# Maxing out RRSP?



## Blush (Jan 9, 2014)

I have $30,000 in RRSP contribution room and have the cash in HIA. Should I max out and invest the tax refund in my TFSA or leave cash in HIA or GIC? Single, Age 52, $55,000 salary with 8 years to retire with a DB pension plan.


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## OnlyMyOpinion (Sep 1, 2013)

Sounds like that would minimize your income taxes and maximize your tax-sheltered savings - so on the surface it makes sense. 
This assumes that maximizing the size your RRSP to draw upon in retirement is integral to your planned retirement income. Possibly (but unlikely?) you have a DBP that will cover all of your needs?
You should think about how you will 'stream' your retirement income if you have not done so. Will you w/d from the RSP (or convert some to a RIF) to provide income from age 60-65, then defer CPP and DBP till 65. Or use TSFA or other savings as a 'cash wedge' in early years and keep the RSP intact to grow tax-sheltered till age 71, etc.


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## rikk (May 28, 2012)

Blush said:


> I have $30,000 in RRSP contribution room and have the cash in HIA. Should I max out and invest the tax refund in my TFSA or leave cash in HIA or GIC? Single, Age 52, $55,000 salary with 8 years to retire with a DB pension plan.


Well ... if contributing to the RSP, you might use an online calculator to determine if claiming say $15K for this tax year, and $15K for next tax year might be the better scenario tax wise because RSP refund/tax is at your marginal rate ... or maybe it doesn't really amount to much either way. Once the $$s are in the RSP, my philosophy/goal was to, as a minimum, grow tax sheltered the future tax that will be owed on withdrawal ... sure, the RSP is just delaying paying the tax, but it makes for a fun hobby. You can approximate that tax by approximating your future income ... pension, e.g., 70% of your best 5 years, plus dividends, interest, CPP, OAS, whatever. I liked the idea of tax sheltered growth myself e.g. the HISA interest is being taxed at the marginal rate ... who needs that considering the paltry return vs the outrageous tax rate.

Just to say ... myself and most of my buddies viewed an RRSP as simply a tax sheltered savings plan ...


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## CPA Candidate (Dec 15, 2013)

Have to consider tax brackets when putting money in RRSPs. You really don't want to take your income down below 44,950 or so (22% bracket) because your benefit of the deduction drops off by 7% (you move to the 15% federal bracket). I'd put at most 10k in an RRSP and put the rest in the TFSA.


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## OptsyEagle (Nov 29, 2009)

CPA Candidate said:


> Have to consider tax brackets when putting money in RRSPs. You really don't want to take your income down below 44,950 or so (22% bracket) because your benefit of the deduction drops off by 7% (you move to the 15% federal bracket). I'd put at most 10k in an RRSP and put the rest in the TFSA.


As CPA said, you can put it all in the RRSP right away, but deducting $10,000 per year for the next 3 years will score you a lot more tax savings, then deducting it all for 2014. Even more then CPA indicated because there is a considerable amount of provincial tax savings on top of the percentages he has listed above. Your tax savings should be in and around the 30% range if you do it as I suggested. If you deduct it all, the next $20,000 of it will provide only around 20% savings.

That is a 50% increase in your tax refund by waiting to make the deductions over the 3 year time period (two more years).


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## none (Jan 15, 2013)

You can contribute the 30K and not claim to all in the same year but rather carry it forward. I.e claim 10K for year 1, 10 K year 2 etc. That's what I'm doing to keep me above the lowest tax bracket.


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## none (Jan 15, 2013)

I was just chugging some coffee AND transfering a bit chunk to my RRSP which I won't use completely for a couple years. Anyway, part of the success of investing is controlling one's behaviour. Taking money out of an RRSP is a big hassle and has some potentially significant financial penalties.

I view RRSPs as tax deferment vehicles myself. I'm a bigger fan of TFSA's for sure b/c that's real money not something of dubious value down the line. For instance, if marginal tax rates increase substantially in the next 25 year then they may end up being a bit of a wash. Anyway, 100K in an RRSP is VERY VERY different from 100K in a TFSA or in a non reg account. That's all I meant.


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## Guban (Jul 5, 2011)

none said:


> You can contribute the 30K and not claim to all in the same year but rather carry it forward. I.e claim 10K for year 1, 10 K year 2 etc. That's what I'm doing to keep me above the lowest tax bracket.


I've written this before, but I'll write it again. *Don't do this*! It may work for none, but I believe that his TFSA is maxed out.

I'd go with what CPA Candidate wrote. Put the balance in your TFSA. You can always take take it out of your TFSA and transfer it into your RRSP when you are ready to take the deduction. By putting $ into your RRSP and not taking the deduction, you are making tax deferred money. Putting it into the same investment vehicle in your TFSA gets you tax free money. Tax free is better than tax deferred! This assumes that your investments grow, but who invests with the assumption that your cash will decrease? Play the odds, and only contribute into your RRSP what you are going to deduct that year. Otherwise, put it into your TFSA!


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## gardner (Feb 13, 2014)

none said:


> I view RRSPs as tax deferment vehicles myself. ... For instance, if marginal tax rates increase substantially in the next 25 year then they may end up being a bit of a wash.


I am also dubious about the efficacy of RRSPs myself -- though I use them to the max anyhow -- but I doubt very much that in the future tax rates will increase substantially, and I am even more confident that the rate thresholds will continue to inch upwards. Overall I would say that there is no chance that effective tax rates on your RRSP holdings will be higher than when you put it in. Although the pessimist in me suspects that they might wind up about the same.

The magic of RRSPs is that by deferring taxes, you are able to get more money in there working for you than you otherwise would be able to invest. This comes from the deduction. If you're not using the deduction, the magic is lost.


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## Eclectic12 (Oct 20, 2010)

none said:


> ... Taking money out of an RRSP is a big hassle and has some potentially significant financial penalties.


 ... not sure that an RRSP withdrawal is that much of a hassle ... my impression is that it's a bit more paperwork.

And yes, one can pay more in taxes of the withdrawal is bad ... but that's similar to choosing to sell a big gaining stock towards the end of the year one has a large income versus selling early in the next year when income is lower. It's more of a planning issue than anything particularly negative about the RRSP.


You may have a balance view but others reading the "penalties" part can take away that there's something inherently negative about RRSP withdrawals.




none said:


> ... I view RRSPs as tax deferment vehicles myself ... For instance, if marginal tax rates increase substantially in the next 25 year then they may end up being a bit of a wash.
> 
> The tax deferment view IMO is a better view to have.
> 
> ...


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## Eclectic12 (Oct 20, 2010)

gardner said:


> ... Overall I would say that there is no chance that effective tax rates on your RRSP holdings will be higher than when you put it in. Although the pessimist in me suspects that they might wind up about the same ...


There's a lot of ink being wasted on nothing if there's "no chance" ... it would seem it does happen to some people.
The flip side of the coin is that compared to what the articles imply, I suspect far fewer are affected.




gardner said:


> ... The magic of RRSPs is that by deferring taxes, you are able to get more money in there working for you than you otherwise would be able to invest. This comes from the deduction. If you're not using the deduction, the magic is lost.


+1 ... now that the TFSA is available, one can also put the deduction to work in a tax free way by putting it into the TFSA.


Cheers


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## none (Jan 15, 2013)

I'm putting cash in my RRSP b/c my TFSA is maxed out. 

Also, if you put money into an RRSP and withdraw it at the same marginal tax rate a RRSP and TFSA are mathematically equivalent (assuming you also put the RRSP deduction into the RRSP).

I'm of half the mind to keep everything except for Can equities in registered accounts. 50% marginal is a pretty sweet tax rate and it's real cash as supposed to the RRSP phantom money (maybe that's a little hyperbole-y).

i was going to take a bunch out of my RRSP last year when my income was low. I didn't because it seemed like a bit of a hassle (paperwork) and I didn't want to lose the contribution room. I don't get much now that I have a pension and figured I had the cash to fill it up so why not? Maybe that was not 'idea' but I feel people tend to try to hyper-optimize things are make them overly complicated when they really don't have to. Personal choice.


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## fplan (Feb 20, 2014)

I agree with Guban. 
22% tax bracket for 2014 starts 43950. so best bet is contribute 55k-43950 to your rrsp.
http://www.cra-arc.gc.ca/nwsrm/fctshts/2014/m11/fs141125-eng.html


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## gardner (Feb 13, 2014)

Eclectic12 said:


> it would seem it does happen to some people.


I guess I should have been more clear. What I believe is that the CRA's marginal tax rates and brackets are not likely to get worse in the future and RRSP withdrawals are already and will always be the most highly taxed sort of income. The brackets will likely continue to inch up.

Whether your ACTUAL marginal tax rates on your ACTUAL RRSP withdrawals in the future will be worse or better than "now" is a function of other factors, like your other sources of income and whether you are being forced to withdraw at a rate higher than you need. My mum is in the situation where her withdrawals are just as highly taxed as they would have been when they went in, so I know this is possible. The "rule of thumb" that RRSP withdrawals are into a 30% marginal rate is not remotely sound in my opinion.


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## rikk (May 28, 2012)

And fwiw ... when my wife retires in 2-3 years, she won't have much of a pension ... pension splitting will reduce my current average 26.5% tax (any RSP withdrawal would currently cost me 40% marginal tax plus 15% OAS) to about 16%. Just saying, there's ways to get at that RSP ...


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## steve41 (Apr 18, 2009)

This thread is missing a major issue... estate and actuarial concerns. In one case you may decide to max/shelter your RRSP and in the other, you may attack your RRSP and/or preferentially invest outside your RRSP. In one situation, (the first), if you die prematurely, your estate gets nailed. In the second case, your estate will benefit. (BTW, the reverse holds) 

Also, this 'gaming the tax bracket' stuff doesn't make a lot of sense.


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## Eclectic12 (Oct 20, 2010)

gardner said:


> I guess I should have been more clear. What I believe is that the CRA's marginal tax rates and brackets are not likely to get worse in the future and RRSP withdrawals are already and will always be the most highly taxed sort of income.


This is clearer ... though for those who might take the "highly taxed" as a negative, the trade-off is that where it was employment income - the contribution was equally highly taxed compared to capital gains or eligible dividends.




gardner said:


> ... Whether your ACTUAL marginal tax rates on your ACTUAL RRSP withdrawals in the future will be worse or better than "now" is a function of other factors, like your other sources of income and whether you are being forced to withdraw at a rate higher than you need...


+1 ... which is why it's good to keep a eye on it and keep one's mind open to plan ahead. It's all to easy to see in retrospect what would have helped.




gardner said:


> The "rule of thumb" that RRSP withdrawals are into a 30% marginal rate is not remotely sound in my opinion.


I haven't heard of this rule of thumb before ... but then again, a key driver is what the retirement income is going to look like plus if any proactive planning has been done to manage this.

IAC, I am still thinking through whether I'd care that the RRSP withdrawals are at a higher rate given that where there are gains, selling and re-investing has had an almost negligible drain on the proceeds compared to a taxable account. So yes the taxes might be the same as well it was put in but there may be a lot more available to withdraw.


Cheers


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## gardner (Feb 13, 2014)

Eclectic12 said:


> I haven't hear of this rule of thumb before


They use it here: http://www.moneysmartsblog.com/rrsp-myth-retirement-income-lower/

But I have seen other uses of the same -- in my opinion quite muddy -- reasoning. It hinges on the assumption that 100% of your retirement income is RRSP withdrawal. So if you have a pension or two, OAP, non-registered investment income, hobby income -- any of that stuff -- the 30% calculus is bogus.


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## Eclectic12 (Oct 20, 2010)

steve41 said:


> ... In one situation, (the first), if you die prematurely, your estate gets nailed. In the second case, your estate will benefit. (BTW, the reverse holds) ...


Fair enough ... though I'm not sure what one can do about it ... it's not like anyone is going to guarantee me that I'm dying at age ## so that I can shift my RRSP/TFSA/taxable investments to whatever would help out. 


Cheers


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## steve41 (Apr 18, 2009)

Eclectic12 said:


> Fair enough ... though I'm not sure what one can do about it ... it's not like anyone is going to guarantee me that I'm dying at age ## so that I can shift my RRSP/TFSA/taxable investments to whatever would help out.
> 
> 
> Cheers


True, but you may have some idea of life expectancy..... poor health, parents' age at death....


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## none (Jan 15, 2013)

Personally, I hope to kick the bucket with just enough to cover my funeral expenses. My kid doesn't need a hand out to make it in this world.


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## gardner (Feb 13, 2014)

rikk said:


> follow up questions the answers to which might be something like ...


"Bus hit him, and that was it."


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## Eclectic12 (Oct 20, 2010)

gardner said:


> But I have seen other uses of the same -- in my opinion quite muddy -- reasoning.
> 
> It hinges on the assumption that 100% of your retirement income is RRSP withdrawal. So if you have a pension or two, OAP, non-registered investment income, hobby income -- any of that stuff -- the 30% calculus is bogus.


You did say:


> ... RRSP withdrawals are into a 30% marginal rate is not remotely sound in my opinion.


Yet when I looked at the link - I can find no mention of RRSP withdrawals being at 30% ... only that the average tax rate can be 30%.
For fun, I plugged into a 2013 Ontario tax spreadsheet a combined income (ie. CPP + pension + investments + OAS) of a $120K, with only the personal exemption reducing it. 

When I divide the taxes owing by taxable income reported - this ends up at 0.29, or 29%.


Cheers

*PS*

For some of the scenarios discussed, a marginal tax rate of 43% for the RRSP contributions is used.


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## My Own Advisor (Sep 24, 2012)

29% tax rate for a retiree on a pension + CPP + investments + OAS making $120k? That's not too bad actually.

I hope I'm that $120k retiree! That's great income in retirement with no debt.


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## Eclectic12 (Oct 20, 2010)

... LOL ... I don't expect many retirees will be in this range - I figured it would be a good illustration of the average tax rate which would cover most people in retirement, when RRSP withdrawals are being made.

I probably should modify the spreadsheet to be a better indication of what the eligible dividend gross-up would do but don't have time at the moment.


Cheers

*PS*

With a graduated set of rates - IMO only the average makes sense as how does one assign that layering?
Was the company pension paid first so that it was taxed at 20% while the RRSP withdrawal happened last so that it was taxed at 43% or was it visa versa?


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## My Own Advisor (Sep 24, 2012)

RRSP withdrawal would be "on top" of existing pension income or CPP; from a tax perspective (pushing you into subsequent higher rates), no Eclectic?


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## Eclectic12 (Oct 20, 2010)

YMMV ... since I plan to be withdrawing from my RRSP/LIRA long before starting the pension, I see it as the other way round ... that the pension will be pushing me into higher tax rates.

I don't believe that CPP will be a factor in my case, as I believe the pension & CPP are integrated (but I haven't checked that closely).


Part of the reason I see it as arbitrary as whether is that on the tax forms, it's one calculation against the income number ... I can decide it's RRSP or investments or pension that is being assigned the lower tax rate but at the end of the day, no matter how I think of it - one rate is going to be charged against the total.



Cheers


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## gardner (Feb 13, 2014)

Eclectic12 said:


> I plan to be withdrawing from my RRSP/LIRA long before starting the pension


Yes, that is my plan as well. I believe practically any period of low/no income should be used to draw down your RRSP and convert it into cap-gains and eligible dividend paying investments. You want to lock in the tax savings whenever you get the chance.

I think the marginal rate calculations vis-a-vis RRSP withdrawals are optimistic because they don't take into account other income sources that push up your income and push up the marginal rate. If the overall average rate is 29% the marginal rate is closer to 40%. The RRSP withdrawal is arguably the "last dollar" versus the average dollar if I have pension, interest or similar income that I can't defer. RRSP withdrawal that I can defer or set to a planned level is therefore "on top" of the other sources.

I think where folks get hit with high marginal rates on withdrawals is when they have a lot of savings and when they run up against mandatory withdrawal. A widow with her own pension plus a survivor benefit and trying to draw down her own and her husband's RRSP could easily get in the situation where the marginal rate coming out is just as bad as when it went in.


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## My Own Advisor (Sep 24, 2012)

You guys are giving me more to think about....

(Eventually) draw down the RRSP accounts, move the proceeds into non-registered investments for eligible cap gains and DTC but I would only consider this after the TFSA is maxed out every year.

No?

I only have 14 years into my pension. I suspect I'll need 20-25 year of pension to make a go of retirement in addition to other assets. Otherwise, I will simply have to work longer or spend less.


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## gardner (Feb 13, 2014)

My Own Advisor said:


> draw down the RRSP accounts, move the proceeds into non-registered investments [...] but I would only consider this after the TFSA is maxed out


Yes, for sure. If you find yourself in a low income period with RRSP holdings and TFSA room, I would definitely move as much as possible from RRSP to TFSA to exploit that low-tax environment. That's only going to be 5.5K per year though. I would be looking to move the whole basic personal deduction space at least -- something on the order of 11K -- maybe more.


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## Eclectic12 (Oct 20, 2010)

gardner said:


> Yes, that is my plan as well.
> 
> I believe practically any period of low/no income should be used to draw down your RRSP and convert it into cap-gains and eligible dividend paying investments. You want to lock in the tax savings whenever you get the chance.


I might have mislead you a bit ... I have no plan to convert to a taxable situation plus I don't see any no/low income opportunities on the horizon. 

At current projections, investment plus pension income is going to be substantially lower than current income. With so much time to go before retirement ... should a low/no income time frame come up - only a transfer to a TFSA makes sense to me.

My plan is to create a low/no income period before the pension starts ... now that a spousal RRSP is coming into play where the spouse's retirement income is going to be lower than mine, there may be no need anyway.




gardner said:


> ... I think the marginal rate calculations vis-a-vis RRSP withdrawals are optimistic because they don't take into account other income sources that push up your income and push up the marginal rate.


 ... which is why I'm puzzled as the link in post # provides an example of retirement income that *has* other income. In particular, example 2 uses a retirement income total made up of OAS + CPP + Trust + RRSP. It is also stated that the retirement income is greater than employment income.




gardner said:


> ... I think where folks get hit with high marginal rates on withdrawals is when they have a lot of savings and when they run up against mandatory withdrawal. A widow with her own pension plus a survivor benefit and trying to draw down her own and her husband's RRSP could easily get in the situation where the marginal rate coming out is just as bad as when it went in.


True ... but then again, if like my mom - she's four or five tax levels down from her husband plus didn't contribute any of her money to the survivor pension ... there's lots of cash being paid out at better rates before a smaller percentage comes out at the higher rate.


Cheers

*PS*

With more time to think about the widow's situation ... the question that comes to mind is whether her husband converting the RRSP to taxable investments is going to help that much. 

As I understand it, taxable investments will be one of many part of the estate - possibly resulting in the investments being taxed at the top tax rate, on a large chunk of it. Leaving it in the RRSP likely meant a tax free rollover to the widow where until her death, the withdrawals are being spread out.

Where she is paying a high marginal rate than when it was put in - that may be cheaper than if it was aggressively added to his lump sum estate.


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