# Post-tax money into RSPs?



## michika (Apr 20, 2009)

Can someone just clarify something for me please about post-tax dollars going into an RSP?

To me it appears that I'm paying tax on the funds twice, one when I get my paycheck, and again when I go to withdraw the funds. However, I also realize that if I invested that same money outside of an RSP I'm taxed on my check, and I'll be taxed on the gains of those dollars (assuming they are outside a TFSA).

So what is the benefit to me of putting my after-tax dollars into my RSP account only to be taxed on the whole amount if/when I withdraw it, versus only paying tax on the gains of the funds outside of a RSP? Or am I missing something?


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## FrugalTrader (Oct 13, 2008)

Michika,

You're forgetting about your tax refund when you contribute to an RRSP. Providing that you reinvest your RRSP tax refund, you have invested with "pre tax" dollars.


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## MoneyGal (Apr 24, 2009)

If you are making regular (i.e., monthly) RRSP contributions and you are an employee, you can also file a Request to Reduce Tax Deductions at Source with the Canada Revenue Agency. 

The effect of this form is to take into account your RRSP contributions as they are made, as opposed to at the end of the year, when your return is filed.


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## michika (Apr 20, 2009)

I already get a huge refund every year, to the tune of 3-5K due to my education credits. So I haven't even used my RSP deductions in the last 4 years, I haven't needed them...so I'm unsure if that will play a role either. When I filed this year we estimated that I have enough tuition credits for another two years, this also doesn't take into account the courses I'll do this year.

Can I even ask for a reduction if I'm already in the lowest bracket? I also have to double check if my company can even do that on my behalf as I'm a contractor, albeit paid by my company.

I think I'll file it anyways, and see what happens.

Thanks for the answers!


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## augustabound (Apr 20, 2009)

michika said:


> So what is the benefit to me of putting my after-tax dollars into my RSP account only to be taxed on the whole amount if/when I withdraw it, versus only paying tax on the gains of the funds outside of a RSP? Or am I missing something?


You benefit from the compound gains from your contributions before you pay any redemption taxes.


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## Ben (Apr 3, 2009)

michika said:


> To me it appears that I'm paying tax on the funds twice, one when I get my paycheck, and again when I go to withdraw the funds.


FT's response is short, sweet, and accurate, but just to flesh it out a bit for others' benefit:

It sounds like you are talking about one of two things.

1. If you are like me, and have RRSP's taken directly off your paycheque, and part of that contribution is from your employer, then the portion the employer contributes is a taxable benefit, and you pay tax on the RRSP contribution the employer made on your behalf. The RRSP contribution can be considered "after-tax" dollars at this point. If this were the whole story, then yes, you'd have a legitimate beef about paying tax again when you withdraw the money in 30 years. However, the entire amount of the RRSP contribution is then tax-deductible, including the amount your employer contributed. This brings those funds back to a "before-tax" status. 

2. Or, perhaps you're talking about additional lump sum contributions, ie. transferring after-tax money from your bank account directly to your RRSP account. That contribution is tax-deductible, which brings the money back to "before-tax" status. 

In the above 2 scenarios, it makes sense that RRSP withdrawals would be taxed.


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## lb71 (Apr 3, 2009)

Maybe a simple example will help. Assume a flat 30% tax rate. You make $40 and contribute $5 to an RRSP. Without the RRSP contribution, your tax bill would have been $40 x 30% = $12. With the contribution, your tax bill is ($40 - $5) x 30% = $10.5. 

Assume your RRSP grows at 0%, so in one year it is still at $5 and you withdrawal the entire $5 out. You will pay a total tax of $1.5. So in the end, your total tax bill was $10.5 + $1.5 = $12, same as if you did not make a RRSP contribution.

Now of course, this simplifying example ignores the benefits of an RRSP:

your investments grow tax free, and
hopefully you contribute at a high marginal tax rate and withdrawal at a lower marginal tax rate

They are not post-tax dollars going into your RRSP, but pre-tax dollars. (The $5 contribution is deducted from your income in determining your tax bill.) I think in your case, you have contributed to your RRSP but not used the contributions yet because you have education credits. However, you can carry forward those contributions (indefinitely I believe) and use them in the future. (In the meantime, the investments grow tax free.) In the worst case scenario where you never get to use them for whatever reason, you would then declare them when you withdrawal your money from your RRSP so they offset and you would not pay tax on the withdrawal.


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## michika (Apr 20, 2009)

Going back to Ben's examples.

I pay into my own RSP with my paycheck. Its not deducted off my check. I physically get my check, cash it, then electronically transfer the funds from my bank account to my RSP account. I don't get any help from anyone with this, no matching, no nothing. So what feels like is happening is that I'm getting taxed on my paycheck, which I am. Then in taking those after tax dollars, I'm adding them to my RSP. If I have to withdraw from my RSP I will be taxed again. 

Although it does make sense in term's of Ib71's example.

So what happens if I'm indefinitely contributing at a low tax bracket, and when I go to withdraw these funds I'm still in this low bracket? Is there a benefit here still aside from growing the investment tax-free?

I feel a bit better about making my contribution this morning. For the longest time it bothered me, as it felt (and still does a little bit) that I'm being double-taxed on the money and loosing out in some way.


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## lb71 (Apr 3, 2009)

What's happening is you are contributing to your RRSP using post tax dollars because you are not deducting the contribution right now since you are not in a position yet to utilize it. So yes, it does feel like your are contributing with post tax dollars.

Hopefully, sometime in the future you can use those RRSP deductions to get back that tax you paid. If not, the worst case scenario would be that your investment grew tax free.


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## michika (Apr 20, 2009)

Hopefully when I get that chance to use all my saved up deductions, then I'll finally stop feeling like I'm double paying on the money.

Thank you very much for the clairfication.


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## Ben (Apr 3, 2009)

You will feel a whole lot better yet when you do actually use those deductions, and get a dandy of a tax refund!


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## Tommy_Act (Apr 17, 2009)

*Don't Do It!*

You have it right. Putting after tax dollars into an RRSP is non-sensical. Don't believe any numbers you are given that attempt to prove otherwise.


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## Tommy_Act (Apr 17, 2009)

*Correction?*

My initial reply assumed that all of your RRSP room had already been used.


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## Ben (Apr 3, 2009)

The minute you put after-tax dollars into an RRSP, you get a tax deduction on the contribution, and it then becomes before-tax dollars that are held in the account.

If it were possible to hold after-tax dollars into an RRSP, then indeed it would make no sense, as you would be taxed again upon withdrawal. Because holding after-tax dollars in an RRSP is impossible, there is no issue.


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## michika (Apr 20, 2009)

I got some "found money" today and put some into my RSP as well. It felt a little less bad then last time. I'm feeling better about the whole, I'm not being touble taxed thing.


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## Bullseye (Apr 5, 2009)

If you withdraw your RRSP's at the same tax rate you were at when you contributed (or took deduction), then you are correct that the 'only' benefit would be the tax-free growth. In this example, your RRSP would offer the same benefit as using a Tax Free Savings Account.

The downside, though, is that if you are in a low tax bracket in retirement, your RRSP withdrawls could trigger clawbacks of some government benefit programs. 

If your situation is just that you are a student now, will have a higher income later, and plan to apply the RRSP deduction when in that higher tax bracket, then you are probably on the right track. 

If you expect to be lower income for your working life, though, and also don't plan to have children, then RRSP's would be a bad idea for you. The TFSA would be a better choice. 

Confusing? Yes, unfortunately it is! The government has such a mish-mash of programs and benefits now, you need to be an expert to untangle it all and work out the best solution sometimes.

I wrote an article a while back on RRSP's for low income earners, it might offer some additional info to help you;

http://colourfulmoney.com/?p=32


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## michika (Apr 20, 2009)

I went over your article and now I'm confused once again. It made perfect sense though if I intended to have children.

1. I'm not a FT student anymore, I hold a FT day job, and still occasionally do courses on the side.
2. Definitely no children here for me.
3. I think at the very most, in my current position I may go up a tax bracket and that would be it.
4. I do not qualify for any GST rebates due to my partner's income, which is quite up there.

So the way I see it is that I don't ever expect to get GST rebates anymore, plus with no kids it means we don't get any of that money. So the only benefit in RSPs for me is the contribution benefits, yes?

When you mention being in a lower tax bracket, are we talking the lowest, or what range are we talking about? I am in the bottom bracket now, but a raise would bump me up to the next one with little difficulty.


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## Bullseye (Apr 5, 2009)

If you'll likely never hit the 31% bracket, then RRSP's are probably not an efficient use of your savings, and in reality, they could actually COST you money in the long run. The 31% bracket is where RRSP's start to offer a benefit for people without children.

The main benefit of an RRSP is the deferral of taxes from periods of higher income to periods of lower income. Those who don't expect to retire in a lower bracket won't get this benefit. Here's an example of what I mean*;

A 30 year old making $35k per year is in the 21% bracket, every $1 of RRSP contribution they make will get them a $.21 refund. Say that person retires at 65, and gets $15k per year from CPP and OAS, and then withdraws $10k each year from their RRSP. That $10k will be taxed at 21%, so they will have to pay $.21 for ever dollar of withdrawl. The only benefit they will have is that the growth of that RRSP will have been tax free. However, because their taxable income is now $25k instead of $15k, they won't qualify for some government programs for low income earners, such as GIS, GST rebate, free prescriptions, and other goodies.

If this same person had instead contributed to a TFSA, they still would have the same tax free growth, but when they withdraw $10k per year, their taxable income would still be $15k! No clawbacks or loss of benefits. RRSP withdrawls are counted as income, TFSA's withdrawls are not.

Does that clear up some of the confusion? 

Note that your situation may be different from my example, there are many factors that can influence decisions regarding savings. Hopefully that gives you a starting point, though.

* this is a simplified example for illustrative purposes


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## michika (Apr 20, 2009)

That does actually help a lot. Now though I am questioning if an RSP is the best use for my money long term. I guess the first step is to do some digging and figure out some better numbers for my job within the industry and not just within my company and a few of its closest competitors.


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