# Should I contribute to RRSP at my income level?



## techcrium (Mar 8, 2013)

My current income is $45K.

TFSA is already maxed.

I could also afford to max RRSP if I wanted to.

However, at this income level....is there a point? I feel like I will reach a higher income level later in the future....I just don't know when.


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## none (Jan 15, 2013)

you could always contribute now - enjoy all the benefits of tax free growth and foriegn tax protection and claim the deduction at a later date.


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## Synergy (Mar 18, 2013)

If you think your retirement income will be at or below $45K, then by all means contribute to your RRSP. If you expect to earn more later on in your career and in retirement, then contribute within a non-registered account. You could also contribute to your RRSP and defer the actual tax break for a year when you're making more money down the road.


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## Westerly (Dec 26, 2010)

if your single, I wouldn't go out of my way, although you could contribute and claim the deduction later at a higher NI (keep the earnings sheltered.) Back when I just got out of University I was making aprox $30K and my spouse perhaps the same less childcare. We contributed through our substantial carry-forward, brought our family NI down near $21,000, and got back aprox 35-47% considering tax, CCTB, and GST personal credit increases. We turned around later and used the RRSP under the Life-long learning program to pay off the student loans.


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## Charlie (May 20, 2011)

Even if your tax rate is double on withdrawal than on contribution, you're ahead of the game in 15 yrs if your return is 5%. It's 10 yrs at 7%. The benefit of RRSPs is long term growth.


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## Synergy (Mar 18, 2013)

Charlie said:


> Even if your tax rate is double on withdrawal than on contribution, you're ahead of the game in 15 yrs if your return is 5%. It's 10 yrs at 7%. The benefit of RRSPs is long term growth.


Are you willing to share the math, or source for the above info. Thanks.


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## james4beach (Nov 15, 2012)

I would contribute some to RRSP (get some of the tax credit) but not your max amount.

Also, if you think there will be upcoming years where you have little or no income, this can affect your decision. For instance in my line of work it's very likely that in 5-10 years I will have zero income for a year (well before retirement). I'm happy to put more into my RRSP now. Once that year comes with zero income, I'll withdraw from my RRSP.

The key with RRSPs is not your tax rate at "retirement" but rather the tax rate at the time you withdraw. It may be advantageous to withdraw before retirement, because tax rates could be a lot higher at the time you retire.

For instance I very strongly believe that tax rates will be dramatically higher when I retire in 40 years. I don't want my RRSP money to sit in there for 40 years.


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## james4beach (Nov 15, 2012)

Relating to my notes above,
http://www.theglobeandmail.com/glob...ider-an-early-rrsp-withdrawal/article8710985/


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## steve41 (Apr 18, 2009)

Generally, it seems to work out best when you max your RRSP and once retired, shelter it. It is not the tax rate nor the amount of tax which count.... it is the present value of those tax pmts. The math is tricky, BTW. Also, since one never knows when they will die, an optimum strategy doesn't really exist. The 'max/shelter your RRSP' strategy works best for someone who makes it out to a ripe old age.


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## Guban (Jul 5, 2011)

You may want to consider a couple of other points. Will you take advantage of the Home Buyers Plan? How about the Life Long Learning Plan? What will you do with the money otherwise - invest it?


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## alingva (Aug 17, 2013)

Do you have Group RRSP? If yes - you should contribute to it. If no - probably answer is no. The point of RRSP is to get higher refund then you pay tax when you retire. Probably your bracket will be the same or higher so you should not contribute to personal RRSP


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## Eclectic12 (Oct 20, 2010)

alingva said:


> Do you have Group RRSP? If yes - you should contribute to it. If no - probably answer is no.
> 
> The point of RRSP is to get higher refund then you pay tax when you retire. Probably your bracket will be the same or higher so you should not contribute to personal RRSP


Unless the employer is putting matching funds into the Group RRSP (i.e. extra contributions from the employer that are not available in a personal RRSP) - this doesn't make any sense to me. 

Whether it's a personal or group RRSP - the tax bracket is going to be the same and the future withdrawal tax bracket are going to be whatever it is at the time of withdrawal. So if it doesn't make sense to contribute to a personal RRSP, the situation will be the same for the Group one.


Also - just because there's a Group RRSP, doesn't mean it's any good. 

A personal RRSP will lets one shop for and setup one that makes sense for the individual. The Group one is set by the company, where some offer a good or reasonable choice of investments at a reasonable cost. Other plans offer little choice with high costs. So IMO it's better to evaluate what one wants to do and include comparing what the choice/costs are before deciding what route to go.

Another factor to bear in mind is that assuming the Group RRSP has what one wants (or the ability to transfer within a reasonable time frame to a personal RRSP which offers better choices/costs) is the possibility of contributing the full amount (i.e. no taxes withheld). If it's offered by the company that pays one's income, usually they can put the full amount in, not report it as income and use the pension adjustment (PA) to reflect what's been contributed.

The advantage is that the pre-tax amount is growing tax deferred right away. To end up with the same amount in a personal RRSP, one has to get the refund and contribute it. IMO, this is especially useful for items such as overtime where the tax withheld tends to be more than on regular income.


Cheers


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## james4beach (Nov 15, 2012)

Find out if there's any company matching involved.

If the company offers some kind of match, where you put in some money and they match with half, then *absolutely* use that. It's literally free money. I have been using the strategy of contributing to my RRSP up to the point of max employer matching, and no further.


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## alingva (Aug 17, 2013)

Eclectic12 said:


> Unless the employer is putting matching funds into the Group RRSP (i.e. extra contributions from the employer that are not available in a personal RRSP) - this doesn't make any sense to me.


This is exactly what I meant. Thanks


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## Eclectic12 (Oct 20, 2010)

alingva said:


> This is exactly what I meant. Thanks


*whew* <wipes brow> ... I though it was another time there was an angle I was overlooking. :chuncky:


Cheers


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## Sasquatch (Jan 28, 2012)

Carefully consider your options. My wife and I are now in a position where we are in danger of having our OAS clawed back because we have to liquidate our RRSPs within the next 4 years or so. Our tax brackets have not changed from worklife to retirement and we faithfully contributed to RRSPs for most of our working life.
In our position, having RRSPs were not the smartest thing we ever did!
Think about it very carefully!!


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## Synergy (Mar 18, 2013)

Sasquatch said:


> Carefully consider your options. My wife and I are now in a position where we are in danger of having our OAS clawed back because we have to liquidate our RRSPs within the next 4 years or so. Our tax brackets have not changed from worklife to retirement and we faithfully contributed to RRSPs for most of our working life.
> In our position, having RRSPs were not the smartest thing we ever did!
> Think about it very carefully!!


I don't necessarily view "claw backs" as a negative or as a penalty per say. I wouldn't be too sad if I were to be clawed back completely come retirement. I'm not going to stop earning, investing, saving, etc. just to avoid OAS claw backs. However, I agree that one should pay attention to their tax brackets in order to estimate when to start contributing, how much to contribute, and when to stop (RRSP). That way you'll get the best bang for your buck out of your RRSP's. With that said, the stats appear to indicate that most need not worry about claw backs, saving too much, etc.



> according to Human Resource Development Canada, only about five percent of seniors receive reduced OAS pensions, and only two percent lose the entire amount.


Source: http://retirehappy.ca/minimizing-old-age-security-clawback/

Additionally, even a big non-registered dividend paying portfolio can jack up your tax bracket come retirement.


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## Canadian (Sep 19, 2013)

I know with claw backs it's seen as "free" money taken away from you. But isn't that, in a way, a good thing? It means you prepared enough that you don't need government assistance to retire. I know a lot of financial planners try to structure their clients' retirements to help maximize government assistance, but the goal should be to maximize overall retirement income. If the increment of post-tax income above the OAS claw back threshold is _greater_ than the OAS payments, you're in a much better position (assuming you didn't forego too much enjoyment in your younger years to save).


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## Pluto (Sep 12, 2013)

techcrium said:


> My current income is $45K.
> 
> TFSA is already maxed.
> 
> ...


I'm with those who are suspicious about the value of a personal RRSP. The main reason is withdrawals are taxed as income, even if the increase in value was capital gains. 

The way to increase your net worth is, as the Wealthy Barber guy wrote, "Be an owner, not a loaner". Buy assets that tend to go up in value so when you sell you get taxed at a capital gains rate, not marginal rate. When you buy stock outside an RRSP you only pay capital gains tax when you sell, so it can grow, in some sense, in a tax free environment anyway. Plus, when you get older, you are not forced to sell and withdraw as you are with a RIFF. 

1. Buy a place to live. When you sell, the capital gains is tax free. If you can hack it, rent out a basement suite. This assumes you do not live in a one industry town where the mine or whatever could get shut down and real estate would drop 50% over night. 
2. Every Bear market buy dividend paying quality stocks, (EG Canadian Banks). In a bear market, buy them on margin. About a year later, sell enough to get off margin. Wait for the next Brear market and repeat. 

In 25- 30 years you will have more money than you ever thought possible.


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## Synergy (Mar 18, 2013)

Pluto said:


> I'm with those who are suspicious about the value of a personal RRSP. The main reason is withdrawals are taxed as income, even if the increase in value was capital gains.


If you're concerned about being taxed as "income" upon withdrawal, why not simply load your RRSP with fixed income bearing products (GIC's, Bonds, etc.). That way you'll get the tax deferred compounded growth without the worry of paying more taxes on dividends, capital gains, etc. should you have invested them outside of a registered account. Additionally, contribute only in years when there's a good chance that your tax bracket will be lower in your withdrawal years (retirement). The math has been done before...

Rather than some conspiracy - perhaps the government has set up TFSA's, RRSP's, etc. simply to try an encourage people to "save"?


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## OnlyMyOpinion (Sep 1, 2013)

Synergy said:


> If you're concerned about being taxed as "income" upon withdrawal, why not simply load your RRSP with fixed income bearing products (GIC's, Bonds, etc.).


Good suggestion we hope, because that's what we've done over the years - our RRSP's are 100% interest income (strip bonds) and our nonregistered acc is 100% equity for eligible dividend income and capital gains.


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## Synergy (Mar 18, 2013)

^ Another option for those worried about having too much income, paying too much taxes, etc. come retirement, is to retire early! If you must work to keep yourself busy, volunteer, join clubs, etc.


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## Canadian (Sep 19, 2013)

Having a large RRSP sounds like a good problem to have. If your income will be relatively high from your RRSP then you can start withdrawing from it early and have smaller annual withdrawals over a longer period of time.


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## Pluto (Sep 12, 2013)

Synergy said:


> If you're concerned about being taxed as "income" upon withdrawal, why not simply load your RRSP with fixed income bearing products (GIC's, Bonds, etc.). That way you'll get the tax deferred compounded growth without the worry of paying more taxes on dividends, capital gains, etc. should you have invested them outside of a registered account. Additionally, contribute only in years when there's a good chance that your tax bracket will be lower in your withdrawal years (retirement). The math has been done before...
> 
> Rather than some conspiracy - perhaps the government has set up TFSA's, RRSP's, etc. simply to try an encourage people to "save"?


I'm sure your strategy is useful for some peoples preferences. Most of my gains has been made from capital gains, as opposed to loaning money and earning interest. I do like the TFSA, however. Way better than the RRSP for the average income earner. I can see RRSP's being of more value to high income self employed folks. But for people with an average income, I think buying a home with a rental suite superior to an RRSP. People with an average income can't afford all the options, and I think they are better with a home that can also generate some rental income, compared to modest RRSP contributions and collecting meager interest on it.


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## Synergy (Mar 18, 2013)

Pluto said:


> I'm sure your strategy is useful for some peoples preferences. Most of my gains has been made from capital gains, as opposed to loaning money and earning interest. I do like the TFSA, however. Way better than the RRSP for the average income earner. I can see RRSP's being of more value to high income self employed folks. But for people with an average income, I think buying a home with a rental suite superior to an RRSP. People with an average income can't afford all the options, and I think they are better with a home that can also generate some rental income, compared to modest RRSP contributions and collecting meager interest on it.


Agreed, RRSP's aren't the only or best option for everyone - especially "low income earners" (bottom tax bracket). Some may benefit more from TFSA's, other from doing the landlord thing, etc. but I still feel that there's a place for RRSP's in most peoples portfolio's. It may be low on the priority list for some, but an option nonetheless. Why not diversify your retirement income sources - some real estate (a home), some investments (TFSA, Non-Reg, RRSP), a rental property, etc. "Average income earners" should be able to max their TFSA's, pay down a mortgage and still have a little left over to be able to stash away some cash inside an RRSP. 

Another interesting use for RRSP's.- RRSP contributions can help lower seniors income to ensure they don't go over the OAS threshold.

http://www.theglobeandmail.com/glob...can-help-seniors-with-benefits/article548651/


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> ... I can see RRSP's being of more value to high income self employed folks. But for people with an average income ...


Not sure why you think it such limited terms ... my brother is no where close to a high income earner but will definitely by several tax bracket lower in retirement than while he was working. So in his case, the RRSP contributions made before the TFSA came into being are almost certainly going to be of benefit to him.




Pluto said:


> ... compared to modest RRSP contributions and collecting meager interest on it.


Who says you have to collect meager interest in an RRSP? 

Doing so seems just as bad a choice as deciding TFSAs can only hold savings accounts and "it's not worth it" as the current interest rates are so low.


RRSP and TFSA can hold stocks, mutual funds, REITs, bonds, GICs etc. so there's lots of choice out there.


Cheers


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## My Own Advisor (Sep 24, 2012)

If my OAS is clawed back, even just a bit, it means I saved enough. A good problem to have and will gladly complain about it.  

As for the original question, max out registered accounts first and then, start saving in a non-registered account after that. Again, good problems to have for any investor.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> I'm with those who are suspicious about the value of a personal RRSP ...


What's to be suspicious about? 

It's no different that cho0sing to buy stocks versus a GIC, whether to buy or rent etc. ... depending on where you are plus what your plans are - it may or may not make sense. Understanding how it works so that one can plan properly is key.




Pluto said:


> The main reason is withdrawals are taxed as income, even if the increase in value was capital gains ...


The trade off is that selling in an RRSP allows the full $$ to be put into another investment. Selling an investment that has risen in a taxable account means that capital gains taxes are due, reducing the available cash for another investment.

As well, if one is contributing through work, the full $$ goes into the RRSP to be invested/grow compare to using after tax dollars in the taxable account.


So yes, it will be taxed as income - but what's thirty years of no capital gains tax, no year by year taxes worth in terms of growth?





Pluto said:


> ... When you buy stock outside an RRSP you only pay capital gains tax when you sell, so it can grow, in some sense, in a tax free environment anyway. Plus, when you get older, you are not forced to sell and withdraw as you are with a RIFF.


This is only true if one avoids dividend paying stock. Otherwise, there's also the year by year, dividends to pay taxes on. Then as one starts collecting OAS, if one still owns the dividend stock, one will have to report something like $1.38 of income for each $1 of dividends received. One's income is being inflated for the OAS clawback.

http://www.moneysense.ca/invest/dividend-downer


Even if one does stick to no-dividend stocks - how many is one willing to live through the ups/downs and not sell? 
It's pretty safe to assume there will be some stocks being sold ... otherwise one is going to ride companies like Nortel all the way down.



Pluto said:


> 1. Buy a place to live. When you sell, the capital gains is tax free. If you can hack it, rent out a basement suite. This assumes you do not live in a one industry town where the mine or whatever could get shut down and real estate would drop 50% over night.


Assuming the renter doesn't trash the place ... sure. Assuming the real estate bears aren't correct that Canadian RE is over-valued. Assuming one is willing to sell as most I know are only selling to move into a retirement home.




Pluto said:


> 2. Every Bear market buy dividend paying quality stocks, (EG Canadian Banks) ...


As per the above - this is going to mean yearly taxes on the dividend income plus potentially a reduction of OAS benefits. 


Cheers


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## Zeeshanbmerchant (Jan 4, 2014)

Pluto said:


> I'm with those who are suspicious about the value of a personal RRSP. The main reason is withdrawals are taxed as income, even if the increase in value was capital gains.
> 
> The way to increase your net worth is, as the Wealthy Barber guy wrote, "Be an owner, not a loaner". Buy assets that tend to go up in value so when you sell you get taxed at a capital gains rate, not marginal rate. When you buy stock outside an RRSP you only pay capital gains tax when you sell, so it can grow, in some sense, in a tax free environment anyway. Plus, when you get older, you are not forced to sell and withdraw as you are with a RIFF.
> 
> ...


you know i have never understood people's mentality when it comes to RRSPs

i always think, jeesh by the time you plan to use them, life's pretty much over anyways. I mean no offense to the elderly, but well, 

OP heed the good advice and put into property. Property always increases in value because its a limited resource


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## Synergy (Mar 18, 2013)

Zeeshanbmerchant said:


> you know i have never understood people's mentality when it comes to RRSPs
> 
> i always think, jeesh by the time you plan to use them, life's pretty much over anyways. I mean no offense to the elderly, but well,
> 
> OP heed the good advice and put into property. Property always increases in value because its a limited resource


Who's to say you can't enjoy the benefits of am RRSP in your 40's and 50's - some have the luxury of retiring early with a nice juicy RRSP. Also, many retires between the age of 65-80yrs young are enjoying travelling, skiing, hiking, cylcing, curling, volunteering in the community, etc. - life's not over. I'm young, but in my practice I see a lot of healthy retired seniors enjoying life and benefiting from their retirement savings (RRSP, pensions, etc.). Property is good, but if you don't sell it in retirement you'll never see the true value - it's an expense that's not generating any income.


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## OnlyMyOpinion (Sep 1, 2013)

*"you know i have never understood people's mentality when it comes to RRSPs
i always think, jeesh by the time you plan to use them, life's pretty much over anyways. I mean no offense to the elderly, but well, 
OP heed the good advice and put into property. Property always increases in value because its a limited resource"*

And no offense to the young and stupid (you) - but retiring at 55 or 60 is usually a long way from life being over, and unless you have the certainty of a gold-clad pension - an RRSP is the way to save in a tax-efficient, diversified and flexible manner. Nothing wrong with some real estate in the mix, but its not the place to have all your eggs. You'll see.


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## Pluto (Sep 12, 2013)

Eclectic12 said:


> Who says you have to collect meager interest in an RRSP?
> 
> 
> 
> Cheers


I don't think anyone said that. My point is 1. the biggest gains available are capital gains, taxed as capital gains. If you own a home, gains are not taxed at all. However, withdrawals from a RRSP are taxed as income. 2. The op's income is 45,000. Does the op own a home? if not it is probably better off to buy a home, compare to putting savings in a RRSP. part of the reason is leverage. the other part is tax free capital gains. Be an owner, not a loaner.


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## richard (Jun 20, 2013)

Pluto said:


> I'm with those who are suspicious about the value of a personal RRSP. The main reason is withdrawals are taxed as income, even if the increase in value was capital gains.
> 
> The way to increase your net worth is, as the Wealthy Barber guy wrote, "Be an owner, not a loaner". Buy assets that tend to go up in value so when you sell you get taxed at a capital gains rate, not marginal rate. When you buy stock outside an RRSP you only pay capital gains tax when you sell, so it can grow, in some sense, in a tax free environment anyway. Plus, when you get older, you are not forced to sell and withdraw as you are with a RIFF.
> 
> ...


The advantage of withdrawing at a lower tax rate can compensate for the conversion of capital gains to income. Last time I checked this, if you withdraw at a tax rate that is 10% lower than when you contributed that will make up for it.

Real estate might work for some but it comes with additional expenses, work, and the obligations of making regular payments like the mortgage, taxes, and repairs. It also has risk based on the location, the way tenants act, and the demand. At least you can remove some of the work if you're willing to lower your returns. If you don't do that it can be another job. I prefer investments that don't require me to do any work other than reading a few things whenever I have time, and that I won't lose if I have to stop putting in money for a few months. You can beat the returns of a passive portfolio but you can't beat the demands it puts on you.

There's another old business saying: "own nothing but control everything". I live by that when it comes to real estate.


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## Canadian (Sep 19, 2013)

Zeeshanbmerchant said:


> Property always increases in value because its a limited resource


Ah yes, because there is _always_ a greater fool willing to pay a higher price for such a resource. I suppose you haven't followed property values in Detroit, Southern Chicago, and many other cities over the past couple years.

@Pluto - you can't spend your house. One still needs a place to live during retirement.


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## richard (Jun 20, 2013)

Zeeshanbmerchant said:


> you know i have never understood people's mentality when it comes to RRSPs
> 
> i always think, jeesh by the time you plan to use them, life's pretty much over anyways. I mean no offense to the elderly, but well,
> 
> OP heed the good advice and put into property. Property always increases in value because its a limited resource


You're going to be 60 some day, if things go well. Better to have something to show for it than to be broke. 

Properties always increase in value, except for the ones that don't. The long-term increase in value is about 1% more than inflation, so it's mainly the large amounts of leverage that make it look like you're earning more. If you don't count all the work and other expenses you have to pay for. And everyone outside of infomercials will tell you that real estate won't make you rich in your 20s and 30s either.


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## My Own Advisor (Sep 24, 2012)

Real estate is a gamble IMO. Everyone needs a place to live but not everyone needs to own their home. Folks have simply been conditioned this way.

As part of our retirement plan, we're not intending to include our home as part of our investments, even though technically it is. We need a roof over our head but until the mortgage is done, it's not really an asset in my mind - just a big liability, a big debt with lots of ongoing expenses. Not exactly a stellar investment.


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