# When to start an RRSP?



## Koala (Jan 27, 2012)

Right now, I do not have an RRSP. I have very little taxable income, would it make more sense to just make some interest on my savings (tax free) and have more to contribute later? Obviously, either way I would not be claiming the deduction yet.

Another thing to consider is I would probably withdraw some of it for a house down payment.


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## the-royal-mail (Dec 11, 2009)

Why not save the cash in your TFSA for now? What's the rush to go to RRSP?

And, why not save separate buckets of cash for your retirement as well as your future house purchase prior to buying a house?

Don't rush this stuff. It's important.


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## Montrealer (Sep 13, 2010)

Start a.s.a.p.

I started when I was 21 and investing using a regular investment plan/dollar cost averaging plan so that it's automatically deducted from my checking account. 

I advice to anyone and everyone is to start saving as early as possible to avoid any and all hardships in the future.


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## Koala (Jan 27, 2012)

My TFSA has been maxed out. I haven't used all of this year's room yet, but will by the end of the year.

I'm just curious if there's any benefit to contributing to an RRSP now, or if it's better to wait.


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## Koala (Jan 27, 2012)

Montrealer, it won't affect the amount I save vs. spend. It's just whether or not it's worth it to have it in a registered plan now.


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## Montrealer (Sep 13, 2010)

Any age, at any time, do it! Start it! It will pay off, trust me!


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## Sasquatch (Jan 28, 2012)

Think carefully before investing in an RRSP. 

My wife and I did soreligiously for many years but stopped contributing completely about 14 years ago.

We started to realize that our tax bracket would change very little when we switched from working to retirement (we are retired now).

Mind you, we both were very fortunate to have defined benefit pension plans and we now find ourselves in a position, where we don't need the funds in our RRSPs.

When the time comes where I have to start drawing down my own RRSP, I will be penalized with a partial clawback of my OAS and it looks like Harper may decrease this clawback threshold even further as time goes on.

I want to make it very clear that this is not a "woe is me" post since I realize that I am fortunate indeed to have enough pension income to be eligible for this clawback.

Had I known 30 years ago what I know now, I would not have invested half the funds into RRSPs that I did.

All I am trying to say is to really put on your thinking cap before going the RRSP route.

While it may be true as a general rule that one's tax bracket will be considerably lower in retirement, that does not always turn out to be the case.

Just remember that an RRSP just DEFERS your taxburden to a time when your income will / may be lower, it does not eliminate it.


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## steve41 (Apr 18, 2009)

I have said this several times.... it is extremely unusual to find a situation where the tax rate in retirement is higher (or the same) than in pre-retirement. I have seen many plans written by a variety of individuals.... all of them reflect lower tax rates in retirement. I don't know why yours should be different.


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## Koala (Jan 27, 2012)

Steve41, I agree that's true for most people with a typical job. It's not true for students though. Most of my salary has been scholarships, which are not taxable. Even when I was teaching, the university splits that pay into typical income and a bursary to keep us all under the tax threshold. Now, I have no income and prepared for that by not spending all of my scholarship money when they stopped paying.


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## steve41 (Apr 18, 2009)

Koala said:


> Steve41, I agree that's true for most people with a typical job. It's not true for students though. Most of my salary has been scholarships, which are not taxable. Even when I was teaching, the university splits that pay into typical income and a bursary to keep us all under the tax threshold. Now, I have no income and prepared for that by not spending all of my scholarship money when they stopped paying.


Sorry, I was referring to Sasquatch who was in a normal moderate salary situation.


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## Koala (Jan 27, 2012)

Steve41, I wasn't sure if it was to him or me or both so I figured I would clarify the lack of taxes.

I realize that there are other factors that can complicate matters, but just want to get the full understanding of a simple situation before looking at the whole picture.

In the past, people at the bank (even just tellers) have encouraged me to start an RRSP. At one point I didn't even know that I could contribute and carry forward the deduction. Even realizing that now, no one has been able to explain to me the benefit of contributing now; but everyone seems to say I should start now because it's better to start while I'm young. Sure, saving is great, but why registered now?


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## Sasquatch (Jan 28, 2012)

steve41 said:


> I have said this several times.... it is extremely unusual to find a situation where the tax rate in retirement is higher (or the same) than in pre-retirement. I have seen many plans written by a variety of individuals.... all of them reflect lower tax rates in retirement. I don't know why yours should be different.


Our post retirement tax rate IS smaller than our employment tax rate was, however, the difference is not nearly as drastic as we were told years ago when we were buying our RRSPs and when we were relatively green wrt. money matters.

I haven't got all the gory details and I can't be bothered to figure out every nuance, however, all I know is this.....

We are financially much better off in retirement than we ever were while working.
We have no debt of any kind and our living expenses are way down from when we were working.

Even though we have less spendable money now then when we worked, we can pretty well do and within reason buy whatever we want or need.

It turns out that we don't need our RRSPs and probably never will but we will be forced to start depleting them at 71 years old.

This extra forced income penalizes me with a partial clawback of my OAS.....ie. you were a bad boy by saving something extra for your retirement, therefore we will be taking part of it back...

I'm just saying that RRSPs are not for everybody. We would've been better off to just save that money in a regular savings account, pay our taxes then and there even at a slightly higher rate and get it over with. 

This "after tax money" now would truly be ours to do with as we please, without being forced to spend it no matter what, once you reach a certain age.

That's all I'm saying


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## steve41 (Apr 18, 2009)

> This "after tax money" now would truly be ours to do with as we please, without being forced to spend it no matter what, once you reach a certain age.


 Well, ostensibly you did get a tax credit at the time you bought the RRSP. The govt (we) would now like to recoup some of that avoided tax. Seems fair to me.


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## the-royal-mail (Dec 11, 2009)

Koala said:


> ...people at the bank (even just tellers) have encouraged me to start an RRSP.


The reason the bank and everyone else wants you to do that is so that they can start charging fees on your money. Money that's sitting in a savings account doesn't earn them any money on MERs and fees. There has been a lot of TV advertising by the financial industry to get people signed into RRSPs primarily for this reason.

The RE industry also has no problem egging people on to count on using this money towards a house down payment. The part they're not telling you is they want the money you are saving for your down payment to be earning fees for them while you save. 

The money you withdraw from the HBP has to be paid back within a certain amount of time. So if you buy your house, you also need to be ready to pay back this significant money back into your RRSP. While it's not in the RRSP, it's not growing and compounding towards your retirement.

All the bank employees have been trained to pitch these "products" to clients at every turn. IMO you need to stop attending their seminars and talking to them until you fully understand what's at stake. Here in CMF, many of us (though not all) have no vested interest in what you do. No matter what though, realize that various people at your bank and in CMF have an agenda they're pursuing with you.

Follow the money koala, it's all about the fees.


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## Koala (Jan 27, 2012)

TRM, I agree about the banks being in it for the money. Most advice geared towards my demographic is just basic sense. If I go a bit beyond that, it's all about why RRSPs are great and you need to start contributing ASAP (not all by people who would benefit from it either).

In order to figure it out, you need to know all the rules. I'm pretty good math wise. If someone can actually explain one way or the other WHY it's better; I can assess that information. I haven't actually contributed because I can't see it being beneficial; yet so many messages refute this without stating why. It's hard to know if maybe there's something I'm just not seeing.


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## peterk (May 16, 2010)

Are you in your last year of school Koala? If you are extremely confident you will soon be getting a high-paying job then by all means contribute. You can deduct the contributions in a later year when you make a higher income.

But I would say there is no rush; your contribution room is not going anywhere. Perhaps it's best to leave it until you are working, with job security, and have had time to evaluate your career to make sure it is the one for you. At that point you can make a much better 30+ year prediction of your income / retirement plans, and make a more accurate calculation about RRSP contributions.


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## the-royal-mail (Dec 11, 2009)

It's good because you're saving on your own for retirement. That's always a good thing. You can't trust the government to take care of you. It's also good because when you contribute, it lowers your income and you get a tax "refund" from the gov't in March/April (tax time).

The bad thing about it is that it's locked in and if you start one with a bank, you are limited by the choices of investments that can go in to it. It's just a tax shelter is all, and you must withdraw it by age 71. You will be taxed on it when you withdraw it, at whatever your income and the tax rates are at that time. It's also not that easy to take out of the account (other than for HBP) if you should ever need it.

If in fact you are a student right now, I would go with what peterk says. Wait. Your whole life is ahead of you. You have far more important priorities ahead of you, like courting, getting married, graduating, moving, finding your first job, getting experience, learning about the work world, saving money, managing money. All of these things should come before the hype of locking your money in to something like property or RRSPs.


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## Sasquatch (Jan 28, 2012)

the-royal-mail said:


> The reason the bank and everyone else wants you to do that is so that they can start charging fees on your money. Money that's sitting in a savings account doesn't earn them any money on MERs and fees. There has been a lot of TV advertising by the financial industry to get people signed into RRSPs primarily for this reason.
> 
> The RE industry also has no problem egging people on to count on using this money towards a house down payment. The part they're not telling you is they want the money you are saving for your down payment to be earning fees for them while you save.
> 
> ...


Couldn't have said it better myself


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## orange (Oct 23, 2011)

I'll throw my 2 cents in here too...the main reason the RRSP is good (for you, not the banks) is that the average Canadian is stupid with money and has a nasty habit of spending everything the have (or more), so RRSPs kind of force them to save some money for retirement. They put it in thinking about a juicy tax refund to use for their next vacation...and then the money is trapped in there and is too much of a hassel to take out - voila! savings for retirement.

For you, obviously, it doesn't act as forced savings because you're actually thinking about your financial plan. For you, the benefit is deferred tax over a potentially long investment timeline, and the tax deduction, which as you've correctly noted, should be taken when you are in a higher tax bracket than you are now to maximize benefit.

If your TFSA is already maxed, then I would concentrate on paying down your debts first. If you still have money left over for saving, build a down payment fund for your house (why put money into an RRSP only to take it out through the HBP, which you then have to pay back anyway? just save for the house separately). If you _still _have money left over to save, _then_ put money into your RRSP (and claim the deduction at a later time).


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## Sherlock (Apr 18, 2010)

the-royal-mail said:


> The reason the bank and everyone else wants you to do that is so that they can start charging fees on your money. Money that's sitting in a savings account doesn't earn them any money on MERs and fees.


I think this is faulty logic. When you put your money in a savings account and earn 1% interest on it, the bank then goes and lends that money to someone else at 8% interest. So they are earning 7% interest at your expense. On the other hand if you had your money invested in the markets, the bank would be unable to lend that money to anyone. So the bank profits more by having you keep a large sum of money in your savings account (or buying a GIC yielding a lowly 2%) than if you invest your money in equities.


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## stephenheath (Apr 3, 2009)

Sherlock said:


> I think this is faulty logic. When you put your money in a savings account and earn 1% interest on it, the bank then goes and lends that money to someone else at 8% interest. So they are earning 7% interest at your expense. On the other hand if you had your money invested in the markets, the bank would be unable to lend that money to anyone. So the bank profits more by having you keep a large sum of money in your savings account (or buying a GIC yielding a lowly 2%) than if you invest your money in equities.


From what I've heard, because of the deleveraging going on the banks don't have enough people wanting to borrow money to use up all the cash they have now, so they don't really want more except for the few banks with not quite enough reserves for Basel III, which they can't lend back out, although even those banks can get more money cheap right now.


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## uptoolate (Oct 9, 2011)

Sherlock said:


> I think this is faulty logic. When you put your money in a savings account and earn 1% interest on it, the bank then goes and lends that money to someone else at 8% interest. So they are earning 7% interest at your expense. On the other hand if you had your money invested in the markets, the bank would be unable to lend that money to anyone. So the bank profits more by having you keep a large sum of money in your savings account (or buying a GIC yielding a lowly 2%) than if you invest your money in equities.


+1

The bank makes alot more money on my cash in regular accounts than they do on that in my brokerage accounts (including RRSPs) which are incurring no administration fees and are 100% invested and totally off the table for them.

Some also seem to forget that RRSPs don't just defer taxes on the money that has been placed in them but also on the gains on the money inside. If I have a 100k in XBB in my RRSP v in a taxable account then I am doing way better down the road. Tax deferred is tax saved a wise man once said. We can argue about the fact that one can't claim losses in an RRSP and that capital gains and dividend income become taxed as regular income on withdrawl from an RRSP but the RRSP makes sense for almost everyone of middle and above incomes. And the earlier one starts, with the proviso that bad debt is paid down first and the like, the better. 

An RRSP is another bucket. If you have a great pension, more power to you. Most of us don't and many that thought they would turn out not to have as much as they thought. Both conditions will become more prevalent. 

If you have the means, invest in the RRSP, chose the investments inside well, and claim the deduction later when you have a higher income.


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## Koala (Jan 27, 2012)

I agree with most of you, for now I'm just going to worry about 'savings' and most of that will probably go towards buying a house.

If there is some that I will use to an RRSP to me it makes sense to not contribute now, let the interest grow and then have a larger amount in the future to contribute due to the interest when I'm in a higher tax bracket. I have no idea if inflation is taken into account at all. I would assume that contributing $5000 now and using the deduction in 10 years would be the same as contributing $5000 in 10 years and using the deduction then (ie. you will pay the same amount of tax the year you use the deduction even though $5000 now has more purchasing power)? I really need to do much more reading.


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## Sampson (Apr 3, 2009)

@ TRM re: banks want you to invest so they can charge you fees.

You make this argument over and over but I also think the logic is faulty. There are numerous low fee (very low fee) options available such as the TD e-series line of index funds. 

Would you also argue that the banks are misleading investors by demonstrating that non-cash assets typically outperform cash over the long-term? This is simply not true.

I agree that you have to be wary of fees, we all get that, but that doesn't mean that the only low fee option is keeping savings as cash.


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## Sampson (Apr 3, 2009)

@ OP.

You can put money in now, then not claim the tax credit until you earn some money.


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## KaeJS (Sep 28, 2010)

^ This is what I did, Koala.

Although my RRSP only has a value of $9k, I had continued to roll over the tax credits, as well as the tax credits for tuition that I had.

Then, last year when I was working two jobs and made the most money I've ever made (which put me into a higher tax bracket) I decided to claim all of the tuition credit and a small portion (I believe I only claimed what I needed to, about $150 IIRC) of my RRSP room.

It's a great little buffer to have if you ever need it or want it in the future. I actually got a little bit screwed because I owed money on my taxes last year. Thanks to the tuition and RRSP credits I used up, I didn't end up owing a dime after I did my taxes. The government ended up owing me a little bit after all was said and done, and I've still got quite a big chunk of RRSP credit to claim in the future. That's the upside to it.

However, I agree that an RRSP is usually somewhat of a last resort. The only advantage is the tax deferral. I did not contribute to my RRSP at all in 2011. I just make sure that I keep having my $5k ready each January for my TFSA and I worry about the RRSP later.

The RRSP really should be used for exactly what it is for. Long term growth and tax deferral. You don't want to be putting money in the RRSP you are going to use. You want it to grow and grow and grow, this is where (apart from the tax deferral) you are going to get the most benefit. Of course, you will pay tax on the growth, but at least it's still "free" money and will hopefully be taxed at the lowest marginal rate.


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## balexis (Apr 4, 2009)

Watch out regarding postponing the deduction claim, there is a threshold (specific to each situation) after which it becomes less advantageous to postpone the claim to a future year over claiming it at contribution time, even at a lower tax rate.

See section "Delay claiming contribution credit" here for the math behind:

http://www.retailinvestor.org/RRSPmodel.html


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## peterk (May 16, 2010)

I did the RRSP delay claiming break even calculation sometime last year. I'll try and attach the excel file so you can play with it. It's only for a 1 year delay though.

In Alberta, to beat delaying until the next year. You would have to earn 28% from 1st-2nd bracket, 12.5% from 2nd-3rd bracket, and 8.3% from 3rd-4th.

Just go into the formula on the "return" row to adjust the tax rate for your province, and goal seek the "difference" row to 0 to get your required ROR.

EDIT: Looks like I can't upload excel files  Anyone?


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## Maybe Later (Feb 19, 2011)

I don't understand the general disdain from some on this board for the home buyer's plan. For individuals paying tax annually it is a reasonable, beneficial way to increase a down-payment and decrease a mortgage amount.

For a new home buyer with a 25% marginal rate (for simplicity's sake) taking out a 25 year mortgage it means that a $15,000 saved after-tax could instead have been $20,000 if everything were contributed at the marginal rate. For individuals at a higher marginal rate, it is even better ($15,000 becomes more than $23,000 if contributed at a 35% marginal rate).

That's $5000 more that isn't being charged interest on for a 25 year period and that makes it back into the RRSP _at least _10 years before the mortgage is paid out. It's like deferring taxes on your home down payment. Not to mention that the extra down payment can affect whether the buyer pays high CMHC fees, lower fees, or none at all.

It isn't a question of the money not being in the RRSP for the extra 15 years because the question being asked is, "Save outside the RRSP or Save Inside the RRSP?" If the money was never in the RRSP in the first place, and wasn't earmarked for retirement, then the individual hasn't lost anything. Couple this with the fact that most young people aren't maxing out their RRSP in the first few years of work because they have extra costs ... like saving for and buying a house. Keep in mind also that you don't have to wait 15 years to get it back in. It can be repaid in a single year.

For individuals paying tax, it can be a useful part of an overall strategy and is worth looking at for anyone thinking to save for a down payment. It helped us significantly.


With respect to RRSPs and deferring taxes, I have to agree with steve41. My marginal rate is close to double what my average tax rate will be this year. My wife's is almost triple. To fund the same lifestyle we have now in retirement would take significantly less (no mortgage, daycare, RESPs, retirement savings, etc.) BUT, even if we had the same taxable income we have today, and a better lifestyle, AND funded everything 100% from RRSPs, we would benefit to the tune of about a 15-20% difference between the tax paid on the contribution and the tax paid on those same dollars as income in retirement.

Remember, you contribute at you marginal rate, but it is your average tax rate on your withdrawals, not your marginal rate, that matters. The TFSA arguments that say if you're in the same tax bracket now and in retirement that it's a wash are overly simplistic and confuse the issue.


_EDIT for clarification: For the OP who pays little or no tax, it may not be beneficial to contribute to your RRSP or to claim a deduction at this time. My post was to explore the benefits of using RRSPs and the HBP as a strategy to save for a home down payment._


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## Soils4Peace (Mar 14, 2010)

Invest in a TFSA first if:
- your future marginal tax rate (MITR) is greater than or about equal to your current MITR;
- you want _flexibility_ of access;
- you anticipate a _high_ rate of return over a _long_ period of time; and / or
- you are _not sure_ which to choose.

Invest in an RRSP first if:
- your future MITR will be less than your current MITR;
- you will only want the money in a low income year or for retirement;
- you are investing in US dividend stocks; and / or
- your employer matches your contributions.


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## Eclectic12 (Oct 20, 2010)

Koala said:


> [ ... ]
> 
> I haven't actually contributed because I can't see it being beneficial; yet so many messages refute this without stating why. It's hard to know if maybe there's something I'm just not seeing.


One of the advantages to contributing to the RRSP earlier - whether you delay the tax deduction or not is that the money has more time to grow tax free.

Then too - where the comparison is between a taxable investment and RRSP, while in the RRSP, 100% of the gains/income can be re-invested. The taxes due for dividends/capital gains will reduce the amount available.



From the sounds of your current tax situation, using up your TFSA first is the way to go. It also allows the money to grow tax free, with more flexibility and saves the RRSP room for when you are in a higher tax bracket.

The down side is that the TFSA uses after-tax money, which is potentially a smaller amount than could have been put into the RRSP.


Finally - on a different note, it is a lot easier to contribute to an RRSP (or TFSA) when one has few other expenses/commitments. Trying to contribute when there's also a mortgage, wife & kids etc. to cut into the increased income may or may not be as easy to do.


Cheers


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## Koala (Jan 27, 2012)

Thanks Balexis, that's the type of information that helps me understand things the best. 

You guys have help me confirm that I'm doing the right thing. Max out the TFSA so it's overall value increases, earn interest under no tax shelter (as that money won't be taxed either, for now). By the time I do have to pay taxes I can either use that non-sheltered money to buy a house or stick it into an RRSP, or both.


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