# Anyone not using a RRSP to retire?



## Jungle

Just wondering if there is anyone out there that isn't going to use RRSP's in their retirement plan. 

I am considering the Derek Foster retirement plan, where I would pay the mortgage off, save and use income generating investments for retirement income. Right now I have been putting money into an RRSP account, but I thinking with the Derek Foster route, I should just pay off the mortgage, save and invest in dividend paying stocks. Would it make sense to use both strategies?


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## andrewf

Using both strategies makes sense. For investments whose return will compose primarily of eligible dividends and capital gains (held for a long time), holding outside an RRSP can make sense, since this income could be subject to a higher tax rate when withdrawn from the RRSP. I can't imagine it making sense, however, to hold fixed income retirement savings in a non-registered account. Paying tax on the interest year-after-year would put a serious dent in your return.


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## janbjarne

A very valid question. RRSP's have a lot of problems that are not well understood. Any capital gain or dividend received by the RRSP is taxed as income when eventually withdrawn. All withdrawals from an RRSP are income for tax purposes and will make you subject to clawback of Old Age Security and other income tested programs, making the effective marginal tax rate in retirement very high.

The new TSFA account has none of those issues, so I suggest using it to the fullest before using an RRSP - and I totally agree that paying off the mortgage should be first priority.


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## steve41

This is not an easy analysis. When you examine the RRSP against the alternatives (dividends, capital gains, TFSA) you will find that the TFSA and the RRSP are essentially the same... the RRSP is very close to being tax-neutral. When you factor in estate implications (what happens to your estate if you should die early) or emergency cash needs, then there is a good case for maxing your TFSA first.

The fact remains... effective tax rates in retirement are never higher than during your working years. 

(I am sure I will get flack over the word 'never' but I am comfortable using it.)


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## FrugalTrader

One thing to note is that dividend gross up (in non-reg account) is counted as income when calculating the OAS threshold/clawback. So it's not necessarily better to have dividends outside of a tax sheltered account for seniors.


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## andrewf

Anyone know where I saw that chart of marginal tax rates for seniors (GIS/OAS clawbacks factored in)? I went searching and couldn't find it.


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## Larry6417

*Be careful!*

The strategy Foster advocated was to use an investment loan to provide a tax deduction rather than contributing to an RRSP. To implement the strategy, you must be comfortable with leverage. 

*Pro*
Securities paying dividends and yielding capital gains are taxed favourably outside an RRSP while the same securities are taxed like interest upon withdrawl from an RRSP. Also, capital losses can be claimed against capital gains outside an RRSP. 

*Con*
As mentioned, grossing up dividends may affect eligibility for social benefits. Also, if your portfolio becomes (hopefully) large enough then you may run into problems with alternative minimum tax. Foster's credibility has taken some awful hits recently. I've always been a little bit sceptical. I haven't seen anywhere a cmplete list of what he's held and when. He has made some awful decisions recently. See here for a critique www.canadiancapitalist.com/what-went-wrong-with-the-derek-foster-strategy/

He billed himself as Canada's "youngest retiree," yet he hawked books and articles. I don't know if he uses the money from these ventures to support himself, or if he can actually live on his prior accumulated savings. There's always been a whiff of snake oil to him, at least to me. So be careful from whom you accept advice - including posts on the internet .


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## Assetologist

We are using our RRPSs as backup to my corporate investments.
In BC the tax rate on corporations is very favorable.


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## investnoob

I'm 32, but have never made an RRSP contribution. I've been a member of the federal public service's defined benefit pension plan for the past 9 years. I've made contributions to that, and it impacts the amount of contributions I may make to an rrsp.

Typically, my max contribution amount is about 3500 every year. So, I guess you can say that my pension plan is considered an RRSP? 

Anyway, I haven't bothered with an RRSP so far. Instead, I've focused on paying off my student loan (done last year yeah!), and pre-paying my mortgage. In the future, I may make contributions. I haven't really decided yet.

So, in short, because of my pension I haven't really seen the need to make regular RRSP contributions.


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## andrewf

I don't see the need for a someone with a federal govt pension to save much early on. Much better off paying debt. Maybe once you're higher income and your house is paid it would make sense to make contributions.


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## Soils4Peace

I just used my SDRSP to shift income between years. Optimally you would contribute in about February after a good income year, and enjoy your tax refund in the ensuing bad income year. If things still look bad in December you can take the money out again, and pay 20% withholding tax. It is a pretty handy way to shift $10,000 or so.

You can also use RSPs to shift your current income to your spouse's future income. A good idea if that means improving the marginal tax rate.


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## osc

The effective rate for capital gains when marginal tax rate is 38% is 19%. After early retirement, one may withdraw 50000/year from RRSP to pay 19% taxes (assuming no other income - before 65 and no capital gains). 
It makes perfect sense to make maximum RRSP contributions (in addition to maximizing TFSA) before non-registered investing. Paying mortgage before rrsp/tfsa does not make sense as the rate of return for an average investment is higher than mortgage rate. However one needs to be mortgage free before early retirement in order to avoid the need to use rrsp withdrawals for mortgage (or any other debt) payment.
So the order of investment is very simple:
- maximize rrsp and tfsa every year before early retirement
- use the rest to pay off mortgage
- when/if mortgage is paid off, invest in an unregistered account
Retire when the mortgage is paid off and the savings will last forever at 5% withdrawal (for example if you want 30000/year at retirement you need about 600000).


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## Jungle

osc said:


> The effective rate for capital gains when marginal tax rate is 38% is 19%. After early retirement, one may withdraw 50000/year from RRSP to pay 19% taxes (assuming no other income - before 65 and no capital gains).


I thought that investmensts inside RRSP accounts are sheltered from capital gains, but subject to income tax upon withdraw?


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## Jungle

Am I right to assume the following for RRSP? 

Advantage

1. tax deferred compounding effect (if refund re-contributed)
2. Contribute with high marginal tax rate, withdraw at low marginal tax rate

Disadvantages

1. Paying tax upon withdraw
2. Paying tax on the growth that occured inside the RRSP upon withdraw
3. Full withdraw and entire amount taxed upon death when passing to heirs

Once you use all your RRSP income, it becomes depleated. If you hold good dividend paying stocks, you can keep the capital and just live off the dividend income.


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## Jungle

Larry6417 said:


> The strategy Foster advocated was to use an investment loan to provide a tax deduction


I don't think he borrowed money. I think in the book it said he just save $200 a month or something. Either way, there are some questionable things that he didn't disclose in his book, regarding how he reached his net worth by saving $200 a month.


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## Four Pillars

Jungle said:


> I don't think he borrowed money. I think in the book it said he just save $200 a month or something. Either way, there are some questionable things that he didn't disclose in his book, regarding how he reached his net worth by saving $200 a month.


He doesn't mention borrowing to invest in his book. However, he admitted later that he did some big leveraged bets which were a big part of his success.

It kind of took away from the book because in the book he made it sound like he just saved $200/month and then retired. Which isn't what he really did.


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## Ionse

I am not planning on retiring with a RRSP. I will rely on rental income and dividend income. I plan on making more in 20 years then I currently am so I dont see the benifits of the RRSP being worth it.


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## Jungle

Ionse said:


> I am not planning on retiring with a RRSP. I will rely on rental income and dividend income. I plan on making more in 20 years then I currently am so I dont see the benifits of the RRSP being worth it.


Only problem during retirement, rental properties are still a job. Not my idea of retirement! 

At least with dividend income, they don't call you with repairs to fix!


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## the-royal-mail

*ducks* What the heck is dividend income? Can someone provide me with a simple, brief explanation? No links please, just a high level overview, then I can ask questions from that. Maybe I should start a new thread for this.

FWIW, I agree with jungle in that rental properties are a JOB, a hassle and a huge responsibility. Not what I want to be doing during retirement, either.


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## MoneyGal

From Wikipedia:

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.


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## andrewf

the-royal-mail said:


> *ducks* What the heck is dividend income? Can someone provide me with a simple, brief explanation? No links please, just a high level overview, then I can ask questions from that. Maybe I should start a new thread for this.
> 
> FWIW, I agree with jungle in that rental properties are a JOB, a hassle and a huge responsibility. Not what I want to be doing during retirement, either.


Are you serious? Dividend income is the proceeds of a portfolio of dividend paying stocks. A dividend of course is the disbursement of retained earnings by a corporation to its shareholders.

For what rental properties yield, you need some serious leverage and a lot of work to make them attractive. I'm not sure why people who want to enjoy their retirement would look to property management as an income source. Sounds a stress source to me!


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## Ionse

You can pay somebody to look after them for you and still make a good amount from them. I think rentals will help me retire earlier and I don't mind spending some of my time looking after them, even after I have "retired".


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## sprocket1200

non-registered dividends are also affected by the 'gross up' rules. this will push you higher into claw back territory and reduce your OAS/GIC entitlement. this, coupled with the work from rental properties (and their potential losses), makes me wonder if you shouldn't rethink the RRSP strategy...


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## K-133

investnoob said:


> I'm 32, but have never made an RRSP contribution. I've been a member of the federal public service's defined benefit pension plan for the past 9 years. I've made contributions to that, and it impacts the amount of contributions I may make to an rrsp.
> 
> Typically, my max contribution amount is about 3500 every year. So, I guess you can say that my pension plan is considered an RRSP?
> 
> Anyway, I haven't bothered with an RRSP so far. Instead, I've focused on paying off my student loan (done last year yeah!), and pre-paying my mortgage. In the future, I may make contributions. I haven't really decided yet.
> 
> So, in short, because of my pension I haven't really seen the need to make regular RRSP contributions.


I'm also a federal employee contributing to the pension plan. Perhaps someone could confirm but, isn't it counterproductive to contribute to the RRSP, when you would theoretically be taxed at a higher rate when you take money out of the RRSP, as your salary would more than likely be higher in 20-35 years, than it is today?


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## Armi

My parents aren't using a RRSP for their retirement. They only have TFSAs and banks to keep their retirement income.


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## Ionse

I am planning on retiring before I start to recieve OAS or CPP money. The rentals I am buying older or run down properties and I am using my time to make them rentable and profitable. I am not worried much about their resale value as I have little intention of selling them within the next 30 years.


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## CheckingIn

Larry6417 said:


> The strategy Foster advocated was to use an investment loan to provide a tax deduction rather than contributing to an RRSP. To implement the strategy, you must be comfortable with leverage.
> 
> *Pro*
> Securities paying dividends and yielding capital gains are taxed favourably outside an RRSP while the same securities are taxed like interest upon withdrawl from an RRSP. Also, capital losses can be claimed against capital gains outside an RRSP.
> 
> *Con*
> *As mentioned, grossing up dividends may affect eligibility for social benefits*. Also, if your portfolio becomes (hopefully) large enough then you may run into problems with alternative minimum tax. Foster's credibility has taken some awful hits recently. I've always been a little bit sceptical. I haven't seen anywhere a cmplete list of what he's held and when. He has made some awful decisions recently. See here for a critique www.canadiancapitalist.com/what-went-wrong-with-the-derek-foster-strategy/


Hi Larry,

I was wondering if you can elaborate on the bolded sentence? I'm a huge fan of dividend investing, and I consider myself quite educated on the subject. However, I think I need to re-consider my knowledge on the subject after reading that sentence 

In particular, are you saying that the dividend income I receive throughout my life can impact my future benefits?


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## kcowan

CheckingIn said:


> In particular, are you saying that the dividend income I receive throughout my life can impact my future benefits?


No what Larry is saying is that dividend income can result in clawbacks to GIS, age credit, OAS and several other welfare programs. This does not become a factor until you are approaching retirement age.


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## FrugalTrader

It's the dividend gross up that's the killer as it's counted when calculating seniors benefit thresholds for clawbacks.


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## square one

I, too, am wondering if RRSP is the wrong way to go. My husband and I will have about $70,000 combined defined benefit pension income per year upon retirement and plan to have about $30,000 per year more to withdraw from another source (we want to travel alot). We will soon be paying off the mortgage and plan to put all of the 'mortgage payment money' into investments for 12 to 14 yrs. But should we be avoiding RRSP and just put it into TFSA and non-reg accts (given clawbacks and tax rate upon withdrawal with RRSP) or does the benefit of reinvesting and compounding the tax refunds make the RRSP still a better plan? (up to the max, of course as we will have more to invest than that) Is there a 'magic number' for income in retirement (in Ontario) that makes the RRSP the clear loser?


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## andrewf

Square one, you're going to run out of TFSA contribution room. You only get $5000/yr/person.

Whether it makes sense to contribute to RRSP or TFSA depends on whether you believe you will be in a higher, lower, or equal tax bracket (after factoring in benefit clawbacks) when you retire.


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## Mike59

*Count me out of RRSPs*

I definitely am opposed to RRSPs for many reasons. 

Some non-RRSP options i've exercised:
- TFSA (max out yearly as first priority)
- Universal life policy (which tax shelters all investment income)
- Incorporation: (although taxed at a higher rate, investments can grow faster here, and there are legal ways to tax shelter such as corporate class mutual or index funds that focus on capital gain)

My biggest reason not to invest in RRSPs is that I consider them essentially frozen until retirement (with all the steep penalties/taxes if drawn early)- I prefer all assets to be liquid. As well, I'd bet taxation rates will be brutal in future generations with a small working class funding health care for a large society of elderly. I'd rather pay the tax now and keep the government out of my business.


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## cardhu

CheckinIn said:


> In particular, are you saying that the dividend income I receive throughout my life can impact my future benefits?


It doesn’t affect future benefits, it only affects benefits in the year the dividend income is received (or perhaps with a one-year lag, if there are benefits that are based on the prior year’s income) ... 

Dividend income received prior to age 65 would not impact your eligibility for OAS, GIS, or any of numerous other income-tested benefits / tax credits available to seniors ... but it would impact things like the Child Tax Benefit, GST rebate, etc., which are not age-based.


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## cardhu

square one said:


> Is there a 'magic number' for income in retirement (in Ontario) that makes the RRSP the clear loser?


No, there’s no magic number, its quite circumstance-specific ... based on today’s rules/rates/programs, the most significant clawback that could affect you would be the OAS clawback, but if you are making effective use of income splitting, then with a retirement income of “only” $110,000/yr ($70k DBP + $10k OAS + $30k “other”), you won’t come anywhere near that clawback threshold (that threshold could change between now and then, obviously ... many (including myself) think that aside from minor tweaks, the most likely change would be to base the clawback on household income, instead of individual income, as is the case now) ... there are other clawbacks, but none that are likely to be real deal-killers in your case. 

If the tax burden (not bracket) at the time of withdrawal is equal to or less than the tax rate at the time of contribution, including whatever program clawbacks may apply, then you cannot lose by using RRSP ... it only becomes a “clear loser” when the tax rate on withdrawal is higher than on contribution ... and not just a little bit higher, but substantially higher. 

RRSP carries the risk that you both die before the account is substantially depleted ... this would result in the entire remaining balance being brought into your income for the year ... that final disposition may or may not occur at a higher tax rate than you ordinarily face on regular withdrawals.


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## square one

cardhu, thank you, that's a very helpful reply. I expect our tax burden to be about equal on withdrawal as it is now on contribution, perhaps a bit less. Presently I am home with the kids and working part-time, so my husband is contributing to my spousal RSP as his income is just over $100,000 (and he will have the higher pension income in retirement). When he runs out of contribution room (we are catching up on those yrs when we didn't contribute at all) then we will reassess whether using my contribution room makes sense. If my income remains under 50,000 I expect we should then stick with TFSA and then non-reg. accounts. (as you said, with income splitting, I expect my retirement income to be about 55,000)
This "whether to use RRSP" question seemed simple at first, but it's apparent to me that it requires much more thought than most people give it.


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## kcowan

cardhu said:


> ... based on today’s rules/rates/programs, the most significant clawback that could affect you would be the OAS clawback, but if you are making effective use of income splitting, then with a retirement income of “only” $110,000/yr ($70k DBP + $10k OAS + $30k “other”), you won’t come anywhere near that clawback threshold (that threshold could change between now and then, obviously ... many (including myself) think that aside from minor tweaks, the most likely change would be to base the clawback on household income, instead of individual income, as is the case now) ... there are other clawbacks, but none that are likely to be real deal-killers in your case. ...


OAS gets clawed back starting at $63k and is totally clawed back by $110k.


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## FrugalTrader

Not to nitpick, but I think the OAS clawback starts at around $67k.


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## steve41

The OAS clawback threshold is indexed. If you are looking 20 years down the road to when you are 65, that $67K limit will be much larger, don't forget.


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## andrewf

steve41 said:


> The OAS clawback threshold is indexed. If you are looking 20 years down the road to when you are 65, that $67K limit will be much larger, don't forget.


Unless they make OAS less generous by clawing back earlier. I think it's a significant risk, given our aging population and the generally poorly thought-out nature of OAS (giving welfare to wealthy retirees).


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## MoneyGal

Clawing back earlier (I assume you mean at an earlier age? or possibly at a lower net income), or simply not indexing the point at which the clawback starts. Or basing the clawback on household income, not individual income. 

There are so many other benefits delivered through the tax system which are NOT indexed (i.e., child care deduction, to provide one off-the-top-of-my-head example) and which are based on HOUSEHOLD income (i.e., CCTB for low-income families). I don't understand (actually, I probably do) why a benefit which is NOT means-tested ALSO benefits from both indexation and individualized, not household, calculation.


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## andrewf

I meant at a lower income, but pushing the eligibility age back to 67 + is another possibility. Of course this would be a hell of a political fight, given that old people vote.


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## peterk

I keep reading that the RRSP works out to be relatively tax neutral, and it's a toss up between that and the TFSA. My own calculations don't seem to agree, and favour the TFSA considerably.
Over a 30 year time line with 6% growth and 3% dividend. You would need a tax return on income in the highest bracket (in Alberta) when you deposit, and be in the lowest tax bracket when you withdraw during retirement to make the RRSP better than the tfsa.
More realistically though, when I start working/saving out of college, I'll be in the second tax bracket, and when I retire, I'll be in the second tax bracket as well. In this case, there will be 11% more money in a TFSA than an RRSP. And I haven't even considered OAS clawback.
Am I doing this too simplistically? Can someone take a quick look at my table and see if I'm missing anything?

Edit: Can't seem to attach an excel file... oh well..


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## andrewf

^ Assuming dividends are reinvested gives an assumed 9% return (since dividends are not taxed in either RRSP or TFSA. 

TFSA is then just 1.09^30-1=12.27 or 1227% return.

RRSP is (1-tax_ret)*(1/(1-tax_contr))*1.09^30 -1 . where tax_ret is effective tax rate at retirement and tax_contr is the rate at contribution time. As we can see using some simple algebraic manipulation, if tax_ret=tax_contr=t we get:

(1-t)*(1/(1-t))*1.09^30-1
= (1-t)/(1-t)*1.09^30-1
= 1*1.09^30-1=1227% return

You're welcome for the mathematical proof that TFSA and RRSP are identical if the tax rates are the same at contribution and retirement. The main caveat I can think of is US dividends due to the tax treaty, the dividends are treated differently between RRSP and TFSA.


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## peterk

Ah, I wasn't reinvesting my dividends.
Also, I'm sure you're right, but why is the new principle increased by Pnew= P/(1-t) at deposit time, and not Pnew = P*(1+t) ? If your marginal rate is 32% will you not get $320 returned in tax on $1000 deposited into an RRSP?

Thanks Andrew!


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## cardhu

kcowan said:


> OAS gets clawed back starting at $63k and is totally clawed back by $110k.


Not for couples making effective use of income splitting strategies.


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## slacker

I think it is more complicated than this. For one, TFSA is invested via after-tax cash, where as RRSP is invested via before-tax cash. That means you start with a bigger principal with RRSP.

There's also no way to predict what actual tax rates will be when you cash out the RRSP. Whereas the government will most likely honour the "tax free" part of the TFSA.


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## kcowan

cardhu said:


> Not for couples making effective use of income splitting strategies.


But then the age exemption gets clawed back for incomes over $32k.


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## cardhu

kcowan said:


> But then the age exemption gets clawed back for incomes over $32k


Not for couples making effective use of income splitting strategies. 

You have to remember that couples have the opportunity to split income in retirement ... there are various mechanisms for doing that ... and therefore, if there is any "clawback" that is based on individual income, a couple that has planned well can bring in up to twice that amount before reaching the threshold limit ... the incomes that I have been referring to are combined incomes, not individual incomes. 

Besides, the age amount reduction is relatively insignificant in the grand scheme of things. People should certainly be aware of it, but planning one's retirement strategy around the avoidance of this minor tax effect seems like much ado about nothing.


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## Vancouver

Others have mentioned RRSPs are effective if in retirement net income is lower than during the working years. For many low to moderate income individuals, during the working life the marginal tax bracket is low. Upon retirement, with added CCP and OAS, the tax bracket could end up being similar as during working years, so withdrawals from the RRSP or RRIF could be taxed at the same rate as the tax savings. The one advantage though is tax sheltering earnings and letting earnings compound sheltered in an RRSP.

However I've been the executor for two relatives. Both were the last surviving spouse, so their RRIFs were not transferable to anyone else. Their RRIFs were collapsed and the total value was deemed to be earned in the year of their death. I was astounded at the resulting tax bracket they ended up in in the year of death. It seemed all the tax savings they made in the ~20% tax bracket while working were given back to the government and more at the 40%+ tax bracket in the year they passed away. These relatives were great savers but earned perhaps slightly more than minimum wage. I'm sure the relatives both would have been disgusted at how much of their hard earned savings went for income taxes in the end. I haven't done the calculations but intuitively it's hard to imagine tax savings in the 20% tax bracket plus compounded earnings yielded more than the 40+% that went for taxes. 

My choice is max out TFSA first. It's after tax money, but I prefer to pay as I go rather than defer and get hit hard later.


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## Cal

Couldn't there have been more that the relatives could have done, possibley with the help of an accountant to reduce the tax hit upon death. You didn't post alot of details, but was there anything obvious that you noticed from either estate that could have been done differently to prevent such payable taxes.


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## My Own Advisor

@Cal,

What types of things can be done to minimize taxes payable in retirement? For the estate?

I see what Vancouver is saying. I can definitely see how this could happen.


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## Eclectic12

Jungle said:


> Am I right to assume the following for RRSP?


Maybe ... maybe not ... there's lots of variables that you need to apply what you plan to do.




Jungle said:


> Disadvantages
> 
> 1. Paying tax upon withdraw
> 2. Paying tax on the growth that occured inside the RRSP upon withdraw


A couple of things to bear in mind - odds are this is income that one would have paid taxes on anyway. As well, unless there's room to make the same growth in a TFSA, in a taxable account there's taxes to pay on the growth (ex. dividends, income, capital gains).



Jungle said:


> Once you use all your RRSP income, it becomes depleated. If you hold good dividend paying stocks, you can keep the capital and just live off the dividend income.


That would assume the investment in the RRSP is sold, withdrawn as cash and spent. One of the options for spending the cash is to buy investments that produce income in a taxable account (preferably something that pays a lot of return of capital such as a REIT so that income is not increased for the OAS clawback).

I'm sure I've also seen posts from those built into their retirement plan to have a period before collecting their pension where they are withdrawing from the RRSP at a lower tax rate because their pension hasn't started yet.


Cheers


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## Eclectic12

Mike59 said:


> ... My biggest reason not to invest in RRSPs is that I consider them essentially frozen until retirement (with all the steep penalties/taxes if drawn early)- I prefer all assets to be liquid...


I can see the idea of taxes might be higher but RRSPs can be withdrawn from and don't have any "penalties", unless you consider the permanent loss of the contribution room a penalty.

When one withdraws from an RRSP early, just like when one is earning income - taxes are withheld at a set rate. When the tax return is filed for the tax year of the RRSP withdrawal - the final income from all sources for that year is determined and the final taxes owed based on that income are calculated.

Where the taxes due are lower than the taxes withheld - there's a refund and where it is higher than the taxes withheld, there's a tax bill.


At the end of the day, it's income and it is being taxed. There's no penalty or steep extra taxes.


Cheers


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## My Own Advisor

I wish my parents did this Eclectic12, w/d from RRSP before pensions and OAS kicked in. 

They've still got debt in their 60s. I'm suggesting they w/d from RRSP soon and kill the debt. They are VERY lucky to have DB pensions. CPP coming in now. OAS starting in a year.


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## Eclectic12

CheckingIn said:


> Larry6417 said:
> 
> 
> 
> *As mentioned, grossing up dividends may affect eligibility for social benefits.*
> 
> 
> 
> I was wondering if you can elaborate on the bolded sentence? ...
Click to expand...

Others have answered most of this well ... I'm not sure the "grossed up" part is clear, especially if you have an accountant or another person doing your income taxes.

When reporting eligible dividend income, the amount received is multiplied by 38% ("grossed up") and reported as income. So where $1000 was received, $1380 is reported as income.

Before the income test for social benefits (ex. OAS), it's not a problem as the dividend tax credit reduces the taxes this generates. 

http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm

When the income test is applied - income that is from eligible dividends will be reported at 38% higher than received and it is this inflated amount that is used. So one may think one is below the threshold, the "gross up" plus growth in the dividends paid may have put one at or over which will trigger clawbacks.


Cheers


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## Vancouver

Cal said:


> Couldn't there have been more that the relatives could have done, possibley with the help of an accountant to reduce the tax hit upon death. You didn't post alot of details, but was there anything obvious that you noticed from either estate that could have been done differently to prevent such payable taxes.


I suppose one thing would have been distributing the estate earlier by withdrawing from the RRIF, paying tax at a lower rate than on the lump sum collapse of the RRIF and distributing the money to the beneficiaries over time. The risk is distributing too much and out living the money. So these are things retirees need to think about, the tax hit to their estate when a sizable RRSP or RRIF is collapsed in the year of death and added to income in that final year.


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## da718

Vancouver said:


> I suppose one thing would have been distributing the estate earlier by withdrawing from the RRIF, paying tax at a lower rate than on the lump sum collapse of the RRIF and distributing the money to the beneficiaries over time. The risk is distributing too much and out living the money. So these are things retirees need to think about, the tax hit to their estate when a sizable RRSP or RRIF is collapsed in the year of death and added to income in that final year.




When a person dies, and the RRSP/ RIF has no beneficiary listed, it is true the monies are considered as income in the year of death and the relevant tax rates apply. Thus the possibility of very high tax rates. 

HOWEVER, it is perfectly normal, and highly advisable, to have one (or more) beneficiaries listed on the RRSP / RIF. In this latter case any monies in these registered entities goes directly to the beneficiaries. They bypass the estate / probate process, are NOT considered income to the deceased person, and are TAX FREE to any and all the beneficiaries listed. 

da718
(note, first post in this forum)


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## Eclectic12

My Own Advisor said:


> @Cal, ... What types of things can be done to minimize taxes payable in retirement? For the estate?...


I suspect once it's an estate, it's too late! :rolleyes2:

One thing is to monitor the levels of money and as Vancouver mentions, if it seems clear there will be plenty, distribute some of it. 

I'm not sure where the source was and there will probably be more taxed than I like but at least my folks distributed some funds a couple of times. Though it does help that all but one sibling will be responsible with the money.




My Own Advisor said:


> I wish my parents did this Eclectic12, w/d from RRSP before pensions and OAS kicked in.
> 
> They've still got debt in their 60s. I'm suggesting they w/d from RRSP soon and kill the debt. They are VERY lucky to have DB pensions. CPP coming in now. OAS starting in a year.


Unfortunately, that's where taking the newspaper and quick articles at face value can be a problem. On can locked into the point and miss some of the variances. Just like some has latched onto the possibility of having too big an RRSP and are going to the other extreme of "I should liquidate the RRSP in my thirties".


Cheers


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## Jon_Snow

Just had a glimpse of my wife's T4... forget RRSP's, looks like I'll be able to use her income to retire. Wowsers. :eek2:


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## Eclectic12

Jon_Snow said:


> Just had a glimpse of my wife's T4... forget RRSP's, looks like I'll be able to use her income to retire. Wowsers. :eek2:


Ah yes ... the "sugar spouse retirement plan" ... one just has to keep the spouse happy! :chuncky: 

Cheers


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## snowbeavers

I'm not as I'm a non-resident canadian and use an overseas brokerage for all retirement. Not sure where we'll end up retiring but most likely abroad. Consequently, we do not have to pay any taxes on capital gains (provided that we don't move back to Canada).


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## Cal

http://business.financialpost.com/2011/09/27/testamentary-trust-worth-consideration/

A decent article about Testamentary Trusts, structuring life insurance policies....


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## Arshes76

da718 said:


> When a person dies, and the RRSP/ RIF has no beneficiary listed, it is true the monies are considered as income in the year of death and the relevant tax rates apply. Thus the possibility of very high tax rates.
> 
> HOWEVER, it is perfectly normal, and highly advisable, to have one (or more) beneficiaries listed on the RRSP / RIF. In this latter case any monies in these registered entities goes directly to the beneficiaries. They bypass the estate / probate process, are NOT considered income to the deceased person, and are TAX FREE to any and all the beneficiaries listed.
> 
> da718
> (note, first post in this forum)


I'm pretty sure that's incorrect. If it was an insurance policy than yes, that would be true, it would bypass probate. But for RRSP/RRIF's this wouldn't apply. The funds in the RRSP/RRIF were growing tax free and and the funds deposited to the RRSP were never taxed, so they MUST be claimed as taxable income upon death (unless there is a surviving spouse, then they can be transferred to the spouse tax free) but when the spouse passes away, they must be included in their final tax return.


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## sprocket1200

Jon_Snow said:


> Just had a glimpse of my wife's T4... forget RRSP's, looks like I'll be able to use her income to retire. Wowsers. :eek2:


Yeah, those women love to work. Brutal!


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## sprocket1200

My Own Advisor said:


> I wish my parents did this Eclectic12, w/d from RRSP before pensions and OAS kicked in.
> 
> They've still got debt in their 60s. I'm suggesting they w/d from RRSP soon and kill the debt. They are VERY lucky to have DB pensions. CPP coming in now. OAS starting in a year.


And massive income tax problems!


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## My Own Advisor

Yes, they have tax issues now for sure. On the plus side, they have pensions, CPP and soon, OAS income. On the downside, they have $80,000 in debt (mortgage + LOC). 

I've been telling them for years (close to 10 now...) to kill the LOC (about $55,000). Not sure if they are listening....

They keep wanting to open a TFSA because "the bank said so"

I have suggested they take some small withdrawals from RRSP (up to $5,000 per year) and kill the debt monster. Otherwise, they're in a big tax mess come age 71. Then, when the debt is 100% done, if/when they have money leftover, start the TFSAs.


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## Eclectic12

My Own Advisor said:


> .... I've been telling them for years (close to 10 now...) to kill the LOC (about $55,000). Not sure if they are listening....
> 
> They keep wanting to open a TFSA because "the bank said so"
> 
> I have suggested they take some small withdrawals from RRSP (up to $5,000 per year) and kill the debt monster. Otherwise, they're in a big tax mess come age 71. Then, when the debt is 100% done, if/when they have money leftover, start the TFSAs.


If it hasn't worked going the RRSP withdrawal to pay the LOC, why not see if you can get them to go with RRSP withdrawal to fund the TFSA?

It's the not the ideal way to go IMO but the benefits I see are:
a) it moves the money into a tax sheltered environment before the full income kicks in.
b) if they do decide to start paying off the debt, they can speed up the process with whatever is in the TFSA.
c) if they aren't listening for the "pay down the debt", this route lines up with what they want to do (i.e. open the TFSA) so that they might do it.


I'd still remind them that paying off the debt is likely the best thing to do but provide the funding the TFSA as an alternative.


You can lead a horse to water but you might have to sweeten the water ... :biggrin:


Good luck & Cheers.


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