confusing, as I've discussed at length in this thread. Maybe I'm just an idiot.


You're not alone, confusing and/or misleading IMO. 

Also, this is a financial forum with people here generally having a better understanding of RRSP/TFSA mechanics than most. Can you imagine the level of confusion that would occur if the general public were given this thread to read before making retirement investment plans?


----------



## leslie

NEW #22: CBC unsigned

This article sanctions RRSP withdrawals for the HBP and LLP. As usual it presents the mechanics without clarifying, or wrongly stating, the benefits of each plan.

The HBP is presented as if its mechanics determined its benefit - that having access to the cash was its benefit, and having to repay the HBP was its cost. Garbage. The declining yearly benefit of the HBP equals the $HBP outstanding * the tax rate NOT paid on withdrawal * the interest rate on the mortgage thus reduced. Yes, if your $$ is already in an RRSP, having access to it is a benefit ...
* but you would be giving up the profits that would have been earned by that $$ inside the RRSP, and 
* many/most people decide from the start which account (RRSP vs TFSA) to save in after being mislead into choosing the RRSP because of the falsely claimed HBP benefits. If properly advised they could have chosen to save in a TFSA and still had the cash available. 

I agree with the article's warning that repaying the HBP may be very difficult because of the higher home-ownership costs and the additional actual mortgage. But they omit the big warning, that deciding to save in an RRSP (instead of a TFSA) when young and in a lower tax bracket, locks people into the long-term big differences in benefits between RRSP and TFSA - just for the piddly HBP benefits. 

The LLP is wrongly presented as "_essentially an interest-free loan from the RRSP_". But of course it is not 'free'. You have to give up the profits what would have been earned by that money if left invested inside the RRSP. You may well think that the value of the education is greater, but be clear it is not 'free'. The benefit of the LLP is the same as that for the HBP. The $outstanding on the loan * the tax rate NOT paid on withdrawal * the rate of return earned by the cash outside the account. 
* If you did not otherwise have the funds for the tuition you would have had to borrow, so this benefit can be calculated on the interest rate of the debt not assumed. 
* Or if you otherwise did have all the necessary spare funding, the rate of return would be considered the return you would otherwise have earned by that cash. 
* Or if you would not have considered the education 'worth it' if not for the LLP plan, then the rate of return would be 0% and there would have been no benefit.

The article is correct to say that speeding up repayments, if you have the extra cash, is not a good idea. This is true always, not, as they say, "If you're earning a significant income and would benefit from the tax deduction a regular RRSP contribution would get you". The benefit is the yearly calculation above based on the outstanding debt. Repaying the LLP immediately results in $0 benefit. The benefit increases with the larger the amount of LLP outstanding, and the larger the returns earned by it. Non of that calculation considers the tax rate that would be applied to subsequent RRSP contributions.


To understand these claims you must of course have read the easy-to-understand links given in the first post of this thread.


----------



## leslie

NEW #23: Staff at CBC

This article is a compare the merits of the RRSP vs TFSA. Instead of stating the tax-sheltering $benefits of each they report their mechanics - as if that would make a difference (doesn't). 

The first claim pro-RRSP is that ..._"You want a steady stream of income from your savings in retirement"._ Many of the official sites present the RRSP as the vehicle for retirement savings, and the TFSA is for other savings. This is a false dichotomy. Those in lower tax brackets should use the TFSA for retirement savings. 

Their second pro-RRSP claim is that ..."_You want to reduce your taxable income"._ This is the most common false claim ---- that the contribution's tax reduction is a benefit and a reason to use the account. It is not, ever. 

To understand these claims you must of course have read the easy-to-understand links given in the first post of this thread.


----------



## leslie

NEW #24: Wade Stayzer in Huffington Post

This article talks about RRSP draws early, when bad things happen, as opposed to for retirement. It presents a warped idea that you must pay '_penalties and repercussions_'. It claims that our "_reticence (to w/d early) can be attributed to the stark number that must be considered_". It talks about the withholdings tax as "_ranging anywhere from 10 to 30 percent .... clearly these numbers are huge_".

Give me a break. The taxes withheld from draws are only a downpayment on the year end tax return, where withdrawals are included in income. The taxes paid on withdrawal are not a 'cost' to you and do not change your net worth. Not all the RRSP account is ever 'your money'. A portion of it was essentially funded by the extra $$ you could save at the start with the Contribution Credit. This CC grows to finance the taxes on withdrawal. The CC was not a benefit when received at the start, and the taxes paid on withdrawal are not a cost. 

The article fails to even mention the true big cost of early withdrawals. Assuming you will use all your contribution room otherwise, an early withdrawal destroys contribution room, and destroys all the profit sheltering benefits for future decades and decades and decades. 

The article made no mention of a change in tax rates, so I don't either. To understand these claims you must of course have read the easy-to-understand links given in the first post of this thread.


----------



## leslie

NEW #25: Staff at CBC

The author takes a ludicrous stance. He aks _"Why save in an RRSP_?" and answers because "_you don't want to be poor_" .... as if you cannot save elsewhere !!!! Most of the article is about the fact that government benefits will not be enough so you need to save --- I agreed of course. 

But then he talks about withdrawals and repeats the claim that ..."_RRSPs have come under criticism as a savings vehicle in recent years because your withdrawals are taxable._" Why repeat a false argument and give it credence? The taxes paid on withdrawal are funded by the original Contribution Credit. The CC is not a benefit, and its repayment, along with all the profits it earned, is not a cost. The taxes are self-financing. 

Better to educate people to understand that anyone's RRSP account is 'not all their own money'. 

He defends the taxes by claiming ..._"You will likely have moved to a lower income bracket after retirement". _ But about 50% of workers won't be taxed at a lower tax rate than at contribution. This promise by all the official sites, of a lower tax rate, is completely one sided. To be honest the high probability of paying a Penalty from a higher tax rate should ALSO be disclosed.


----------



## leslie

NEW #26: Dale Jackson on BNN

Again the savings options of an RRSP and TFSA are contrasted. While the TFSA's benefit is claimed to be ,,,_"a great opportunity to invest more of your money without any tax on the gains_", the RRSP's main benefit -- the only one that everyone gets -- the exactly equal $benefit from the exact same profit sheltering -- is ignored.

Instead he wrongly present's the RRSP's benefit to be the tax reduction on contribution, and claims that .."The more you make, the more you save." In fact the CC is never a benefit. And it is the tax rate difference between contribution and withdrawal that creates any Bonus or Penalty, not the absolute rate. 

To understand these claims you must of course have read the easy-to-understand links given in the first post of this thread.


----------



## steve41

OK..... give me an example.
Current age
savings to date:
-rsp
-tfsa
-taxable
gross salary
expected pension if any
planned retirement age
ror, inflation rate, province


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## OnlyMyOpinion

Hmm, no data yet. Maybe that last windmill took poor Don Quixote out of action?


----------



## RBull

^Good one!


----------



## leslie

NEW #27 : Peter Bowen in Global News

Here Bowen repeats the standard line comparing the RRSP ... "_The benefit of an RRSP is that you deduct contributions today and defer taxes until your retirement, when you will likely be earning less money and may be in a lower tax bracket_" ........ to the benefits of a TFSA ... "_In contrast, TFSA contributions don’t generate a tax deduction, but any investment income you earn with the money isn’t taxed_."

In fact both the TFSA and RRSP's main benefit is their permanent sheltering of profits from tax. A benefit that is always exactly equal.. The RRSP contribution's tax deduction is never a benefit. Nor is there ever any benefit from deferring tax. And while there would be a RRSP bonus if you can withdraw at a lower tax rate, there is no guarantee that you will not instead pay a Penalty from withdrawals at higher rates. Probably half of wage earners should expect higher withdrawal rates.


----------



## leslie

NEW #28: Paul Delean in Montreal Gazette

The situation - a 69 yr old retiree with pension needs $8k and asks whether to w/d from his RRSP or TFSA. The answer given (use the TFSA) is justified by the argument that ... "There’s no tax hit, and you don’t even lose the contribution room." 

Since so little information is given a truly correct answer is not possible, but the justification stated for this advice is wrong. The RRSP's contribution credit is never a benefit, and correspondingly the taxes on withdrawal are not a cost. The w/d taxes are funded by the original contribution so it makes no difference to this decision that the portion of the account owned by the government needs to be repaid. If the w/d taxes are delayed (by not taking w/d) for another 10 yrs during which the assets in the account double in value, then the $taxes on w/d will also have doubled. 

From the info given it seems that the pensioner is currently living off his pension without needing any TFSA or RRSP draws, so an important difference to consider is the RRIF's required draws vs the TFSA's ability to continue sheltering profits until death. This would make the RRSP the better choice of funds - allowing the TFSA to grow without interuption.

The second deciding fact not discussed is the expected effective RRIF w/d tax rate (that included clawbacks). Depending on the size of the RRSP , and his other pension income, and where he is positioned within his existing tax bracket, it is likely that w/d $8k now from the RRSP might be done at a lower tax rate than later draws will be taxed. Again making the RRSP the better choice. 

The author idea that the TFSA NOT losing contribution room presumes the pensioner has extra income not needed for living that would fill that room. But if that were so, then he could have saved the $8k needed now, from that money. 

To understand these claims you must of course have read the easy-to-understand links given in the first post of this thread.


----------



## leslie

NEW #29: Kay Ng in The Motley Fool 

The title is false.... _"Contribute to an RRSP to Reduce Your Taxes". "For each dollar you contribute to an RRSP, you reduce your income taxes.... You can even get a tax refund." _

In fact the tax reduction is never a benefit, ever, to anyone. It is not 'a reason to contribute'.


----------



## leslie

New #30: Jonathan Chevreau in Financial Post 

This article tells you _'everything you need to know about RRSPs_' . Obvously the most important issue is 'what benefits does it provide - why use it'. He never states this but does identify _'two carrots_' to get you to use the account. In 'how-great-it-this tones, he claims the first carrot is the _"upfront tax deduction. That's right, Ottawa will send you a refund cheque_". 

But of course the contribution credit is not a benefit, ever, to anyone. It grows as you invest it to fund the eventual tax withdrawal.

His claims the second carrot is that "_in an RRSP (or TFSA) you would not have to pay tax on (profits earned in the account)_". 

It's a miracle !!! Notice that he did NOT include the phrase 'while int the account' or 'until withdrawn'. His claim is actually TRUE. Now Chevreau has been advised of his repeated wrong advice for at least 5 years - always refusing to change it. So this is a HUGE step forward. 

Too bad that he still refuses to drop that first false claim. Hopefully he now personally admits this, but wants to slide his changing advice past the unsuspecting public, one at a time, so the changes are not noticed. Hopefully he will change the false first claim soon as well.


----------



## steve41

OK Leslie, once again..... give me an example.

current age
savings to date:
-rsp
-tfsa
-taxable
gross salary
expected pension if any
planned retirement age
ror, inflation rate, province

Your contention that the tax rate is lower in retirement is plainly WRONG.!


----------



## cainvest

steve41 said:


> OK Leslie, once again..... give me an example.


It would appear leslie is not here to discuss matters with other members but just to post an opinion on other people's website info and direct traffic to the links in the first post.

Is this the case leslie?


----------



## leslie

New #31: Gail Vaz-Oxlade in Vancouver Metro

Although I love this author's message of ..."STOP SPENDING MONEY", when it comes to the RRSP she is just repeating the wrong info of the other 'experts'. She compares the RRSP/TFSA benefits as .._."If you want to defer taxes and build a pool of money for when you retire use an RRSP. If you want to grow your money tax-free with the flexibility to use that money and then replace it later, use a TFSA."_

The RRSP is NOT all about 'deferring taxes'. There is no benefit from any deferral of anything. The RRSP's main $benefit is always exactly equal to TFSA's same benefit from growing your money tax free. I also disagree with the characterization of the TFSA as NOT for retirement (while the RRSP is). For about half of workers, the TFSA is the optimal account for retirement savings.


----------



## leslie

NEW #32: Bruce Barran, CPA in the Ontario CPA's ready-to-use complimentary article #2 for RRSP Season

The article is titled 'Why is an RRSp a good idea' which is another way of saying 'What are its benefits". The author claims that ... _"That tax deduction helps you reduce your taxable income for the year in question. It’s a key benefit. Plus, the income you earn in the RRSP is only taxed when you withdraw the funds."_

Yet again these are false claims. The tax reduction on contribution is never a benefit to anyone. And the profits earned in the account are never taxed. The RRSP's main benefit is the permanent sheltering of profits from tax - a $benefit that is always exactly equal to the same benefit from a TFSA.


----------



## leslie

NEW #33: Brian Moore, FCPA in the Ontario CPA's ready-to-use complimentary article #10 for RRSP Season

This article is on Asset Location. It claims .._." The best strategy is usually to concentrate on interest-earning investments in your RRSP. Things that generate capital gains may be better held outside the plan, because the tax you pay on them is only on half the gain. If the gain is in an RRSP you will pay tax on 100% of the gain when you withdraw it.

The three principle types of investments are interest, dividends and capital gains, and that’s pretty much the recommended order for holdings in your RRSP. Moore always cautions his clients to avoid riskier investments that may lose money in RRSPs, because gone is gone -- there are no tax write-offs for losses in RRSPs.”_

Low yield debt is the WORST thing to hold in tax shelters because your objective is not to minimize the Tax %%, it is to minimize Tax $$. A 6% return taxed at 20% creates more $tax than a 2% return taxed at 40%.

And even the Tax $$ saved in year one does not determine the optimal AL because the faster compounding of high growth assets creates a faster growing benefit even when the tax $$ in year 1 is lower. 

The author has drunk the cool-aid that claims profits are taxed on withdrawal. They are not - ever. Withdrawal taxes are an allocation of principal between the two owners of the account. 

The idea that losses lose their tax impact in tax shelters ignores the reality that their impact is exactly equal to their impact in taxable accounts. In taxable accounts the losses are netted against the gains - within the year and over time. You end up being taxed on NET profits. The benefits of tax-sheltering in both RRSPs and TFSA comes from sheltering the NET profits too.


----------



## leslie

NEW #34: Amin Mawani, FCPA in the Ontario CPA's ready-to-use complimentary article #18 for RRSP Season

This article is a repeat of the wrong advice to contribute to an RRSP whenever you have the savings, but delay claiming the Contribution Credit until a later year when you expect a higher tax bracket. The author obviously has no idea that there is a growing penalty for any delay. He should read http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2616276

It is always better to stash saving in a TFSA in the interval. If that account is full it is almost always better to stash the savings in a Taxable account for the interval, instead of putting into an RRSP with a delayed deduction.


----------



## CPA Candidate

leslie said:


> NEW #33: Brian Moore, FCPA in the Ontario CPA's ready-to-use complimentary article #10 for RRSP Season
> 
> This article is on Asset Location. It claims .._." The best strategy is usually to concentrate on interest-earning investments in your RRSP. Things that generate capital gains may be better held outside the plan, because the tax you pay on them is only on half the gain. If the gain is in an RRSP you will pay tax on 100% of the gain when you withdraw it.
> 
> The three principle types of investments are interest, dividends and capital gains, and that’s pretty much the recommended order for holdings in your RRSP. Moore always cautions his clients to avoid riskier investments that may lose money in RRSPs, because gone is gone -- there are no tax write-offs for losses in RRSPs.”_
> 
> Low yield debt is the WORST thing to hold in tax shelters because your objective is not to minimize the Tax %%, it is to minimize Tax $$. A 6% return taxed at 20% creates more $tax than a 2% return taxed at 40%.
> 
> And even the Tax $$ saved in year one does not determine the optimal AL because the faster compounding of high growth assets creates a faster growing benefit even when the tax $$ in year 1 is lower.
> 
> The author has drunk the cool-aid that claims profits are taxed on withdrawal. They are not - ever. Withdrawal taxes are an allocation of principal between the two owners of the account.
> 
> The idea that losses lose their tax impact in tax shelters ignores the reality that their impact is exactly equal to their impact in taxable accounts. In taxable accounts the losses are netted against the gains - within the year and over time. You end up being taxed on NET profits. The benefits of tax-sheltering in both RRSPs and TFSA comes from sheltering the NET profits too.


Frankly, it's embarrassing to be seeking a designation from an organization that gives advice like this. 

It should be obvious that the investment that should be sheltered from tax is the one with the highest potential tax liability in absolute dollars, and that is the one with the greatest potential for gains and that investment is never an interest bearing investment. Ever.

The comment about losing the ability to deduct losses in RRSP and therefore avoiding risky investments is so stupid it boggles the mind. The money you are risking was never taxed.


----------



## peterk

Not Gail! Nooooooo




leslie said:


> The RRSP's main $benefit is always *exactly equal* to TFSA's same benefit from growing your money tax free.


From what I can tell, this isn't really true. The math behind this "exactly equal"ness is based on an account balance from an infinite series of reinvested tax returns who's mathematical limit equals 1/(1-taxrate). 

I have 2 issues with this:

1, The estimate based on that infinite series of math may work to be pretty damn close to the TFSA if you are looking at a 20 year old who does not withdraw their funds until 65. But it doesn't work so well at all when you are taking about a 50 year old who starts withdrawing at 55. Then the time-value of the "refunds not yet received" becomes an important factor, and the RRSP and TFSA are not at all equal in this situation.

2, The entire premise that the RRSP and TFSA are equal is based on the assumption that the person does not save enough from their income every year to max their RRSP, and thus the refund deposited back into the RRSP is essentially using "free room" that wouldn't have been used anyways. For those that max their RRSP every year, or can even only save (1-taxrate) % of their max limit each year, then the RRSP=TFSA math is no longer valid.


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## Eclectic12

CPA Candidate said:


> ... that is the one with the greatest potential for gains and that investment is never an interest bearing investment. Ever.


There are those who say interest is about the same as equities over the long haul and potentially better, given the stimulus packages in place.




CPA Candidate said:


> ... The money you are risking was never taxed.


Maybe ... but where the RRSP is the main source of one's retirement income, I doubt the idea that "the gov't is losing out as well" is of much consolation.




peterk said:


> ... From what I can tell, this isn't really true. The math behind this "exactly equal"ness is based on an account balance from an infinite series of reinvested tax returns who's mathematical limit equals 1/(1-taxrate).


This is why I have trouble with absolutely stating "profits are never taxed as the contribution credit is also growing to fund the tax bill". All one has to do is spend the tax refund on a vacation and *voila*, there's no credit growing and the principal + any growth will have to find the future tax bill.


Cheers


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## peterk

leslie said:


> Low yield debt is the WORST thing to hold in tax shelters because your objective is not to minimize the Tax %%, it is to minimize Tax $$. A 6% return taxed at 20% creates more $tax than a 2% return taxed at 40%.
> 
> And even the Tax $$ saved in year one does not determine the optimal AL because the faster compounding of high growth assets creates a faster growing benefit even when the tax $$ in year 1 is lower.





CPA Candidate said:


> It should be obvious that the investment that should be sheltered from tax is the one with the highest potential tax liability in absolute dollars, and that is the one with the greatest potential for gains and that investment is never an interest bearing investment. Ever.


Ah I'm not sure about this one CPA and leslie. This is only looking at the tax liability of the unregistered account as you shuffle around the asset allocation. You're not looking at the final RRSP liability that may change as a result of that difference in growth. Leslie, you say the opposite of what I think is correct. You want to minimize the growth in your RRSP not maximize it. Your tax liability comes at the end so you don't want that RRSP to grow too much.

I have not wrapped my head around your "allocating principle between the two owners" ideas. I think it's wrong. It's tax refund at the start, growth, and tax liability at the end. Minimizing the growth in the RRSP (with your bond/GIC/Cash allocation) and maximizing your TFSA and unregistered (with your stock allocation), is the way to go.

However, your insight regarding the delayed RRSP deduction vs. Unregistered is an excellent one. I will definitely be implementing it in the future if my income/tax-rate situation dictates.


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## Eclectic12

peterk said:


> Ah I'm not sure about this one CPA and leslie. This is only looking at the tax liability of the unregistered account as you shuffle around the asset allocation. You're not looking at the final RRSP liability that may change as a result of that difference in growth. Leslie, you say the opposite of what I think is correct.


Keep in mind it's a canned example with built in assumptions ... any change from the assumption means YMMV. As a case in point, whether one talks about a "bonus/penalty" as a separate factor or just look at the mechanics, if the withdrawal income is four or five tax brackets down, I'm not sure it matters which description one uses.




peterk said:


> You want to minimize the growth in your RRSP not maximize it. Your tax liability comes at the end so you don't want that RRSP to grow too much.


YMMV ... where the RRSP is *the* source of retirement income (i.e. no pension), it seems silly to be worrying about the tax liability as one is likely to have a big drop in the income at retirement, never mind complete control (after one's living expenses are taken care of) of the withdrawal tax levels.

Then too, a lot of people I know are looking to retire early ... which may provide a window to draw down the RRSP at lower income levels for as much as ten years before the pension starts being paid. Never mind that even the best pensions have somewhere at or more than a 30% drop of income, built into the DB pension payout formula.


While it's great to build the example to illustrate what is from where ... real life typically does not fit the example. 
Who withdraws *everything* in one lump sum?
As has been pointed out ... those with higher income in retirement than working exist but are rare.




peterk said:


> I have not wrapped my head around your "allocating principle between the two owners" ideas. I think it's wrong. It's tax refund at the start, growth, and tax liability at the end.


Where the tax refund is contributed (or the closer situation to the example, no withholding taxes are taken) *and* the withdrawal tax rate is the same, portion that would have paid the tax will grow at the same rate - covering the withdrawal tax bill.

As I said above, have a similar situation except spend the tax refund on a vacation ... then the story changes (or have the withdrawal tax rate drop). 




peterk said:


> Minimizing the growth in the RRSP (with your bond/GIC/Cash allocation) and maximizing your TFSA and unregistered (with your stock allocation), is the way to go.


TFSA contribution room is far more limited. 

Selling as I've done recently in the taxable accounts to conserve capital will generate a tax bill that will slice down the registered account, slowing growth. 


This is an area where "one size fits all" seems like a recipe for regrets.


Cheers


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## FI40

CPA Candidate said:


> It should be obvious that the investment that should be sheltered from tax is the one with the highest potential tax liability in absolute dollars, and that is the one with the greatest potential for gains and that investment is never an interest bearing investment. Ever.


I'm going to go ahead and disagree with you there.

A corporate bond fund might earn 2-3% in yearly interest on average (at today's very low rates - at some point this will be higher). An equity fund might earn 6% as capital gains and 1% from dividends on average. The dividends and interest are taxed every year. For people with a high income prior to retirement, it can certainly make sense to put the bonds in the RRSP and the equities in a taxable account. Especially if tax rates post retirement are low (i.e. low living expenses). That way, collapsing the taxable account in equities will be very cheap and way better than paying tax on the 2-3% interest EVERY YEAR during working years. The advantage is in the deferral.

I ran the numbers both ways for my situation, taking into account expected tax in absolute dollars each year. The bonds in the RRSP come out ahead for a range of assumptions that I feel will reflect my experience. Your mileage may vary. My point is that it's not so clear cut.


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## leslie

NEW #35: SunLife sponsored article in Huffington Post

Here the different benefits of the RRSP /TFSA are compared using the false claims of everyone ... _"A Registered Retirement Savings Plan (RRSP) can come in handy, as your annual tax deductible contributions can benefit your tax refunds..... While RRSP contributions aren't tax deductible, the bonus is that the money grows tax-free and withdrawals aren’t taxable, meaning your money is easily accessible in a pinch._"

The errors are 
(i) in claiming the RRSP's contribution tax reduction to be a benefit. It is never a benefit to anyone.
(ii) the benefit tax-free growth is always exactly equal between the RRSP and TFSA. It is NOT only the TFSA's benefit. 
(iii) The fact that TFSAs withdrawals are not taxed is not a bonus, any more than the RRSP withdrawal tax is a 'cost' of that plan. The RRSP withdrawal taxes are funded by the original tax reduction on contribution. They don't come out of your own pocket. 

You have to read the referenced sources at the top of this thread to understand these conclusions.


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## leslie

NEW #36: Roger Higgins in The Nelson Daily

This author advises ...._"Always make your maximum contribution each year – that’s how to get the most in immediate tax savings and in long-term growth."_

Yes, contributing to an RRSP will reduce your taxes ....... but that tax reduction is not a benefit, ever, to anyone. It should not be a reason to use the account. 
Also, putting savings into an RRSP is not always the best long term growth. There are many situations where the account should not be used. Just about anyone in the bottom tax bracket should be using a TFSA in preference (not as a fall back position as he indicates later in the article). Anyone expecting their tax bracket to be higher in the forseable future should not be contributing. They should use the TFSA in preference, and if full then stash the savings in a taxable account in the interim. The account should not be used until the TFSA is full for those people expecting Aunt Mary to leave them $1M when she dies. Or for those people with generous defined benefit pensions who are sooo well paid then have extra savings. Etc.


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## peterk

I looked at your spreadsheet.

I not sure I agree with the way you make comparisons between the accounts types. You start with pre-tax dollars ($20,000 in your spreadsheet) and then apply tax to the TFSA/Unregistered accounts. Nobody saves and makes contributions in this pre-tax manner. The actual mechanics of it is that someone saves $20,000 in post tax dollars, and then may quality for an RRSP refund if they so choose to make a contribution & deduction.

Doing it your way applies the magical 1/(1-taxrate) benefit to the RRSP vs. other accounts. From everything I can see, this is spreadsheet trickery which does not apply in the real life mechanics of how someone earns, saves, and pays/deducts taxes on their income.

The final point in how these are not equal in my opinion is this: Even if what you do above is taken to be correct, and we neglect the effect of tax returns and the number of years it takes to iterate through your tax returns to get the full 1/(1-taxrate) benefit... That RRSP contribution is not a given, you need the room, and to get the room you need to earn employment income. There is no RRSP room earned from your previous year's RRSP tax refund, after all. So to make the claim that RRSP/TFSA are equal in this regard, you must be willing to steal RRSP contribution room from at least several years into the future worth of employment income (which is not guaranteed).

I am also not convinced of your asset location calculations. I'm still quite determined that it is best to hold your bonds/GIC/Cash components of your portfolio within the RRSP, and minimize the RRSPs total value to also minimize the tax burden at withdrawal... I'll take another look at your links though.


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## leslie

NEW #37: Jason Heath in MoneySense

This article compares the best options regarding paying off 5.7% debt vs earning profits with investing. He correctly says that if the investment is tax-sheltered in a TFSA and equivalent rate of return to come out equal would be the same 5.7%. But then he addresses investments in an RRSP and claims ..."_You would receive an upfront tax refund, making your required rate of return threshold in order to be better off than paying down the line of credit less than 5.7%." _

Garbage. The tax reduction on RRSP contribution is not a benefit, ever, for anyone. It does not change the effective rate of return you earn on investments in the account. The investments grow at the tax-free rate of return (the same 5.7%) and that shelter from tax is permanent. The $benefits from this shelter is always exactly equal to the same benefit from TFSAs. 

He then muddies the water talking about the 'lot of factors, unknown factors, cannot predict rate of return' kind of excuses for fuzzy thinking so common with experts. But he concludes that regardless of these unknowns your RRSP's rate of return will be more than the 5.7%.

The only way the overall total of net RRSP benefit is greater than the benefit from tax-sheltering profits, is if the withdrawal tax rate is lower than the contribution rate. Since about half the working population will face HIGHER withdrawal tax rates, this is a false claim. Since he admits this factor is unknown, he should use a 'non-change-in-rates assumption' as the default. NOT the presumption that suits his "I want to sell a product" mindframe. 

You need to read the links at the top of this thread to understand these conclusions.


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## steve41

> Since about half the working population will face HIGHER withdrawal tax rates, this is a false claim.


Wrong!!!! It is very, very uncommon to see tax rates higher after retirement!!!!


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## leslie

NEW #38:  KCM Wealth Mgmt in HoweStreet.com

This article tries to sell the RRSP with 3 false claims ...._"Three solid reasons to pursue RRSP accumulations stand out for me: 
Long-term, tax deferred investment growth.
Future withdrawals, ideally at lower tax rates.
Contributions provide immediate tax savings."_

* But growth in the account is PERMANENTLY tax free - creating a $benefit that will always exactly equal the same benefit from a TFSA.
* Future w/d tax rates should NOT be presumed to be lower, because they will be higher for about half the working public. 
* The tax reduction on contribution is not a benefit, ever, to anyone. It is more like a loan that you must repay .... along with all the profits earned by it. 

The author presents strategies that include ... _"You can also make the allowable RRSP deposit and elect to deduct part or all in a future year."_ He fails to mention the growing penalty from that choice, and the better choices that exist. He needs to read http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2616276

A second wrong strategy derives from his wrong understanding that ... _"Investment income earned in RRSP accounts is tax deferred until withdrawn. All funds withdrawn from an RRSP are fully taxable, like salary. There is no preferential tax treatment of Canadian dividends, gains or losses. Further, the dividend tax credit is lost as it cannot be used by the RRSP."_ This s wrong because the profits earned in the account are never taxed, not while inside and not on withdrawal. The main RRSP benefit is always exactly equal to the same $benefit from a TFSA - the permanent sheltering of profits from tax. 

From that wrong understanding, he concludes Asset Location advice ... _"Where possible, interest bearing investments are more suited for RRSPs. Some investments, like stocks, are often better owned outside the RRSP."_. Which is also predictably wrong. Quite the opposite is true. He needs to read the links at the top of this thread and the paper at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2317970 The effective tax rate is not the deciding factor for AL. It plays a role, but it is the growth rate (rate of return) of the asset that is far more important - that trumps all but a 0% tax rate.

The third false claim he makes is that ..._"Remember that capital losses can’t be used inside RRSPs."._ No one invests with the presumption of losing money in the long run. Profits in a taxable account are levied only on the NET gain-loss over time. All those $taxes are saved when in the tax shelter. The effect of tax sheltering is exactly equal between gains and losses.


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## peterk

I'm out. Whatever it is that you're trying to accomplish here leslie, I don't think you've done it. Best of luck.


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## leslie

NEW #39: Diane Dekanic in The Globe and Mail 

Here the author identifies what she considers different strategies for single savers. She _"recommends single people stop contributing to RRSPs after a certain age, depending on how much they’ve set aside. That’s because the money withdrawn in retirement is taxed as income, which is at the highest tax rate."_ But since the original contribution credit was calculated at full tax rates, and it funds the eventual tax on withdrawals, also at full rates, there is not 'problem' here - no 'tax savings' to be managed - no benefits from NOT adding to the account.

She _"advises clients to have sufficient funds in non-registered accounts with capital gains that are taxed at a lower rate ... Because it allows more flexibility when it comes time to withdraw income." _ Why? Sure there are some hoops to jump through to w/d from an RRSP but nothing of any materiality. Why give up the benefit of permanently sheltering profits for decades and decades just because you don't want to fill in a simple form?

And is she saying that dividend paying assets are best located in the Taxable account before (say) low yield Treasury debt? Tax rates do not determine the Asset Location choice. The metric by far the most important is the asset's growth rate - making high return equities best held IN tax shelters. 

She flits back and forth between advising a Taxable account and a TFSA (instead of the RRSP). Since no one disputes the common advice for those in the bottom tax bracket to use a TFSA instead of an RRSP .... her advice for others at higher tax brackets to use an RRSP - but stop contributing at some point- is questionable. She says to stop contributing at age 40 if the RRSP is worth $200,000.

Lets look at that. A $200,000 account earning 7% for 30 years (I'll give her an additional 10 yrs's edge above her presumption of retirement at age 60) would equal $1,522,451. Inflation doubles in 30 years so that value = $761,225. A 5% required draw would equal $38,000. That is all in the bottom tax bracket, even with another $7,000 of additional income before the 2nd tax bracket is triggered at $45,000. Heck those contributing in the 2nd tax bracket could have additional RRIF withdrawals of $52,563 (in addition to the $38,000) before facing a penalty from w/d at a higher tax rate. 

So not only is the advice to use a Taxable account ludicrous (loosing out on all that profit sheltering) but there would be no anticipated penalty from w/d at a higher tax rate, and a large probability that most of the RRIF draw would be taxed at a lower rate - creating a bonus above the TFSA's benefit. That bonus could easily fully offset the RRIF's clawback of GIS. As well, the RRIF draws are pensionable income that can be split between spouses further reducing the effective w/d tax rate and increasing the Bonus from w/d at a lower rate.


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## Eclectic12

steve41 said:


> Wrong!!!! It is very, very uncommon to see tax rates higher after retirement!!!!


Why let actual experience get in the way of a perfectly logical theory? :biggrin:


Cheers


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## AltaRed

steve41 said:


> Wrong!!!! It is very, very uncommon to see tax rates higher after retirement!!!!


Steve, you would see more of this in real life than most of us, but I suspect very, very uncommon might be a slight exaggeration? I am aware of people in this situation, especially tax rates when young,


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## Eclectic12

The "rates when young" is pointing out that when one starts out, one has a lower tax rate ... then I fit that picture as I know I contributed to my RRSP at a lower rate than today's employment rate. Whether it's lower than my eventual withdrawal rate (will be lower than last employment tax rate by at least three tax levels) is not clear to me.

Then too ... less tax rate at contribution also meant less income and a smaller RRSP contribution than the later higher income earning years. TFSAs weren't around so that is a new choice for those who are in the lower income levels.


Bottom line is that it is complicated to figure out ... does the tax deferred translate to enough growth to cover the potentially higher tax rate (if I could track the contribution performance versus how the varying tax rate contributions have done)? 

Were those contributions part of the "buy for $28, collect dividends that would have had taxes applied, sell for $105, park in a HISA MF then re-buy for $50"? 
[If I knew this was true ... would I care about a potential higher tax rate in this case?]


What is the tax differential as using the 2016 Ontario tax rates for both ends of the contribution then withdrawal?
A back of the envelope estimate would be along the lines withdrawing what looks like a 9% higher tax rate.


Cheers


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## steve41

OK, OK..... I will retract one of the 'verys'. (I forgot about the retirees who were LottoMax winners)


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## cainvest

steve41 said:


> OK, OK..... I will retract one of the 'verys'. (I forgot about the retirees who were LottoMax winners)


And not too far down the road you'll likely have to put the extra "very" back in due to TFSA savings coming into play for retirement.


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## humble_pie

leslie said:


> A $200,000 account earning 7% for 30 years ... would equal $1,522,451. Inflation doubles in 30 years so that value = $761,225. A 5% required draw would equal $38,000. That is all in the bottom tax bracket.



perhaps we have a little mistake here? a 5% mandatory withdrawal from a RRIF account worth $1,522.451 would be $77,622.55. It would not be $38,000. The tax rate on $77,622 withdrawn & taxed as income would *not* be the bottom tax bracket.

the gummint doesn't care what inflation may or may not have done to the buying power of the dollars.


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## leslie

NEW #40: Dale Jackkson on BNN

This article claims to dispute 5 myths, one of which he claims is that _"Registered retirement savings plans are a tax exemptions"._ (by which he means a 'permanent savings' as opposed to 'deferrals'). Beats me why he claims this is a myth because it is definitely only me and my merry band that have ever claimed ANYTHING approaching this. 

The received wisdom, that no one but I disputes, is that the RRSP 'is all about deferrals'. And it is THIS understanding that is wrong. Sure this account belongs to the those classed as 'tax-deferred', because the tax on the original employment income is deferred until withdrawal. But that does NOT mean there is any benefit created by that deferral. People care about the account's benefits, not its mechanics.

There is no benefit from deferring the taxes paid on the original employment income - because the liability it creates grows at exactly the same rate as the rest of the account grows. There is no benefit from 'deferring' the taxes on profits earned in the account, because the profits are NEVER taxed, not deferred. The $benefit from the permanent sheltering of profits from tax will ALWAYS exactly equal the same benefit from a TFSA (which everyone agrees is NOT about deferring). 

Maybe the author chose this to specifically address my claims. But he gave no math proof, where as I have given both a math proof and an explanatory model. Of course you have to actually read with an open mind the links posted at the beginning of this thread. The comments above prove this still needs repeating.


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## leslie

NEW #41: Canada Press in CTV News and also Vancouver Sun

This claims the RRSP ..._"allows you to defer taxes, not avoid them. You are able to deduct your contributions from your income, but when you withdraw the money in retirement, you will pay income tax._"

Maybe they are finally catching on the the fact that the official claim (that the contribution's tax reduction is a benefit ) is false. But lack the integrity to clearly state they have been (and officials continue to be) wrong. Better to sneakily change your tune, than to never change at all I guess.

But this wording essentially continues another false idea (that profits earned in the account are also just tax-deferred, and not tax free permanently). The truth is that the RRSP's main benefit, the only one that everyone gets, is it permanent sheltering of profits from tax. This $benefit will always be exactly equal to the same benefit from a TFSA - which everyone agrees is a permanent tax shelter. 

And it leaves you with the false impression that you benefit 'from the deferral'. But there is NO benefit from the deferral of anything in the RRSP.

To understand my conclusions you must read the referenced material at the top of this thread.


----------



## Charlie

As the RRSP deadline approaches, I'm expecting a slew of Leslie posts disputing the advice in any and all articles with a link to his reference material in the first link.

And I will understand none of it. Even with a strong background and interest in finance. Oh well...


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## OnlyMyOpinion

Leslie (a.k.a Leslie Reed, C.Reed, Chris Reed, Retail Investor, less)
I know your intentions are good, but to say that _"Maybe they are finally catching on the the fact that the official claim ... is false. But lack the integrity to clearly state they have been ... wrong."_ suggests a conspiracy, or a subpar understanding of RRSPs by everyone in the country except you. 
I agree that there are a lot of 'sound bitey' and incomplete articles out there. But I think the lack of understanding of the pros and cons of RRSPs that you seem to believe exists is overstated, particularly as it relates to readers of CMF.


----------



## Retired Peasant

I no longer see the point of this thread. Leslie doesn't respond to anyone's questions/challenges, but just blindly posts example after example. Surely whatever the point, it was made by page 4 or so?


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## cainvest

OnlyMyOpinion said:


> I know your intentions are good, but to say that _"Maybe they are finally catching on the the fact that the official claim ... is false. But lack the integrity to clearly state they have been ... wrong."_ suggests a conspiracy, or a subpar understanding of RRSPs by everyone in the country except you.


Exactly ... not to mention the fact that when uses the same "hyper-critical" eye that is being used to point out these articles, the errors in leslie's "reference material" becomes obvious.


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## leslie

NEW #41: Marion Wahl in Kelowna Daily Courier

This author compares the RRSP and TFSA. While the TFSA is described as ... _"accounts that allow Canadians to earn tax-free investment income_". the RRSP is presented as ... _"There are two main benefits of RRSPs. First, the contributions to your RRSP are deductible from your taxable income. While the purpose of an RRSP is to provide retirement income, an immediate benefit is to save tax dollars now. Second, any income earned on those contributions is not taxed until the funds are withdrawn."_

In fact the main benefit of both accounts is the same permanent sheltering of profits from tax. This $benefit will always be exactly equal. The profits in an RRSP are not taxed on withdrawal. Those taxes are an allocation of principal. 

And the immediate reduction of taxes on contribution is never a benefit, ever, to anyone. It is more like a debt that will be repaid, along with all the profits earned by it.


----------



## leslie

NEW #42: Russ McEachnie in Waterloo Chronicle

Here a 7 ways to save and grow your savings. But not always the best ways. He advises to ... "_Always make your maximum RRSP contribution each year.... and fill up unused contribution room._" But that advice is often disfunctional. Contributing large amounts in a particular year may well push down the marginal tax rate into a lower bracket. Contributing the maximum every year may cause you to lose the benefit of a higher tax rate later. And most people in the bottom tax bracket should not be contributing at all while they have TFSA room.


----------



## leslie

NEW #43: Garth Turner in The Greater Fool

The author tries to sell the idea of borrowing to fund RRSP contributions ..... "_ Here’s how an RRSP loan works: borrow $10,000 (and contribute it to RRSP). if you earn a hundred grand, you’ll be getting about $3,800 back. Use that to pay down the loan. Now you owe only $6,200, and yet have $10,000 in your plan._"

Unfortunately this magic does not work. The RRSP account is always fluffed up by the amount of debt you own the government. The account's money is not all yours. You cannot access the money without first repaying the government its share of the account. In this case the sucker would end up owing the bank $6,200 and owing the government $3,800, totaling the $10,000 he borrowed. 

Further down he claims ..._"Understand the huge difference between an RRSP and a TFSA. The former defers tax and the latter eliminates it. So at age 71 all retirement plans turn into taxable cash"_. While it is true that RRSP withdrawals are taxed, that does not justify the comparison. 
* BOTH accounts eliminate all taxes on the profits earned in the accounts. 
* The TFSA does not eliminate tax on the original employment income - you must pay it at the time earned.
* The RRSP also does not eliminate the tax on the original employment income - you pay it later at the future value of what you originally owed, compounded at whatever rate of return your investments earned. There is no gain/loss vs what the TFSA pays.

He has missed the actual big difference between the two accounts. The RRSP creates a possible additional bonus/penalty from a w/d tax rate that is lower/higher than when contributed. His argument about the loss of OAS (which impacts only relatively rich people) should really be about the loss of GIS (which most everyone gets clawed back). The loss of benefits is factored into the net RRSP benefit by considering it as an increase in the effective tax rate on withdrawal - creating a Penalty from a higher w/d tax rate for about half of all workers.


----------



## OnlyMyOpinion

leslie said:


> ...He has missed the actual big difference between the two accounts. The RRSP creates a possible additional bonus/penalty from a w/d tax rate that is lower/higher than when contributed. His argument about the loss of OAS (which impacts only relatively rich people) should really be about the loss of GIS (which most everyone gets clawed back). *The loss of benefits is factored into the net RRSP benefit by considering it as an increase in the effective tax rate on withdrawal - creating a Penalty from a higher w/d tax rate for about half of all workers.*


Hey Steve - We finally understand why so many people face high tax rates in retirement - you have to include the OAS/GIS you don't receive as part of your tax liability. So all these working years I should have been factoring in the welfare payments I wasn't eligible for when figuring out my tax rate. 
Sheesh :crushed: So, what is everyone else smoking today?


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## cainvest

Pickings must be getting slim to go after the small circulations like the Kelowna Daily Courier ... what's next, the Piapot, SK Tribune?


----------



## leslie

NEW #44 : Preet Banerjee in Global News

He makes two misleading points. 

(i) _"Get the tax break-- The reason everyone starts talking about RRSPs during tax time is because it’s a great way to put some money aside for the future while also enjoying a tax break. Reap the benefits of moving money aside and cutting down your overall payment."_

As I have repeated ad nauseum above --- the contributions credit is NOT a benefit, ever to anyone. The author in private communication has admitted that "_ I acknowledge that more emphasis should be made that it's not a "benefit", and rather more of a "feature"_. If you parse his quote above you will see he never ACTUALLY claims the CC is a benefit .... even while leaving everyone who does not know better, that it IS. No doubt he sleeps well.

(ii) "_If you already have a pension plan through your work ... Unfortunately, most pension plans do not cover the full cost of retirement and even top ups from CPP and Old Age security often leave you a little short changed. Contributing to your RRSP is like having a little nest egg – just in case!_"

If the TFSA did not exist, or if that account is full, I would agree. But to make this claim without that qualification is just wrong. Diversify. You will already have taxable income in retirement. You will not want more, being taxed at your high marginal rate. Using the TFSA is usually better. The possible exemption would be for those contributions taxed at the top or next-to-top marginal rate.


----------



## leslie

NEW #45: Evelyn Jacks in the Battlefords News

Although I have always found Ms Jacks to be correct on other tax issues, her take on the benefits of an RRSP mimic the received wisdom and are wrong. Her she presents the benefits of different accounts. For the TFSA she correctly states that ..."_Earnings are never taxed_". For RRSPs she says they ..._"offers two advantages. They shelter income until the funds are withdrawn, and they offer a tax deduction when the contribution is made_".

But the earnings in an RRSP are never taxed. This benefit from permanent sheltering of profits will always exactly equal the exact same benefit from the TFSA. And the contribution's tax deduction is never a benefit -ever, to anyone. It is more like a loan that must be repaid along with all the profits earned by it in the interim.

She expands from this wrong starting place to give Asset Location advice ... _"Interest income is most efficient in an RRSP, whereas the benefits of reduced taxation of capital gains, and dividends are not available if the investments are held in an RRSP. If investments are made in RRSPs, TFSAs, and non-registered accounts, be sure to keep investments that earn dividends or capital gains in your non-registered accounts as these will be taxed at lower rates." _ 

But the benefits from profit sheltering in both the TFSA and RRSP are not determined primarily by the tax rate on profits. The benefit compounds with time, so a higher growth rate creates greater benefits given enough time. This makes high return assets the better choice for tax shelters even though their profits will be preferentially taxed. Eg a bond earning 2%, taxed at 100% generates LESS benefits in a tax shelter for 5 years than a stock earning 8%, taxed at 20%.


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## leslie

NEW #46: Joel Schlesinger in Winnipeg Free Press

This article is on the "contribute to RRSP or pay down mortgage" question. The article starts out fine ..... compare the returns. He starts going off track by comparing risky stock investing to 100% safe debt repayments, without acknowledging the difference in risk, without mentioning that many/most people's investment portfolios include both stock and low-yield debt - the debt portion of which would create net losses when offset by a higher rate mortgage. 

He goes further off track when considering the tax rate on RRSP contributions. He says ..."_Those who are in a higher tax bracket, who can generate a very large refund, should consider contributing to their RRSP over an additional lump-sum payment on the mortgage. Highest earners receive a tax refund of about 46 cents for every dollar contributed to an RRSP — far more than the interest saved on additional mortgage contributions. Even if you’re investing only in GICs, the large tax refund alone makes RRSP contributions worthwhile."_

This argument is based on the false 'the contribution credit is a benefit' idea. The cc can never be compared to any asset's rate of return or interest costs. The larger cc from higher tax brackets does NOT change the choice 'because of the larger cc'. If presented another way, the argument would be valid. It would be valid to argue ...'Those in higher tax brackets are more likely to realize a bonus from withdrawals at a lower rate. So the net benefit (including its profit sheltering) from an RRSP (vs the mortgage) swings in favour of the RRSP'. 

His claims that _"Moreover (the RRSP cc) can be put to good use. The refund that gets generated can be put down against the mortgage"_. There are two errors here. First the cc is not a benefit, ever, for anyone. Second there is nothing 'MORE' about this. You cannot double up your benefits by doing anything specific with your refund. You NEED to add any refund to savings because it is this extra bit that funds the RRSP's eventual withdrawal tax. $x in an RRSP does not equal $x in a TFSA, or $x paydown of debt, or $x in a taxable account. You need to save more when using an RRSP just to be equal. 

The errors continue with ..._"Yet the argument for making a lump-sum contribution is less compelling for lower-income earners because true tax savings are only realized when taxes paid on RRSP withdrawals are less than the taxes deferred on the original contributions. Of course, RRSP money grows tax-sheltered, so long-term tax savings aside, contributing to an RRSP is still somewhat beneficial even for low-income earners.."_

Yes, the RRSP option benefits from any Bonus on withdrawals at lower tax rates than at contribution ... BUT his idea that the RRSP's benefit comes mainly from the lower withdrawal rate, and only minimally from the income sheltering is false. The RRSP's benefit from permanent profit-sheltering is by far the biggest, most important benefit, and the only one that everyone gets. It will always exactly equal the same $benefit from a TFSA. It is the Bonus from a lower w/d rate that is 'the extra'.


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## leslie

NEW #47:  Investor's Group in Global News video 

In this video at time 1:20 the advisors is asked _"What is the RRSP's Benefit?_" Her answer is ..."_The biggest benefit is that all income and growth in the plan are tax deferred_".

But in fact there is NO benefit from any deferral of anything, any time, for anyone. The profits in the plan are never taxed, not while inside and not on withdrawal. The major RRSP benefit, the only factor that everyone gets, is the permanent sheltering of profits. This $benefit will always exactly equal the same benefit from a TFSA.


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## My Own Advisor

I disagree here Leslie, but potentially your issue here is with the word "benefit".

The RRSP is an excellent account because all income and growth earned inside the account grow tax deferred - this is true - until money is withdrawn.

You can _benefit_ from this account by contributions in a higher tax bracket (that grow tax-deferred) and withdrawals in a lower tax bracket (that are taxed).


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## leslie

New #48: Jonathan Chevreau in the Financial Post

I have included this article in the thread, not because it makes false claims, but because it is the first article this year to make CORRECT claims. Kudos to J Chevreau for allowing Jamie Golombek to dispute the false claims by Doug Dahmer, even while Chevreau's past articles have all been on the side of Dehmer. 

Golumbek, along with ROB's John Heinzl were early adopters of my ideas. As a reporter Heinzl is supposed to report what others say, but he usually tries to get one article each RRSP season promoting his/my ideas. So far this year I have not seen one. 

Golumbek authored two articles - Blinded By The Refund, and Just Do It - The Case For Tax-Free in 2011. In these he backs up my claims that the contribution's tax reduction is not a benefit, ever, to anyone. And that the profits in the account are not just tax-deferred, they are tax free - while in the plan and on withdrawal. At my urging he also got CIBC to remove from their website the accepted false claims. Since then, until now, he has gone silent, and CIBC replaced the false content. No doubt he has faced directives from CIBC and his professional body to 'keep quiet'. 

This article revisits the 'withdraw RRSP funds early when you face low w/d tax rates, and expect higher rates later'. I was hoping this false advice had died its death because it has been repeated ad nauseum in past RRSP seasons. The 'withdraw' argument is presented as always as if the only RRSP benefit is that created by the difference in tax rates between cont and withdrawal. Under that presumption the advise would make sense. 

But of course that possible bonus/penalty is a small factor compared to the benefit that everyone gets from permanently sheltering profits from tax. A benefit you lose when withdrawing early. Golumbek does a good job presenting the tradeoff, and limiting the situations when that tradeoff may (or may not) be worth the early w//d.


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## leslie

NEW #49 : staff at Kelowna Capital News 

This article promotes the use of the RRSP's HBP to finance a home. They advise contribution savings to the RRSP specifically to use the HBP. _"The advantage to you is your $25,000 RRSP contribution will count as a tax deduction for this year and will generate a tax refund. You can use the tax refund you receive to repay the RRSP or other expenses related to buying your home._" 

This is the old 'the contribution credit is a benefit' argument. But the cc is never a benefit, ever, for anyone. The benefit from a HBP equal only the profits earned (interest costs saved) by the cont. credit (or withdrawal taxes not paid) until repaid. So a 
$25,000 outstanding debt in year (declining), multiplied by (say) 
30% tax rate multiplied by (say)
3% mortgage rate, will create a benefit in year one of only 
*$225.*

The tax refund from the RRSP contribution used to fund a HBP must be repaid using after-tax dollars. It is not a benefit.


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## peterk

leslie said:


> This is the old 'the contribution credit is a benefit' argument. But the cc is never a benefit, ever, for anyone.


Right. Except for people who max out their RRSP and TFSA with a high savings rate. Or those who have a regular savings rate, but a juicy DB pension that result in a much smaller RRSP contribution...

All your math goes out the window with those people, and the traditional "The benefits of an RRSP are the tax refund and the tax deferral until retirement" motto applies. So I wouldn't call it "never a benefit, ever, for anyone", exactly. :rolleyes2:


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## Jaberwock

My RRSP contributions cost me less than 55 cents per dollar. I am now drawing out of my RRIF and getting back 70 cents on the dollar. The tax credit sure looks like a benefit to me


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## Eclectic12

peterk said:


> ... All your math goes out the window with those people, and the traditional "The benefits of an RRSP are the tax refund and the tax deferral until retirement" motto applies. So I wouldn't call it "never a benefit, ever, for anyone", exactly. :rolleyes2:


A good point for those reading the thread ... past responses seems to indicate the OP is more interested in what the defined model educates people with versus what people are experiencing.


Cheers


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## leslie

New #5: Rob Carrick in Globe & Mail video

This article talks about when /if to move money from a taxable account into either a TFSA or RRSP. The most explicit point made was that ..._"if makes sense ..such as sheltering the highly taxed form of interest income of fixed income assets"_.

This asset location AL advice is the worst possible. The rate of tax paid on profits is NOT the deciding AL factor. The rate of return is by far the bigger factor. Eg a bond paying 2% and taxed at 100% produces less benefits after 5 years from sheltering profits in a TFSA or RRSP, than a stock earning 8%, taxed at 20%. When you have assets that overflow your RRSP and TFSA limits, low-yielding debt should be the first assets TO GET KICKED OUT.


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## peterk

leslie said:


> When you have *assets that overflow your RRSP* and TFSA limits, low-yielding debt should be the first assets TO GET KICKED OUT.


Strongly disagree. One of those "overflowing assets" will be your RRSP tax refund, which will not be reinvested back in the RRSP, and your math completely breaks down. In that case, holding debt or GICs in your RRSP is probably the very best place for it, as every dollar of growth increases your future tax liability. At that point you have to make the decision of whether the deferred tax benefit in the RRSP outweighs the reduced tax rate on unregistered investments (gains, dividends), and perform that calculation.


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## OnlyMyOpinion

leslie said:


> ...This article talks about when /if to move money from a taxable account into either a TFSA or RRSP. The most explicit point made was that ..._"if makes sense ..such as sheltering the highly taxed form of interest income of fixed income assets"_.
> This asset location AL advice is the worst possible. The rate of tax paid on profits is NOT the deciding AL factor. The rate of return is by far the bigger factor. Eg a bond paying 2% and taxed at 100% produces less benefits after 5 years from sheltering profits in a TFSA or RRSP, than a stock earning 8%, taxed at 20%. When you have assets that overflow your RRSP and TFSA limits, low-yielding debt should be the first assets TO GET KICKED OUT.


Leslie, I'm afraid you are simply too single-minded to understand when circumstances make your argument moot (some might say simple-minded, but that would be rude).


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## Eclectic12

peterk said:


> Strongly disagree. One of those "overflowing assets" will be your RRSP tax refund, which will not be reinvested back in the RRSP, and your math completely breaks down.


Agreed.




peterk said:


> In that case, holding debt or GICs in your RRSP is probably the very best place for it, as every dollar of growth increases your future tax liability. At that point you have to make the decision of whether the deferred tax benefit in the RRSP outweighs the reduced tax rate on unregistered investments (gains, dividends), and perform that calculation.


Assuming there's an income source (i.e. good DB pension and/or sizeable taxable investments) that combined with CPP/OAS forces one into the high income category. Or to use the model's terminology ... the "penalty" from higher income tax levels at withdrawal.

Dealing with the taxable investment income has more choices than in the past as where one is not bothered by the swap structure, there are now ETFs that will force all distributions to be CG at the sale of the investment. Compared to interest or dividend income, this reduce if not cut one source of income out of the tax level/OAS income test picture.


Cheers


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## peterk

Eclectic12 said:


> there are now ETFs that will force all distributions to be CG at the sale of the investment. Compared to interest or dividend income, this reduce if not cut one source of income out of the tax level/OAS income test picture.
> 
> Cheers


Neat, I didn't know that. I suppose one would have to be careful with their tax bracket when deciding to invest in that. Most likely for lower income people in most provinces they would be paying negative 5% to 10% tax on dividends and 10% to 20% tax on Capital gains. Of course the time value of deferring the capital gain a number of years vs dividend tax is not insignificant either. It'd be a tricky calculation.

For high income earners where the dividend and cap gain tax rates are very similar, the deferred cap gain tax would be a huge winner vs annual dividend taxes. Is there any discussion on CMF already about these ETFs?


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## Eclectic12

peterk said:


> Neat, I didn't know that. I suppose one would have to be careful with their tax bracket when deciding to invest in that.


Why would the tax bracket matter?
Zero taxable income until the investment is sold will benefit anyone worried about forced withdrawals adding income, would it not?

I see the point about dividends for low income people but I doubt low income people have a big enough DB pension payout *plus* RRSP minimum withdrawals to need to dabble in a less known investment choice.

The other advantage is that where one wants to hold the US market in a TFSA, no distributions gets rid of the IRS 15% withholding tax making it tax free, like a Canadian domiciled investment. In an RRSP, it also means the loss of the FTC is no longer relevant compared to a traditional Canadian domiciled ETF.
http://www.horizonsetfs.com/etf/HXS




peterk said:


> For high income earners where the dividend and cap gain tax rates are very similar, the deferred cap gain tax would be a huge winner vs annual dividend taxes. Is there any discussion on CMF already about these ETFs?


Also for OAS thresholds ... don't forget that the $1 received in eligible dividends, the OAS test is applied to the reported $1.38 instead of the post-DTC preferred tax rate.

I can recall people asking about ETFs having a few mentions of this type of ETF but that is it. I don't recall a thread that digs into the guts beyond HP's help comments highlighting it is a swap structure so there is counter-party risk involved that a plain jane ETF typically does not have.


Cheers


*PS*

Choosing non-dividend paying stock achieves the same thing but for some sectors, that means skipping the sector as all the large players pay dividends.


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## peterk

I mean in comparing the swap ETF vs. regular. If you are in a dividend tax bracket that is near 0% (a whole lot of low-mid income people) then buying the dividend paying ETFs or stocks (high yielding ones, at that) is going to be the preferred tax-minimizing strategy any day of the week.

Myself, I pay a 18% Capital gain tax and a 15% tax on CDN dividends. So it wouldn't be so cut and dry. I'd have to compare carefully the benefit of the lower dividend tax rate vs. the benefit of the deferred capital gains tax to calculate the average length of time I'd need to hold the Swap ETF to break even on my taxes.


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## leslie

New #51: Jeff Buckstein in The Globe and Mail 

This article claims to list ... _'several ways an RRSP can help you save while saving you tax_".

(1) "_The most immediate advantage people recognize is the upfront tax deduction_". But as always, that tax reduction is not a benefit, ever, for anyone. The statement is false. 

(2) The author then tries to wiggle out of his first claim by admitting ... "_There is a caveat attached to the upfront deduction, however. When you ultimately start withdrawing the funds in your RRSP they will be taxed_". So why did he make the false claim in (1) to begin with? The two factors will always exactly offset each other. So both comments should have been edited out. The contribution credit is not a benefit. 

(3) Then he claims .." _this withdrawal should not take place until your retirement years, by which time you will presumably be in a lower tax bracket compared to when you contributed the money._" The industry loves to make this false assumption. But half of wage earners will face higher tax rates on withdrawal in retirement. 

(4) Then he presents one possibility of withdrawals at higher tax rates..... but limits this to during working years. A truthful presentationof (3) and (4) would state that "there is a possible bonus/penalty from withdrawing at lower/higher tax rates than at contribution" - without any presumptions or promises.

(5) He claims ..."_An RRSP offers plan holders the opportunity to enjoy tax-free compounding of income on investment instruments kept inside the plan_." This comes from the false idea that profits are taxed on withdrawal. The truth is that profits are never taxed, not while inside the plan and not on withdrawal. This $benefit from permanent profit sheltering will always exactly equal the same benefit from a TFSA. 

(6) Robert Snowdon claims that ... "_Some experts say investors should hold interest-bearing securities such as bonds in an RRSP because interest is 100 per cent taxable, and they should hold stocks outside the plan, where they are eligible for capital-gains and dividend tax credits"_, Why would he repeat this claim if he did not believe it himself? Why attribute it to only 'some experts' without countering with his own position?

Of course this is the exact opposite of the correct Asset Location. Tax rates do not decide the issue. The most important variable creating benefit from tax shelters is the asset's rate of return. His wrong advice comes from his wrong idea that profits are taxed on withdrawal.


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## steve41

All goes to show that 'numbers don't lie'. Words however, can.


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## leslie

New #52: Dave Faulkner in Advisor.ca

This article highlights the important, and perfectly correct fact that $1,000 in an RRSP does not equal $1,000 in a TFSA because you must pay tax to withdraw the RRSP funds. And so when funding the accounts, the choice is never between funding $x in a TFSA vs funding $x in an RRSP. They are not equal because the RRSP is funded with before-tax money, and the TFSA is funded with after-tax money. The RRSP contribution must be larger. But this is not a problem because as long as $spending is kept equal, the RRSP's tax reduction means that $savings for an RRSP will be bigger. 

Unfortunately they did not present the facts that way. The article says you must do a mathematical calculation, that you might not be able to 'finance' the difference, and you must invest the tax refund in the RRSP. None of these is true.

Eg. 
You have $10,000 extra cash in your chequing account.
Your marginal tax rate is 45%.
You expect any tax refund in 3 months.
At that time you want to spend $4,500 on a vacation (or to reduce your mortgage, or whatever).
Question - how much will you contribute to an RRSP vs a TFSA?

1) You will put $5,500 into your TFSA and keep the remaining $4,500 to pay for the vacation.
2) You will put $10,000 into an RRSP and use the tax refund to pay for the vacation. 
You did not do any calculations. You did not use the tax refund to gross up your RRSP. You did not finance the RRSP contribution. And yet you DID end up funding the accounts with the correctly equal values (not $amounts).

As the example above shows, the RRSP's tax refund is not necessary for funding. You can tell your employer to reduce the taxes withheld from your paycheques during the year - allowing you to save with before-tax dollars. Your employer may directly fund a company RRSP and not deduct taxes - making its contributions before-tax dollars. You can borrow from your emergency fund for any top up equal to an expected tax refund. 

No one disputes the common sense that it is better to collect $$ owed to you sooner rather than later. How and how fast you collect the value of the Contribution Credit is your personal decision, not an attribute of the system itself. The material linked at the top of this thread discusses, and includes variables for, a time delay in collecting the CC. If you personally choose to delay collection then you will pay a penalty for that delay.


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## steve41

There is no such thing as a marginal tax rate, average or effective tax rate..... there is the T1 (tax algorithm) It is a complex formula with indexed tax brackets, age credits, exemptions, dividend gross-ups, clawbacks.... Any analysis that attempts to show that RRSPS are a wrong retirement savings approach MUST take into account this tax reality. Spreadsheets don't cut it BTW.


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## atrp2biz

leslie said:


> New #51: Jeff Buckstein in The Globe and Mail
> 
> This article claims to list ... _'several ways an RRSP can help you save while saving you tax_".
> 
> (1) "_The most immediate advantage people recognize is the upfront tax deduction_". But as always, that tax reduction is not a benefit, ever, for anyone. The statement is false.
> 
> (2) The author then tries to wiggle out of his first claim by admitting ... "_There is a caveat attached to the upfront deduction, however. When you ultimately start withdrawing the funds in your RRSP they will be taxed_". So why did he make the false claim in (1) to begin with? The two factors will always exactly offset each other. So both comments should have been edited out. The contribution credit is not a benefit.


Can I borrow $10,000 from you? I'll pay you back $10,001 in ten years. It's a steal of a deal for you...you're getting a 'benefit' of $1!


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## Eclectic12

peterk said:


> ... If you are in a dividend tax bracket that is near 0% (a whole lot of low-mid income people) then buying the dividend paying ETFs or stocks (high yielding ones, at that) is going to be the preferred tax-minimizing strategy any day of the week.


Where one is in a low-mid income level, one likely is not paying attention to CG ETFs.




peterk said:


> Myself, I pay a 18% Capital gain tax and a 15% tax on CDN dividends ...


What's it worth to have use of the 15% *today*?

I am not sure it is as simple as "what's the difference in the tax rate".


Cheers


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## peterk

Eclectic12 said:


> I am not sure it is as simple as "what's the difference in the tax rate".
> 
> Cheers


Yup! That's what I said above.


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## Eclectic12

The part about


> the average length of time


 makes it sound like a simple straight line calculation.

Then too, while one may be single now - getting married may mean a spousal RRSP changes the picture, for better or worse. :biggrin:

< ... silly pun intended ... >


Cheers


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## leslie

NEW #53: Dave Faulkner in Advisor.ca

This is a follow up article referencing my post just above. He responds to a reader correctly pointing out he had ignored the clawback of GIS. But his new example continues to 'prove' nothing. He models a 45 year old just starting saving..... and that presumption decides the outcome - not some general rule about which account (rrsp vs tfsa) is better.

He models the 45 yr old earning $58,500 savings $5,500 yearly. That puts his RRSP contributions in about the 30% tax bracket, while his eventual withdrawals will be mostly/all in the bottom 22.5% tax bracket. So while both accounts generate the same benefit from permanent tax-free profits, the RRSP will generate an additional bonus from withdrawal at a lower tax% than at contribution. Offsetting that bonus is the RRSP penalty from clawbacks of GIS/OAS.

How those two factors trade off all depends on the size of the RRSP - the bonus from the lower tax rate equals the difference in rates multiplied by the $withdrawn. This bonus will be bigger the greater the rate of return assumed earned. It will be greater the longer the account has been open. For example if you presume the savings were started at age 35 instead of 45, and the rate of return earned is 7%, then his result gets reversed - the RRSP comes out ahead (assuming spending levels don't change in retirement). 
http://www.retailinvestor.org/SaveInRRSPorTFSA.xls

Secondly he provides additional analysis on the issue I talked about in my post above. He creates comparisons that are 'different' and therefor have 'different' outcomes. The only way to compare accounts is to use 'same' comparisons. E.g.he compares ...
1) Baseline: $5,500 to TFSA (Isaac applies for GIS)
2) $5,500 to RRSP, $1,631 tax refund to TFSA
3) $5,500 to RRSP, $1,631 tax refund to Mortgage
4) $5,500 to RRSP, $1,631 tax refund to Education

A fair comparison of 3) and 4) would be to use the model I showed above. $5,500 in the chequing account now. Any tax refund is expected in 3 months. At that time $1,631 will be need to pay the mortgage, or pay tuition. The options are between
A) $3,869 (=5,500 - 1,631) into a TFSA, reserving $1,631 for the future expenses, or 
B) $5,500 into an RRSP, using its refund to pay the $1,631 expenses. 
This results in accounts funded by equal values = $3,869 after tax savings. 

His comparison of 1) vs 2) is correct. Both options end up with $5,500 of after tax savings sheltered in the accounts. 

The difference in outcomes he models (and the correctly compared A and B) is all due to the trade off between the RRSP's penalty from benefit clawbacks, vs its bonus from w/d at lower tax rates. His conclusion will not apply in situations with longer timespans and higher portfolio returns. His conclusions do not 'prove' one account is better than the other for all situations.

WARNING - you will not understand the logic and claims made here unless you read the referenced material in the first post of this thread.


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## leslie

NEW #54: Jonathan Chevreau in Motley Fool's Definitive Guide

Chevreau correctly presents the logic that in order to choose options to maximize benefits, those benefits first need to be identified. Most experts fail even this first step and look only at the plan's mechanics. But then he reiterates the common false claims ----- although he has corrected some of his prior errors. 

(1) _"#1: The upfront deduction The effect is more dramatic for those in higher tax brackets ... the refund is closer to $2,500 (on a $5k contribution)"._ This is false. The contribution credit is never a benefit, ever, for anyone. It is more like a loan that must be repaid - along will all profits earned by it in the interim.

People contributing at a higher tax rate do not benefit more than those at a lower rate, even though the $ tax reduction is greater. It all depends on the DIFFERENCE in tax rates vs withdrawal (see 3b below). 

(2) "_#2 : The ongoing tax-sheltering of investment income_". He correctly states this benefit is the same as the same benefit from a TFSA And most importantly he makes no limitation by saying it eventually gets taxed on withdrawal. Here he is correct, and has changed his mind from decades of claiming the opposite. 

(3) "Defer paying Ottawa until you're in a lower tax bracket". Here he mixes up various ideas leading to multiple errors.

(a) There is no guarantee that withdrawals will be at lower tax rates. The claims that 'most people' will w/d at lower rates is false. About half of all workers would face HIGHER tax rates on withdrawal.

(b) True, there is a possible Bonus(or Penalty) from withdrawals at lower (or higher) tax rates. The effect cuts both ways. It equals the $withdrawn multiplied by the difference in rates. 

(c) There is no benefit from 'deferral' of anything. A Bonus can be triggered overnight if you contribute in Jan at last year's high tax, and withdraw the next day at this year's low rate, And at the other extreme, there may be no change in tax rates and no Bonus/Penalty even after the account has existed for 50 years. 

Obviously if the Bonus from w/d at lower tax rates comes from 'deferral ', then the Penalty from w/d at higher rates must result from time moving backwards. It seems to me that this particular use of the word 'deferral' is an attempt by those who simply don't want to admit their past claims were wrong, and so now hitch their false 'deferral' claim to the correct claim of a bonus/penalty from a difference in rates. 

(4) He makes the same false claim as discussed in my 2 preceding posts. They start with the correct idea that RRSP are funded with before-tax dollars (vs TFSAs with after-tax). But then they go wrong by making rules about what must be done with the refund. ......_"If you make your RRSP contribution with a plan to spend the tax refund, you'll be severely curtailing the plan's growth_". 

But as my examples above show, it makes absolutely no difference what is done with any refund, or even if there IS no refund. What matter is that spending is not increased BECAUSE of the tax reduction.. 

(5) He advises to ..."_Borrow to top up or catch up your RRSP contribution._" No one should have any need to borrow for a top up. Since the RRSP contribution is 18% of wages, and the top up would be a maximum 50% tax on the gross contribution, that means it is about 9% of wages = 1.25 month's wages. Everyone should be able to borrow that amount for a few months from their emergency fund (6 months spending). 

Telling people to borrow for catch up contributions is equally bad advice. If the person could not save the money as it was being earned, how on earth is s/he going to save the money to repay the loan?


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## OnlyMyOpinion

View attachment 8570

ww.stefanmart.de/12_quixote/1205e_quixote.htm


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## Charlie

IMO this thread has crossed the line to spam.

but you should read the highly informative referenced material in the first post of this thread. If you're smart enough.


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## Synergy

Great thread IMO. Too many people "believe" everything they hear and are too lazy to do any of their own math, due diligence, etc. I haven't had a chance to review all the posts but it would appear to be a great thread to foster some critical thinking.


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## humble_pie

Charlie said:


> IMO this thread has crossed the line to spam.



yes for a while i was thinking it might be one of the regular series from our friends in south Asia.


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## Eclectic12

Synergy said:


> Great thread IMO. Too many people "believe" everything they hear and are too lazy to do any of their own math, due diligence, etc. I haven't had a chance to review all the posts but it would appear to be a great thread to foster some critical thinking.


Great thread/model to learn from ... as long as one's real life situation lines up. 
Otherwise, where the constructs to teach no longer hold true ... some of the absolute statements have different math results than claimed.


As they say .... caveat emptor.


Cheers


*PS*

I'd focus on the model, the assumptions built into the model and a few examples contrasting what is written versus what the model says. Reading every post where the model disagrees could get tiresome after the fifth or tenth or whatever repetition.


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## steve41

Is his model ....

1. a spreadsheet
2. does it solve within a few seconds

If the answers are 'yes' to both, then he has a problem.


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## Synergy

Eclectic12 said:


> As they say .... caveat emptor.


and trust no one! Never stop questioning.


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## none

Synergy said:


> Great thread IMO. Too many people "believe" everything they hear and are too lazy to do any of their own math , due diligence, etc. I haven't had a chance to review all the posts but it would appear to be a great thread to foster some critical thinking.


Irony win!


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## leslie

NEW #54: Terry McBride in Canada.com

This article is a grab bag of points. He goes wrong with his Asset Location advice ...._"If you have equities inside your RRSP while you hold interest-bearing GICs outside of your RRSP, then you are probably paying more tax than necessary. Interest income is the most highly taxed form of investment income. Depending on the size of your portfolio, it makes sense to hold interest-bearing securities inside your RRSP. Then, you might hold equities, which generate tax-favoured dividends and capital gains, outside your RRSP."_

This is a common mis-perception that it is the income's tax % rate that determines which assets to prioritize in tax shelters. If he qualified his comments by limiting them to high-yield junk debt, then the advice would be correct. Assets with both high returns AND high tax rates are first to go into tax shelters.

But the rule is as far wrong as possible, when applied to low-yield Treasury debt. The most important metric (of rate of return, tax rate, and time) is the rate of return. The $taxes in year one - payable on Treasury interest are miniscule because their yield is so low. And the preferential tax rate on dividends and capital gains is overcome by the high growth of equities over time. 

I have no idea why he included the phrase ..._"Depending on the size of your portfolio..._"


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## CPA Candidate

leslie said:


> NEW #54: Terry McBride in Canada.com
> 
> This article is a grab bag of points. He goes wrong with his Asset Location advice ...._"If you have equities inside your RRSP while you hold interest-bearing GICs outside of your RRSP, then you are probably paying more tax than necessary. Interest income is the most highly taxed form of investment income. Depending on the size of your portfolio, it makes sense to hold interest-bearing securities inside your RRSP. Then, you might hold equities, which generate tax-favoured dividends and capital gains, outside your RRSP."_
> 
> I've read his stuff before, it's bad.
> This is a common mis-perception that it is the income's tax % rate that determines which assets to prioritize in tax shelters. If he qualified his comments by limiting them to high-yield junk debt, then the advice would be correct. Assets with both high returns AND high tax rates are first to go into tax shelters.
> 
> But the rule is as far wrong as possible, when applied to low-yield Treasury debt. The most important metric (of rate of return, tax rate, and time) is the rate of return. The $taxes in year one - payable on Treasury interest are miniscule because their yield is so low. And the preferential tax rate on dividends and capital gains is overcome by the high growth of equities over time.
> 
> I have no idea why he included the phrase ..._"Depending on the size of your portfolio..._"


Absolutely right, that's stupid advice.


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## FI40

CPA Candidate said:


> Absolutely right, that's stupid advice.


You are right, I don't think it's great advice, but I'm not sure leslie is giving great advice here either. I recommend anybody making a decision like this to put it in a spreadsheet and simulate the results themselves. There are tradeoffs.

I just did that in five minutes for a hypothetical case. In the attached spreadsheet it assumes 7% on equities (no dividends for simplicity), 2% on bonds. Although the amounts in the RRSP and Taxable look different, this is actually how you should carry out a 50/50 weighting in stocks/bonds assuming you know your tax rate won't change.
Anyway, as you guys pointed out, for these assumptions, and assuming you put everything in cash after 10 years (i.e. pay tax), your strategy of putting equities in the RRSP comes out ahead by 2.4%. Definitely worth doing if this is how it all pans out, but not a huge deal in this case. More time, or more difference between the two rates of return, it'll be more though, granted.

What I wanted to point out though is that your strategy results in a higher ending RRSP balance than the alternative ($3,740 higher!), and that's a tradeoff worth mentioning. In general you have more flexibility the lower your RRSP balance. Less chance of getting hit with various clawbacks. So it's really a case by case basis for this.

Also, this assumes bond yields will stay low. They may not. 

One more point to really confuse things: an assumption for steady 2% return in the bond world is all well and good, but a steady 7% return on equities? Garbage assumption. The safer route is equities in Taxable, because at least you can write off taxable losses and they would be worth something to you. After 10 years if your total return on your equities was a -20% plop and you held them in your RRSP, well good luck to you, you lived by the sword and died by it. It's almost like leverage in a way. But the same -20% plop in taxable? Well at least you can write off those losses against other gains (if you have them), and your Taxable account is hardly taxable at all, meanwhile your bonds are plugging away in the RRSP tax free.


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## peterk

FI40 said:


> The safer route is equities in Taxable, because at least you can write off taxable losses and they would be worth something to you. After 10 years if your total return on your equities was a -20% plop and you held them in your RRSP, well good luck to you, you lived by the sword and died by it. It's almost like leverage in a way. But the same -20% plop in taxable? Well at least you can write off those losses against other gains (if you have them), and your Taxable account is hardly taxable at all, meanwhile your bonds are plugging away in the RRSP tax free.


What's wrong with that though? -20% means your RRSP tax bill is that much lower when you withdraw, compared to better returns. In a taxable account you only get half the tax benefit from your capital losses...

Keeping losers and low growers (bonds) in your RRSP is a great place for them. Hard part is knowing which will be losers and winners. Me, I've screwed it up big time. Have a bunch a losers in my TFSA and some winners in my RRSP and Taxable. :stupid:


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## steve41

OK..... for some perspective:

A 40 year old starting out with just 50K in his RRSP, grosses 75K and expects his salary to grow at 3% and retire at 65. Just running out of capital (dying broke) at 95. 

ROR 4%, inflation 2%, taxed in BC.
Non reg growth taxed as 50% cap gains, 50% divs.

Three scenarios:-

1. maxing RRSP and TFSA with excess to nonreg
His constant ATI (lifestyle) solves at 44,633

2. assume no limit to tfsa contributions
His constant ATI (lifestyle) solves at 43,876

3. assume constant 5500 TFSA limit, nothing to RRSP, remainder to non reg.
His constant ATI (lifestyle) solves at 43.538

Conclusion... it doesn't make a heck of difference either way. ($20 a week)


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## cainvest

steve41 said:


> OK..... for some perspective:
> 
> A 40 year old starting out with just 50K in his RRSP, grosses 75K and expects his salary to grow at 3% and retire at 65. Just running out of capital (dying broke) at 95.
> 
> ROR 4%, inflation 2%, taxed in BC.
> Non reg growth taxed as 50% cap gains, 50% divs.
> 
> Three scenarios:-
> 
> 1. maxing RRSP and TFSA with excess to nonreg
> His constant ATI (lifestyle) solves at 44,633
> 
> 2. assume no limit to tfsa contributions
> His constant ATI (lifestyle) solves at 43,876
> 
> 3. assume constant 5500 TFSA limit, nothing to RRSP, remainder to non reg.
> His constant ATI (lifestyle) solves at 43.538
> 
> Conclusion... it doesn't make a heck of difference either way. ($20 a week)


I really like seeing the start to end type calculations but can you fill in some of the blanks with simple numbers and terminology?


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## FI40

peterk said:


> What's wrong with that though? -20% means your RRSP tax bill is that much lower when you withdraw, compared to better returns. In a taxable account you only get half the tax benefit from your capital losses...
> 
> Keeping losers and low growers (bonds) in your RRSP is a great place for them. Hard part is knowing which will be losers and winners. Me, I've screwed it up big time. Have a bunch a losers in my TFSA and some winners in my RRSP and Taxable. :stupid:


So maybe it's a wash on the equities side, but on the bond side, in that situation you're better off having them in the RRSP otherwise you're paying a bunch of tax on it every year. Bond yields won't be this low forever either.

EDIT: I feel your pain though. Had some huge losses in my TFSA...


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## steve41

cainvest said:


> I really like seeing the start to end type calculations but can you fill in some of the blanks with simple numbers and terminology?


 I forget how to create a link to a pdf..... file is called xxx.pdf and it is located on the site abc.com. Help!


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## balexis

steve41: there is a button above the textbox in which you type in forum replies, that looks like the planet earth with an infinite sign at its bottom, that will allow you to add a proper hyperlink to the external PDF. Alternatively you can directly type the proper anchors (replace the parenthesis by brackets):

(URL="http://abc.com/xxx.pdf")This is a link to a PDF(/URL)

Or, just paste the link to http://abc.com/xxx and we can manage it from there!

Unless you meant something else?


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## steve41

report for case 1 pdf
report for case 2 pdf
report for case 3 pdf

Oh yeah.... I mis-entered the amount for case-1. The RRSP wins out a bit more.


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## Eclectic12

FI40 said:


> ... In general you have more flexibility the lower your RRSP balance ...





peterk said:


> What's wrong with that though? -20% means your RRSP tax bill is that much lower when you withdraw, compared to better returns. ...


Trouble is for a lot of people "more flexibility" means less $$$ to live their retirement. I suspect those who will value the flexibility have more $$$ for retirement than most will.


Wouldn't avoiding the RRSP or using slower growing investments be a better choice than targeting to destroy what one has built up?


Cheers


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## FI40

Eclectic12 said:


> Trouble is for a lot of people "more flexibility" means less $$$ to live their retirement. I suspect those who will value the flexibility have more $$$ for retirement than most will.
> 
> 
> Wouldn't avoiding the RRSP or using slower growing investments be a better choice than targeting to destroy what one has built up?
> 
> 
> Cheers


Of course we're not saying that one should "target to destroy" funds in the RRSP. I think you're simplifying this too much. There are tradeoffs. What I said initially in a nutshell is that a higher RRSP + Taxable balance is not necessarily better than having a slightly lower total balance but with most of the funds in Taxable.


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## leslie

MY LAST POST:

This year's RRSP season is now over. I created this thread to document a number of things. 

1) There were 54 articles published in the webmedia - that I had issues with. There were even more with the innocuous repetitions of the account's rules/mechanics, and the generally accepted advice "to use a TFSA in preference when your tax rate is low". Why? Is this business so very, very, very important to the account providers, that they drive this agenda? I appreciate that these accounts are wonderfully 'sticky' because they are so hard to move to another provider, but really? On-line papers have whole sections of articles just for RRSP stuff.

2) Not ONE of the articles clearly identified the RRSP's main benefit - its permanent sheltering of profits from tax. The 2 articles by Chevreau (#201 and #222) came closest. But even there he wimped out and failed to make the necessary clarification that ..."Profits are NOT taxed on withdrawal". This explicit statement is necessary because most readers are used to being told in one paragraph how profits are sheltered IN THE ACCOUNT, only to be told later than they are taxed on withdrawal. I doubt there was even ONE reader of those posts who recognized any difference from the generally-accepted doctrine.

3) The typical false advice that has been given for decades was repeated this year.
(i) The contribution credit is a benefit. So ...
a) The person contributing at the 40% tax bracket gets a larger benefit then the person contributing at the 20% tax bracket.
b) The tax credit can be compared to benefits from other programs, like the RESP's 20% matching contribution.
c) You can multiply your benefits by using the tax refund to (eg) make a donation that generates a deduction for charitable donations, or contribute to a TFSA, or paydown debt.​(ii)) The RRSP's benefit comes from the deferral of taxes. You get to keep the income earned by the contribution credit during the interim.
(iii) Income earned inside the RRSP is taxed on withdrawal at full tax rates. So ...
a) Dividend income that would be taxed at lower rates in a taxable account is wasted within an RRSP. And the dividend tax credit is lost.
b) Income already taxed at top rates in a taxable account (like bond interest) should be prioritized in an RRSP.​(iv) Your investments in an RRSP grow on a tax-deferred basis - not permanently tax sheltered. So ...
a) When choosing between contributing to an RRSP vs a TFSA, the TFSA (where profits are tax-free) should be the default choice.
b) The only important RRSP benefit comes from maximizing the bonus from withdrawals at lower tax rates.​(v) Most people's marginal tax rate in retirement will be lower than when they were working.
(vi) You should delay claiming the contribution's tax deduction when you expect your marginal tax rate to be higher in the future. There is no cost to the delay.​
4) The responses from all contributors (except 1) fell within the _"Reasons/Excuses People Use To Dismiss"_ that I had added as an edit to the original post of this thread. There was not one single sentence in this whole thread that referenced any argument made by the SSRN paper - much less identified an error in it logic or math. I can only conclude that the contributors here fall within ... _(1) The most common reason is because they simply refuse to read the evidence_. Certainly their arguments were the same ones already disproved (even ridiculed) by the paper - but the posts were all oblivious to that reality. 

I was quite confusing why the same contributors who would not read the referenced material in the first post, would choose to 'demand' that I respond to their posts. My 'response' was already available. Why would contributors 'demand' that I provide examples, - when the SSRN paper includes examples, and the spreadsheet referenced proves my my claims for all possible examples?


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## peterk

leslie said:


> I was quite confusing why the same contributors who would not read the referenced material in the first post, would choose to 'demand' that I respond to their posts. My 'response' was already available. Why would contributors 'demand' that I provide examples, - when the SSRN paper includes examples,* and the spreadsheet referenced proves my my claims for all possible examples?*


Well, only for some possible examples. But you did not seem to want to address that or even consider it, did you?  Yes, I took a look at your website.

Despite some disagreements, it's clear you've put a lot of work into this topic. What is your intentions with all this? Are you in the industry, is this your career? Are you a writer or advisor? Or just... obsessed? There must be a good 300+hrs of work in this thread and your website alone, not to mention your other threads about RRSP.

Now that RRSP season is over, perhaps you'd care to join in some other discussions around here.


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## FI40

leslie said:


> MY LAST POST:
> 
> This year's RRSP season is now over. I created this thread to document a number of things.
> 
> 1) There were 54 articles published in the webmedia - that I had issues with. There were even more with the innocuous repetitions of the account's rules/mechanics, and the generally accepted advice "to use a TFSA in preference when your tax rate is low". Why? Is this business so very, very, very important to the account providers, that they drive this agenda? I appreciate that these accounts are wonderfully 'sticky' because they are so hard to move to another provider, but really? On-line papers have whole sections of articles just for RRSP stuff.
> 
> 2) Not ONE of the articles clearly identified the RRSP's main benefit - its permanent sheltering of profits from tax. The 2 articles by Chevreau (#201 and #222) came closest. But even there he wimped out and failed to make the necessary clarification that ..."Profits are NOT taxed on withdrawal". This explicit statement is necessary because most readers are used to being told in one paragraph how profits are sheltered IN THE ACCOUNT, only to be told later than they are taxed on withdrawal. I doubt there was even ONE reader of those posts who recognized any difference from the generally-accepted doctrine.
> 
> 3) The typical false advice that has been given for decades was repeated this year.
> (i) The contribution credit is a benefit. So ...
> a) The person contributing at the 40% tax bracket gets a larger benefit then the person contributing at the 20% tax bracket.
> b) The tax credit can be compared to benefits from other programs, like the RESP's 20% matching contribution.
> c) You can multiply your benefits by using the tax refund to (eg) make a donation that generates a deduction for charitable donations, or contribute to a TFSA, or paydown debt.​(ii)) The RRSP's benefit comes from the deferral of taxes. You get to keep the income earned by the contribution credit during the interim.
> (iii) Income earned inside the RRSP is taxed on withdrawal at full tax rates. So ...
> a) Dividend income that would be taxed at lower rates in a taxable account is wasted within an RRSP. And the dividend tax credit is lost.
> b) Income already taxed at top rates in a taxable account (like bond interest) should be prioritized in an RRSP.​(iv) Your investments in an RRSP grow on a tax-deferred basis - not permanently tax sheltered. So ...
> a) When choosing between contributing to an RRSP vs a TFSA, the TFSA (where profits are tax-free) should be the default choice.
> b) The only important RRSP benefit comes from maximizing the bonus from withdrawals at lower tax rates.​(v) Most people's marginal tax rate in retirement will be lower than when they were working.
> (vi) You should delay claiming the contribution's tax deduction when you expect your marginal tax rate to be higher in the future. There is no cost to the delay.​
> 4) The responses from all contributors (except 1) fell within the _"Reasons/Excuses People Use To Dismiss"_ that I had added as an edit to the original post of this thread. There was not one single sentence in this whole thread that referenced any argument made by the SSRN paper - much less identified an error in it logic or math. I can only conclude that the contributors here fall within ... _(1) The most common reason is because they simply refuse to read the evidence_. Certainly their arguments were the same ones already disproved (even ridiculed) by the paper - but the posts were all oblivious to that reality.
> 
> I was quite confusing why the same contributors who would not read the referenced material in the first post, would choose to 'demand' that I respond to their posts. My 'response' was already available. Why would contributors 'demand' that I provide examples, - when the SSRN paper includes examples, and the spreadsheet referenced proves my my claims for all possible examples?


I believe several posters disagree with many of the things you have said. I am in that group, and *I did read your paper*.

However I thank you for your perspectives which are different from most. I didn't learn anything new about the RRSP, but I suppose I was exposed to another way to look at it. A confusing way, but yeah.


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## OnlyMyOpinion

NEW #56: Leslie in CMF
This post wrongly states that "_This year's RRSP season is now over_". But there is no RRSP season. You can contribute at any time through the year subject to your current deduction limit. 
The "RRSP season" has been created, marketed and promoted by banks and financial institutions to remind you of the final cutoff for contributions that can be claimed in the previous tax year and to guilt you into believing that you are financially negligent if you do not contribute (preferably with them) before the "season" is over. 
But your contribution room is not lost and you may in fact be better off contributing and claiming it in a future tax year depending on your income and financial circumstances. 
It may also make sense to contribute early the prior year because of the compounding of that extra year of growth over many years.

So at the risk of being ridiculed or judged dimwitted by at least one poster on this thread, I am suggesting that it is not possible to be unequivocal when expressing an opinion or a mathematical proof regarding the merits or shortcomings of RRSP's and their seasons.

P.S. This post also corrects a counting error in the thread that would otherwise consider this to be new post #55.


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## bobsyouruncle

Read the paper and the website.

I don't know if it's because I'm new to Canada, or whether my math is weak, but I'm left totally confused. 

So according to Leslie there's bad advice given concerning RRSPs, but I couldn't determine what I am meant to do about it. Maybe it's the lack of case studies or examples, I don't know, but I'm none-the-wiser.


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## Jerm

FI40 said:


> I believe several posters disagree with many of the things you have said. I am in that group, and *I did read your paper*.
> 
> However I thank you for your perspectives which are different from most. I didn't learn anything new about the RRSP, but I suppose I was exposed to another way to look at it. A confusing way, but yeah.


That basically sums up my feelings. I don't see anything "wrong" with the math on either side of the argument, but for a small percentage of the population leslie's perspective must be an easier way of looking at it. I don't think picking apart internet articles adds anything to leslie's case though.


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## ian

I think that the value of an RRSP is very much dependent on one's own personal financial situtation and retirement plan. Many of the articles that we have read make sweeping generalities or caution the reader that they need to do some work because your mileage will vary depending on circumstances.

One thing I do see is that the financial institutions do push them but only pay passing attention to the clients needs or costs. But little attention seems to be paid to three aspects. The first is obvious...spousal vs regular.

The second is the fund itself and more specifically the MER. The people at the bank have always pushed us toward their high MER offerings. Just one reason why we no longer deal with the bank for investment advice. Their advice seems to center on what is good for the bank.

The third is type of funds. We use our RSP for interest and income generating investments. We use non registered vehicles for investments that are directed toward capital gains. The reason is simple...capital gains in a non registered account are taxed at half of what an interest/income return would be taxed at.

Shovelling money into an RSP to obtain a tax refund, WITHOUT consideration to one's current and anticipated financial situation (and other investment vehicles such as TSFA) or without regard to the investment or cost of the investment is never a good thing. Unfortunately I suspect this is the norm rather than the exception. 

I suspect many people spend more time buying a television than they do understanding and directing their RSP's etc. I place no blame on the authors or these articles. The blames lies with those who are too lazy, disinterested, or distracted to put a very small effort into their personal financial well being.


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