# TFSA over RRSP if cant max both?



## kungfuthug (Mar 14, 2017)

Hello.

If I have a ton of TFSA room would it not make sense to max that out before any more RRSP contributions? Isn't it wiser to pay the tax on the seed and not the harvest?

Thanks


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## Eclectic12 (Oct 20, 2010)

YMMV ... if the tax rate on the RRSP contributions is high where the estimated retirement income is low, it may make more sense to make the RRSP contribution then put the refund into the TFSA.

If one expects a much higher income, with the associated higher income taxes in a few years ... it may make more sense to max the TFSA first. One can always withdraw from the TFSA to make RRSP contributions later.


A lot depends on what one estimates the retirement income as well as whether one sees times when income is lower to withdraw from the RRSP (ex. early retirement with limited retirement income).


Cheers


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## TomB19 (Sep 24, 2015)

If you are in the top tax bracket, as most of us are, then rrsp. If you are not in the top bracket then probably still rrsp but put some time into considering how much you will need to withdraw from your RRSP per year and what bracket that will put you in.

I can't imagine someone making less money than required to be in the top tax bracket and then withdrawing at a rate that causes the top tax rate. Has anyone ever seen this?

So put all you can into the rrsp and then put the refund into your tfsa. Call me in 20 years and we'll go for coffee... On you. Lol


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## My Own Advisor (Sep 24, 2012)

"I can't imagine someone making less money than required to be in the top tax bracket and then withdrawing at a rate that causes the top tax rate. Has anyone ever seen this?"

I haven't.

I like Tom's suggestion that when in doubt, fund your RRSP and use your RRSP-generated refund to fund your TFSA. Problem solved


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> TomB19 said:
> 
> 
> > ... I can't imagine someone making less money than required to be in the top tax bracket and then withdrawing at a rate that causes the top tax rate. Has anyone ever seen this?
> ...


Me neither ... some have posted they expect to be in the same or higher tax bracket when retired. I suspect most are wrong as I don't follow how they would know this when they haven't estimated retirement income.

Some appear to be business types who I do believe.


Others have posted they review people's situation where few have higher retirement income.





My Own Advisor said:


> ... I like Tom's suggestion that when in doubt, fund your RRSP and use your RRSP-generated refund to fund your TFSA. Problem solved


With two suggestions of it (posts #2 and 3), it would seem an no brainer. :biggrin:

Only question that I tried to flesh out is if future higher income makes it worth delaying the RRSP portion to have tilt the withdrawal field into more likely being in the OP's favour.


Cheers


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## peterk (May 16, 2010)

I would point out that if you are in this situation currently, leaning towards using RRSP while markets are high is playing the odds best, when considering buying expensive stocks.

The absolute worst place for your stocks to be held during a downturn is the TFSA. 

If there is a major market correction and you are still in the same situation of choosing one account over the other, load up the TFSA with cheap stocks.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> I would point out that if you are in this situation currently, leaning towards using RRSP while markets are high is playing the odds best, when considering buying expensive stocks.
> The absolute worst place for your stocks to be held during a downturn is the TFSA ...


While this is a good warning ... I do not see anything that tells us the OP is going to buy stocks in the RRSP versus a GIC or bond fund or HISA MF that is a bank account.


Cheers


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## CalgaryPotato (Mar 7, 2015)

Most people don't go up in tax brackets when they retire unless they add new streams of income they didn't have before. I mean at least compared to late career. I think it's quite common for people just starting to work to be in a lower tax bracket than they may be when they retire.

That said, while many/most people drop in tax brackets when they retire, that is because they don't have RRSPs that they've been properly funding. If you actually start investing in your RRSP when you are young and keep it full through your working career, you probably aren't going to drop as much in brackets as you may think.

A lot of factors come into play though. TFSA has a lot more flexibility and is probably a better choice for many if you have to choose between the two, at least with the current rules, since it doesn't affect OAS payments the way RRSPs can.

I'm also not sure I believe the assumption that most people in this forum are in the top tax bracket. From what I've seen, their is a wide range from the very top brackets, to the lower-middle brackets.


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## TomB19 (Sep 24, 2015)

If someone is in the top tax bracket when they retire, they either have a lucrative (and somewhat unnecessary) business or they left their retirement to the last moment.

I've made a substantial income for most of my life and I have contributed the maximum. Now I'm 50 and I will have no problem drawing down the rrsp over the next 30 years, unless the markets are massively agreeable, in which case that isn't a particularly big problem.

The vast majority of my wealth is outside of rrsp. I've looked at quite a few scenarios.

It makes sense for me to withdraw the maximum amount that I can from my rrsp that will put me in the bottom tax bracket. From there, I will top up walking around money with unregistered funds. Once unregistered funds are depleted, I will turn to the tfsa.

I expect to be in the bottom tax bracket, have plenty of walking around money, and easily find the next 35 years.

Bob the rrsp and tfsa are important components in a retirement solution.


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## TomB19 (Sep 24, 2015)

Phone posting makes for some strange autocorrect wordings but I think the just is there.

... Further...

If I were to be unemployed for a year, I would withdraw the maximum untaxed amount from the rrsp. You should always pull the maximum free amount out of your RRSP, even if you don't need the money. It's necessary to minimize tax.

... But as long as you're working, you plow as much money in there as you can.


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## TomB19 (Sep 24, 2015)

Jist. Jist... Lol!

I wish I could edit.


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## My Own Advisor (Sep 24, 2012)

This is exactly my approach...future state....

...withdraw the maximum amount that I can from my rrsp that will put me in the bottom tax bracket. 

From there, I will use up non-reg. funds. Last but not least, in my 70s or 80s I will draw down the TFSA. That account will be the last to be depleted.


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## Eclectic12 (Oct 20, 2010)

TomB19 said:


> If someone is in the top tax bracket when they retire, they either have a lucrative (and somewhat unnecessary) business or they left their retirement to the last moment.


That's basically what they seem to be saying ... some more believably and others less so.

Of course if being a business person/entrepreneur is what they enjoy - far better IMO to be doing what one likes. It wouldn't be me. :biggrin:




TomB19 said:


> ... I've made a substantial income for most of my life and I have contributed the maximum ... The vast majority of my wealth is outside of rrsp ... It makes sense for me to withdraw the maximum amount that I can from my rrsp that will put me in the bottom tax bracket ... I expect to be in the bottom tax bracket, have plenty of walking around money, and easily find the next 35 years ...


One of few that balanced high income, high RRSP, high outside of RRSP weath (maybe all in tax deferred investments & TFSA?) yet still being able to withdraw to be in the bottom tax level.

Most I know have other sources of income like investments, gov't & private pensions etc. It still ends up at a lower level than employment as few have full pension at 70% of employment income.


Contrats



Cheers


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## Pluto (Sep 12, 2013)

I'm not a big fan of rrsp's especially if you have a workplace pension. I know people who retired with a workplace pension + riff withdrawals and their tax bracket stayed the same as when working. Plus capital gains in the rrsp/riff ended up being taxed as regular income. Instead of paying about 15% on Cap gains, this individual usually paid 31% on RRSP and riff withdrawals. At one point his forced riff withdrawals plus other income pushed him into the 40% tax bracket, even higher than when he worked. so who was the winner here? either the government was the winner, or maybe a tie. 

the main benifit to the rrsp was the deduction, and growing in a tax free envirornment, but the end game was a serious tax buzz saw in which the government took back with a vengence.


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## Eclectic12 (Oct 20, 2010)

TomB19 said:


> Phone posting makes for some strange autocorrect wordings but I think the just is there.


It sucks at times.




TomB19 said:


> ... Further...
> 
> If I were to be unemployed for a year, I would withdraw the maximum untaxed amount from the rrsp. You should always pull the maximum free amount out of your RRSP, even if you don't need the money. It's necessary to minimize tax.


There's the amount one can pull out without taxes being assessed, where unemployed/no other sources of income will help with but it's still reported as taxable.

Unless I end up with a period of unemployment - my income won't be low enough to have the personal exemption etc. wipe out the taxes as there are too many other things I would lose. It will reduce the overall tax bill though.


Cheers


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## TomB19 (Sep 24, 2015)

My wife has a pretty cheese cake DB pen and she has an rrsp. I will take half of it when the time comes, reducing her tax load.

Unless both halves of the couple have big DB pensions, rrsp is the way to go.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> I'm not a big fan of rrsp's especially if you have a workplace pension.


YMMV ... some workplace pensions are essentially work out to being a half employee funded RRSP. Maybe less than half as for one company I worked for, switching from the DB pension to the new DC pension meant not only losing the payout being backstopped but also having employee contributions drop from around 3% to 1%. It seemed far more of a good deal for the company than the employee.




Pluto said:


> ... I know people who retired with a workplace pension + riff withdrawals and their tax bracket stayed the same as when working ...


It exists ... it seems that where someone I am talking to is convinced they fall into one or the other category, with more detailed discussion - it is an assumption instead of a vetted estimate.


Cheers


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## Pluto (Sep 12, 2013)

^
Yes. I should have clarified. I was thinking of a DB pension. The DC pension is different and I would take it if the employer contributed. 

Even so, I like the OP's original idea: tax the seed and not the harvest. Supposing someone made 75,000 per year. Their tax on capital gains is about 15% and tax on elegible dividends is about 4.5%. If their marginal tax rate upon retirement is about 30% why would they have an rrsp, and get taxed at 30% on dividends and cap gains upon withdrawal? the RRSP is not a clear winner. 

TFSA is however, I think, a great tax shelter.


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## TomB19 (Sep 24, 2015)

This thread has caused me to realize that I assumed everyone in this group would want to retire early, as I do.

Usually, the people who are driven to save for retirement are working toward the earliest possible retirement.

I know lots of people who have a company pension but never bothered to log in and assign their money to a fund so it just sits in cash for years. A friend of mine is 60 and he has never logged into his account. He moans about needing to work forever.

The folks in this forum seem to be doing it right, in terms of saving and putting energy into retirement planning.

Still, I've never heard of anyone's tax bracket going up when they retire. I know it's possible but I can hardly imagine such a scenario where it would not be possible to mitigate the tax problem.


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## My Own Advisor (Sep 24, 2012)

Even if you have a DB pension - why not contribute to RRSPs if you have the income to do so? There are no guarantees with your job or health, ever.


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## canew90 (Jul 13, 2016)

The question was If one can't max both. IMO I'd max out the TFSA of $5,500 which may or may not continue. These decisions are gov't controlled and gov'ts change their minds. Take advantage of tax free for as long as you can. If one can't max both they are currently in a lower tax bracket. Later as one increases their earnings you can always make up the RRSP


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## Pluto (Sep 12, 2013)

TomB19 said:


> The folks in this forum seem to be doing it right, in terms of saving and putting energy into retirement planning.
> 
> Still, I've never heard of anyone's tax bracket going up when they retire. I know it's possible but I can hardly imagine such a scenario where it would not be possible to mitigate the tax problem.


When I retired, my marginal rate stayed the same, and by the time I get my dividend stock portfolio organized, it is not impossible I will get bumped up into the next bracket. That's due primarily to RE cap gains getting transformed into income producing investments. 

The fact that you do not know anyone who's tax bracket going up in retirement doesn't mean it doesn't happen. The guy I know retired with a DB pension, was a middle earner with a 30% tax bracket, made some good RE deals, and loaded up his RRSP's. Later forced RIFF withdrawals pushed him into a 40% bracket when his entire OAS got clawed back, and CAP gains and dividends in RRSP/RIFF got taxed at 40% on withdrawal. During his working life, he was never in that bracket. 

Of course, you and your friends and others mileage may vary. My view is not a generalization to everyone, it is just something to be aware of. If one knows their marginal rate will go down upon retirement, by all means...But even if it goes down one bracket, RSP/Riff witdrawas would probably still be taxed at higher rates than capital gains tax and elegible dividend tas rates.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> ... I like the OP's original idea: tax the seed and not the harvest.
> Supposing someone made 75,000 per year ...


 ... and my point is the OP has provided zero info on whether the tax on the harvest is likely to be the same, half as much or higher.

The flip side to your scenario is my co-worker who is using the RRSP, will be withdrawing at half the tax rate and is putting the tax refund into their TFSA.




Pluto said:


> ... TFSA is however, I think, a great tax shelter.


Absolutely ... though it may not end up being the best choice or it might.


Cheers


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## Eclectic12 (Oct 20, 2010)

TomB19 said:


> ... I know lots of people who have a company pension but never bothered to log in and assign their money to a fund so it just sits in cash for years.


That's the danger of not planning and deciding based on "tax the seed, not the harvest" or "withdraw everything from the RRSP, pay tax now to avoid a future gov't revoking the RRSP".

A kernel of truth that applied to someone else might be a bad thing for a particular person.





TomB19 said:


> ... Still, I've never heard of anyone's tax bracket going up when they retire. I know it's possible but I can hardly imagine such a scenario where it would not be possible to mitigate the tax problem.


Make $60K a year, retire on full DB pension where it replaces 70% of income (i.e. pension is $42K), have almost full CPP which bumps one to $54K and it only takes $6K of investment income and/or RRIF withdrawals to be in a higher tax bracket.


The key IMO is to keep tabs on what applied to oneself so that one is not blindly following what was written up to educate but may not apply.


Cheers


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## Eclectic12 (Oct 20, 2010)

canew90 said:


> ... If one can't max both they are currently in a lower tax bracket.


Depends on one's expenses, cash flow and the amounts involved so I'm not sure I'd be making assumptions.




canew90 said:


> ... Later as one increases their earnings you can always make up the RRSP


If the gov't is willing to change their minds on the TFSA, they can change their minds on how RRSP room is granted (or whether the RRSP program continues) just as easily. I don't think they are going to do much beyond tweaks to either, if anything at all but if one possibility is being considered, one has to consider both IMO.


Cheers


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> ... The fact that you do not know anyone who's tax bracket going up in retirement doesn't mean it doesn't happen.


+1.




Pluto said:


> ... Of course, you and your friends and others mileage may vary. *My view is not a generalization* to everyone, it is just something to be aware of. If one knows their marginal rate will go down upon retirement, by all means ...


It is hard for me to read your comments as anything other than being applied to everyone (or almost everyone) as there seems to be lots of detail for one flavour only.


At this point ... all we know is that the OP:

a) has a "ton" of TFSA contribution room.
b) has made RRSP contributions in the past where some can be made now.
c) whether it fits their retirement situation or not, likes the "no future Canadian tax" of a TFSA.


Without more info, any advice for one or other choice is speculation with no confidence it matches the OP's income or estimated retirement income.


The OP hasn't responded so another speculation is the discussion/lack of clear cut agreement has scared them off. :eek2:


Cheers


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## TomB19 (Sep 24, 2015)

Pluto said:


> When I retired, my marginal rate stayed the same, and by the time I get my dividend stock portfolio organized, it is not impossible I will get bumped up into the next bracket. That's due primarily to RE cap gains getting transformed into income producing investments.


So, you are not in a higher tax bracket. You are pointing out that it is "not impossible".



Pluto said:


> The fact that you do not know anyone who's tax bracket going up in retirement doesn't mean it doesn't happen.


Fair play but you are pointing to some rare corner cases that are misleading to the OP.

There is also the possibility that someone who earned a modest income all their life ends up with a large inheritance and ends up in the top tax bracket at the end of their life. That could easily happen.

Are you giving broad based advice based on these corner cases or are you running for alpha leadership of the group?

If your retirement income is higher than your career income, you have left retirement to the last moment. This highlights my error of assuming that folks in this forum wish to retire early. I pointed this out earlier.

Here's something to consider: If you love your job and have no interest in retiring early, why not enjoy the money while you're young with travel and consumerism while keeping retirement saving to a minimum?


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## TomB19 (Sep 24, 2015)

Eclectic12 said:


> One of few that balanced high income, high RRSP, high outside of RRSP weath (maybe all in tax deferred investments & TFSA?) yet still being able to withdraw to be in the bottom tax level.


It didn't happen by accident. Also, you are using the word "high". That is subjective and my idea of having the world by the tail may be someone else's idea of adequacy.

Anyway, it didn't happen by accident. I've been planning for years and have made some extremely basic errors along the way.

The biggest mistake we made is that my wife's RRSP is too large. We've only had a spousal RRSP for a few years. We should have been using spousal RRSP contributions some years ago. She has a DB pension. She will not go up a tax bracket but she will remain at the top bracket.

We can mitigate this problem by me taking half of her RRSP at some point in the near future.

One of many things about real estate, which is overlooked in the rush to exclaim the horrors of real estate investing in this forum, is that it generates wealth outside of an RRSP. This is a good thing, for reasons discussed in this thread.

Also, the TFSA is a great tax avoidance tool. I love it. Between annual contributions and gains, our TFSAs have gotten large enough to move the needle as a retirement income source.

I think the very best thing an individual can do is to open a spreadsheet and put the time into creating some financial scenarios that describe investing and retirement. It's a big time investment but, in my case, it really helped me understand how cash will flow through my world. The payoff in understanding can be huge.


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## Eclectic12 (Oct 20, 2010)

TomB19 said:


> It didn't happen by accident ... Anyway, it didn't happen by accident. I've been planning for years ...


Which is why I am concerned about some of the cookie cutter responses as well as the OP's idea of taxing the seed instead of the harvest ... one size does not fit all.




TomB19 said:


> ... Also, you are using the word "high". That is subjective and my idea of having the world by the tail may be someone else's idea of adequacy.


Your words were "a substantial income for most of my life", "contributed the maximum" to an RRSP, "vast majority of my wealth is outside of rrsp" yet somehow withdrawing to be in the "the bottom tax bracket" ... which is what is setting up a contrast with other CMF posters who talk about being only a couple of tax brackets from the top.

If all of these things mean being in the bottom half of the tax brackets - then a lot more makes sense.


Cheers


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## Jaberwock (Aug 22, 2012)

If you are in the same tax bracket when you withdraw funds from an RRSP as you were in when you contributed, then investing in a TFSA will give you exactly the same after tax return as an RRSP.

If you expect to be in a lower bracket when you withdraw the funds, max out the RRSP first.

Beware, because after retirement, clawback of the OAS and clawback of the seniors credit can increase your marginal tax rate after you retire. Forced withdrawals from a RRIF can also push you into a higher bracket. 

If you are in doubt, choose the TFSA. The TFSA is easier to manipulate, there are no forced withdrawals (as in a RRIF), and money can be withdrawn without any tax implications, and replaced the following year without losing contribution room. Once you contribute to an RRSP the contribution room is gone forever.


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## CalgaryPotato (Mar 7, 2015)

The problem with basing this decision on tax brackets is you can only do the math for today. If today you are at the lowest tax bracket than it's probably worth putting the money in the TFSA or at the highest it's probably worth the RRSP, but it doesn't account for what will happen in the future. Doing back calculations on whether a TFSA or an RRSP would have worked out better, might be a fun exercise but it only helps so much with the future planning.

Tom, I'm sure you realize but you are in a fairly unique and very strong retirement position, and the situation you are in exactly would probably be difficult to replicate for most. I'm not sure how the math on your situation works exactly to bump you all the way down from the top bracket to the bottom bracket, but I think a combination of your very early retirement, your large unregistered holdings (both property and other) contribute to your scenario. And even at that, it sounds like you still have a spouse that will stay at the top tax bracket after retirement.

This is why, although rarities exist, i feel like while everyone imagines this huge drop from the top tax brackets to the bottom ones at retirement, it doesn't work that way as often in the real world (in cases where the person actually has significant retirement savings)


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> The problem with basing this decision on tax brackets is you can only do the math for today.
> 
> If today you are at the lowest tax bracket than it's probably worth putting the money in the TFSA or at the highest it's probably worth the RRSP, but it doesn't account for what will happen in the future ...


It is a risk ... but far better IMO than basing one's plan on an article that has assumptions that don't apply.

As well, one can use resources like TaxTips.ca to see what's happened to the marginal tax rates over the last 13 years. BC, for example has added one tax level. The bottom end tax level has increased by $6,22 over that time frame, where the rate charged for other income has dropped by 1.99%. On the top end, there's a new level where the rate has increased by 4%.

http://www.taxtips.ca/tax_rates.htm


There's probably more but the last one I can think of at the moment is the question of what being able to use a full $1 is worth versus $0.68 in the TFSA. Whether it is all in the RRSP or split between the RRSP/TFSA where $0.68 in the RRSP with a future tax bill and $0.32 in the TFSA Canadian tax free.




CalgaryPotato said:


> ... Doing back calculations on whether a TFSA or an RRSP would have worked out better, might be a fun exercise but it only helps so much with the future planning.


I'd rather have a plan, be adjusting it as time goes on than depend on experts/other's experience to hope for the best.




CalgaryPotato said:


> ... i feel like while everyone imagines this huge drop from the top tax brackets to the bottom ones at retirement, it doesn't work that way as often in the real world (in cases where the person actually has significant retirement savings)


My co-worker is looking at retirement income between four to five tax levels below his current employment income. As investment income, company pension, CPP etc. kick in - that will become less but it does mean a rather sizeable cushion.

Others I have talked to are having their income boosted by CPP and pension but are still well away from being bumped out of the bottom tax level. (Unlike Tom, they have never had a high income, which means a tiny RRSP, a tiny taxable account and a ton of TFSA contribution room.


As I say - YMMV so one might as well build the plan based on one's situation.


Cheers


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## GreatLaker (Mar 23, 2014)

Jaberwock said:


> If you are in the same tax bracket when you withdraw funds from an RRSP as you were in when you contributed, then investing in a TFSA will give you exactly the same after tax return as an RRSP.
> 
> If you expect to be in a lower bracket when you withdraw the funds, max out the RRSP first.
> 
> ...


Well said. People on a linear income path can make reasonable assumptions about their future tax brackets. With the work environment and the gig economy these days it may be harder for many to make accurate predictions. For many people in that middle zone where it's not clear if tax rates will be lower or higher in retirement, the TFSA is definitely more flexible. On the other hand for people that have a hard time not raiding their savings, the RRSP's rules may make that less likely. 

There is a good, albeit long, article at the following link on how to manage tax rates in retirement by carefully drawing income from the right accounts after retirement but before age 72. Note its tax rates are from Alberta a couple of years back.
What-Account-Should-I-Draw-From-First-In-Retirement - RGA Financial

I was in the 43% tax bracket in ON for a lot of years, then from retirement at 60 expect to be in 20% tax bracket, with judicious withdrawals from RRSP to manage future tax rates. Then in 29% tax bracket starting at 71 with mandatory RRIF withdrawals. So definite savings from use of RRSP. But this is through careful tax planning, not just blind assumptions about how and how much to save.


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## My Own Advisor (Sep 24, 2012)

"So definite savings from use of RRSP. But this is through careful tax planning, not just blind assumptions about how and how much to save."

I think herein lies the problem with most people, they don't care to think about these things. CMFers excluded of course! 

I stand by my reasoning...if people are concerned or confused or unclear if they should invest inside their TFSA or RRSP then consider:

1. Max out the TFSA first whenever in doubt, or
2. If you're still really struggling with that decision, then invest inside your RRSP and use the RRSP-generated refund to fund your TFSA.

For most Canadians, a tax headache in retirement is a good problem to have.


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## CalgaryPotato (Mar 7, 2015)

Eclectic12 said:


> I'd rather have a plan, be adjusting it as time goes on than depend on experts/other's experience to hope for the best.


Oh I totally agree, it's just that whatever that plan is, it's not going to work perfectly. That isn't how plans work. 

Also it seems like Ontario has a lot more opportunity to drop down brackets, as you guys have a much bigger swing in taxes between middle to low income, compared to Alberta and other provinces, which have flatter tax rate systems. But like everything else, that can change really fast.


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## My Own Advisor (Sep 24, 2012)

I like the flatter tax system in AB CP....in fact, I would love some tax reform to simplify our system. I won't hold my breath


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## TomB19 (Sep 24, 2015)

CalgaryPotato, thanks for the comment on my unique position. Your assessment is more than fair.

I've said my peace but I will belabour the exchange with a few comments.

- investing in real estate has enabled us to build up considerable net worth outside of our registered accounts. This is something that will work out very well for us now that we are at retirement age.

- an extension of the previous point is that it doesn't make sense to build up a giant rrsp because of the tax liability. To me, it made sense to fund it to a level that would us to withdraw enough to achieve the top of the lower bracket for 40 years or so. The less retirement you need to fund, the less money you need in the rrsp. Having a $1m rrsp probably doesn't make sense for anyone.

- we have been heavy r-e investors since the 1990s. We have always been saving money for a down payment, Reno, add value to a property, etc. It made sense to fund that first since the returns were a multiple of what we have gotten from the markets. In the early years, we would try to throw $1000-5000 per year into our rrsps. It always hurt.

- 99.99% of people should not invest in r-e aggressively, although quite a few people would do well to add a suite to their basement. Successful r-e investing requires a specific temperament and an animalistic work ethic. If someone knows how to make easy money like they do on TV, please let me know.

- I don't consider us to be wildly great earners. Only about 40% of our income comes from our jobs. Anyone who is a white collar worker should be able to do what we have done. A lot of blue collar workers could do it, too. It doesn't take a lot of income to be in the top bracket so I tend to think a lot of cmfers are in the top bracket.

- people who are employed their entire working life (the majority) and save 18% or less in an rrsp are probably not going to go up a tax bracket when they retire. If your earnings are volatile, that's a different story. If you are making $50k/yr and you have to withdraw $80k/year when you retire, you should have retired earlier because that's silly.

- I suspect our points of view are not all that different but we have dug in to defend our positions.

- we have some net worth in non-registered assets and accounts for operating capital and unregistered investments but i believe the majority of people would be better served if there was a time release check valve on their nest egg. Even the rrsp isn't a complete defense against consumerist compulsions. A lot of people should have a lira to keep them from starving when they get to retirement.


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## TomB19 (Sep 24, 2015)

One more point.

I'm not a financial advisor or a professional investor. I have no relevant accreditation nor do I wish to dismiss the advise of others. This thread has been very interesting to me. Thank you to everyone for the great input. Sincerely.

I also don't have the highest net worth in the forum, nor would I pretend I do.

I'm just a guy with some opinions. Take them for what they are worth.


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## latebuyer (Nov 15, 2015)

Just a note that there is nothing stopping someone from investing in a tfsa for many years and then later investing the money in an rrsp. In fact interesting question if you can transfer securities in kind from tfsa to rrsp. My understanding is when you invest in the rrsp you should deposit just enough to bring you to the lowest tax bracket. I think many of the people on this forum are older and have a different perspective and needs then a younger generation. Many millenials want and need the flexibility the tfsa provides.


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## OnlyMyOpinion (Sep 1, 2013)

^+1 Good point re/ us older coots. 

As always, it is difficult to generalize on individual plans but I still suggest that once younger folks are embarked on a career or long term job (i.e. making regular income from some source) that they need to start saving a regular amount, some of which should be intended for retirement. 

Clearly a TSFA is a primary account to save in, but I would hesitant to suggest that young people in general should ignore an RRSP or make only nominal contributions. 

I probably said this already (its senility) but the RRSP defers and lowers your current taxes - money that can be put to the TSFA (I used to fill out a T1213 each year so less tax was withheld at source each month); the sooner you have money invested the greater the compounding affect (numerous illustrative examples, like Susan saving $5k/yr from age 25-35 ($50k) will have more value at age 65 than Bill who saved $5k/yr from age 35-65 ($150k)); and worse case, you will be able to retire sooner, draw while on mat leave or between jobs.

My sense is that the challenge these days is just being able to set aside money to save. We are such a consumer, credit-driven, instant gratification society, and there are so many demands on our money (opportunities to spend it) that it really is swimming against the current to be a good saver today.


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## cashinstinct (Apr 4, 2009)

In my opinion, the TFSA has less potential downsides, so if I was to recommend to someone, I would say TFSA first.

Why?
1) Regular people blow-up the tax refund from RRSP (or they end up not paying tax because of RRSP, instead of paying taxes... and don't realize it).
2) The illusion you have lots of money for retirement, forgetting that 25-40% of the money is actually owed to governments.
3) The potential loss of OAS (for high income people) or potential loss of GIS (for low income people) in retirement
4) Currently has no impact on social programs eligility in the future.


If someone knows what he/she doing, that has a "high" tax rate for now, and that has the discipline to do something worthwhile with the tax refund... I see why RRSP is interesting, but I find many regular people don't have such discipline.

The tax rate can be a reason for some people to save (RRSP "season"), but I worry about the long-term effects of blowing the tax return and then having to pay tax on the money you saved at retirement.


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## TomB19 (Sep 24, 2015)

If someone is paying tax when they retire then the draw down during a market down turn should focus on the RRSP first and allow TFSA and unregistered holdings to recover.


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## GreatLaker (Mar 23, 2014)

TomB19 said:


> If someone is paying tax when they retire then the draw down during a market down turn should focus on the RRSP first and allow TFSA and unregistered holdings to recover.


I had an interesting thought on this. Most retirement income strategies I have seen say the TFSA should be the last account from which to withdraw, since it will allow gains to compound tax free forever. Makes sense to me for most situations.

But what about if there is a market crash before you need to withdraw? A big risk in retirement is sequence of return risk. Say there is a 50% market crash. Say you started with $1M with annual withdrawal rate of 5%, or $50k in year 1. Well now you have $500k, your WR is 10%, leaving you with $450k, so after year 1 you only have 45% of your portfolio left. Even with a more common 20% crash, you have $800k and after withdrawing your $50k you only have $750k left, so you have lost 25% of your portfolio.

Withdrawing from a TFSA is the most tax efficient... each dollar you withdraw gives $1 to spend since there is no tax on withdrawal, and you can re-contribute in later years. Contrast this to an RRSP where your withdrawals are taxed at your highest marginal rate so you need to take out more from an already depleted portfolio. 

So if you are withdrawing capital after a bad market crash why not take it from TFSA so your gross withdrawal will be smaller to get the same after-tax cash flow? Then when the market recovers you can re-contribute the the TFSA from other accounts.

Thoughts?


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## OnlyMyOpinion (Sep 1, 2013)

GreatLaker said:


> ... Thoughts?


Well, I think that this could work given a fairly specific set of circumstances. Are you assuming you are not in RRIF mode where you must w/d the prescribed minimum? And that you can't dial back your % w/d?

I suppose if you are taking more than the minimum from your RRIF for spending and had it tilted towards equities, you could plan to dial it back and instead draw from a fixed income tilted TSFA if the market was down?

Personally, I can't assume I'll always have the capacity to do the analysis and juggling required - I'm going to need something closer to autopilot, and for my spouse as well if I'm not around.


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## GreatLaker (Mar 23, 2014)

Good point about the RRIF withdrawals. I forgot about that. :stupid:

But for an early retiree it might work.


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## TomB19 (Sep 24, 2015)

There are likely to be a lot of moving parts to this and it is certain there will not be an obvious choice but:

If you had the same equity in an RRSP, TFSA, and un-registered, you absolutely had to sell some of it, and you are paying tax every year, I'd sell from the RRSP. I'd pay tax that year but would saved save future tax.


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## steve41 (Apr 18, 2009)

When you factor in the time value of money, the best strategy is one which minimizes the present value of all those future taxes.


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## Beaver101 (Nov 14, 2011)

steve41 said:


> When you factor in the time value of money, the best strategy is one which minimizes the present value of all those future taxes.


 ... will the strategy work in the dream scenario here where future tax rates gets lowered due to a shrinking labour pool as workers go into retirement (voluntary or involuntary) mode?


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## OnlyMyOpinion (Sep 1, 2013)

Beaver101 said:


> ... will the strategy work in the dream scenario here where future tax rates gets lowered...


Lower taxes in the future? :eek2: 
Beaver, that's not a dream that's a hallucination.

BTW, I enjoyed the video in the news yesterday of you bringing all that Saskatchewan beef home for dinner


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> Eclectic12 said:
> 
> 
> > It is a risk ... but far better IMO than basing one's plan on an article that has assumptions that don't apply ...
> ...


OTOH - as I say, CMF had a poster who was going to liquidate their RRSP, pay the taxes based on an article *with no idea* if the poster was or could possibly be in a similar situation.

AFAICT, having a plan while it may not work out the way it was original envisioned is the better way to go.




CalgaryPotato said:


> ... it seems like Ontario has a lot more opportunity to drop down brackets, as you guys have a much bigger swing in taxes between middle to low income, compared to Alberta and other provinces, which have flatter tax rate systems. But like everything else, that can change really fast.


Which would be a factor in one's plan, would it not?

BTW ... 2004 had Alberta with four tax levels while 2017 has nine - so it may end up being sooner than later or it may stay similar.




TomB19 said:


> ... - we have some net worth in non-registered assets and accounts for operating capital and unregistered investments but i believe the majority of people would be better served if there was a time release check valve on their nest egg. Even the rrsp isn't a complete defense against consumerist compulsions ...


This is confusing to me.

There have been many posts on CMF where people talk about the "penalty" for withdrawing from an RRSP plus how it is "locked in until retirement". They seem to have no idea that as long as one is willing to pay any financial institution fees for withdrawing from an RRSP, they can do it at any time. The "defense against consumerist compulsions" suggests people are withdrawing from their RRSP to spend. The TFSA, OTOH has no barrier for withdrawing/spending.




TomB19 said:


> ... A lot of people should have a lira to keep them from starving when they get to retirement.


??? ... are you arguing that adding the "no withdrawal until age 55" that is a part of a LIRA should be applied to RRSPs as well?

Having or not having a LIRA depends on leaving a company pension. Having or not having an RRSP and/or TFSA is up to the individual.


Cheers


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## TomB19 (Sep 24, 2015)

No.

I'm arguing that some people are not capable of handling their money responsibly.


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## GreatLaker (Mar 23, 2014)

That's why we have CPP, OAS, GIS and lock-in provisions on funds withdrawn from pension plans.


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## Beaver101 (Nov 14, 2011)

OnlyMyOpinion said:


> Lower taxes in the future? :eek2:
> Beaver, that's not a dream that's a hallucination.
> 
> BTW, I enjoyed the video in the news yesterday of you bringing all that Saskatchewan beef home for dinner


 ... LOL!


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## steve41 (Apr 18, 2009)

Taxes are lower in the future.... the brackets are indexed ferchrisakes!


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## GreatLaker (Mar 23, 2014)

_Other things being equal*_ I prefer to pay a dollar of tax in the future than a dollar of tax now.

Consider a retiree with a 30% MTR with RRSP and non-registered accounts. In the non-registered account the securities are long-term holds so 80% of the value is unrealized gains taxed on sale. (In Ont the 29.65% tax bracket covers $46k to $74k of income, so no OAS clawback would be none or minimal.)

To get $100 after tax, at 30% MTR, $142.86 would have to be withdrawn from an RRSP.
To get $100 after tax, at 15% CG tax rate, and tax payable only on the 80% unrealized gains, $113.64 would have to be withdrawn from a non-registered account.
So withdrawing from non-registered leaves an additional $29.22 in the investor's accounts to continue growing and compounding.

I'll take that any day over the fear of future tax increases. Will you pay more tax in the future, yeah because you have more money. If your objective is to pay the lowest tax then put all your money in a no-interest chequing account to avoid earning taxable income.


_Other things being equal*_
There are other considerations that need to be layered on top of this, such as possible OAS clawback, death of a spouse causing higher tax rates for surviving spouse, high estate taxes on a large RRSP in the year of death, and higher tax rates due to mandatory RRIF withdrawals. Some judicious withdrawals from RRSP/RRIF after retirement and before age 72 may reduce total taxes. Making a good decision requires scenario analysis based on reasonable assumptions about the retiree's circumstances, not just based on gut feel that the RRSP had gotten too big.


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## latebuyer (Nov 15, 2015)

One thing i wonder is if eventually the clawback will be lowered for oas. OAS is unsustainable and since the liberals refused to leave it at age 70, i can see that is a possibility.


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## OnlyMyOpinion (Sep 1, 2013)

steve41 said:


> Taxes are lower in the future.... the brackets are indexed ferchrisakes!


I meant that with each future budget, governments will continue to increase their take.


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## Pluto (Sep 12, 2013)

TomB19 said:


> So, you are not in a higher tax bracket. You are pointing out that it is "not impossible".
> 
> 
> 
> ...


There are lots of people with DB pensions - cops, teachers/professors, firemen, and other government employees, so it is not rare. RRSP's don't necessarily work for them. The RRSP has been touted as the main go to investment path, and tax shelter, but it isn't necessarily so. Its great for self employed, but very iffy for those with a DB plan. Do the math. If ones RRSP does well, and one lives to a ripe age, forced RIFF withdrawals is likely to bump one into a higher tax bracket where dividends and capital gains are going to be taxed at a higher rate than if they were not registered. 

For example one earning about 80,000 cap gains will get taxed at about 15% and dividends at about 8% outside a rrsp. But if one has those investments in a RRSP, withdrawals would be taxed at ones marginal rate which could easily be 30%, maybe more. So what is the advantage? Well it grows inside a tax free environment, and you get the deduction. For that you lose the dividend tax credit, and you lose the capital gains deduction. 

Plus, suppose one has some modestly growing dividend stock. As long as he doesn't sell, he pays no cap gains tax - so the stock grows tax free. And the dividend gets taxed at a low 8% in this example of earning 80,000. If he had it in a RRSP, has DB pension, CPP, OAS, he will get taxed upon retirement and withdrawal, at a much higher rate - easily 30% when he withdraws the investment. 

So no, I'm not misleading the OP. I'm just saying, if the OP fits this profile, and only the OP would know, do the math on the after tax return. Buy and hold dividend stocks strategy outside a RRSP will likly be better than an RRSP.


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## TomB19 (Sep 24, 2015)

Thanks, Pluto.

Here is a G&M article that is pretty eye opening to an RRSP contributor, such as myself.

http://www.theglobeandmail.com/glob...-in-earned-dividends-0-in-tax/article4599950/


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## Pluto (Sep 12, 2013)

TomB19 said:


> Thanks, Pluto.
> 
> Here is a G&B article that is pretty eye opening to an RRSP contributor, such as myself.
> 
> http://www.theglobeandmail.com/glob...-in-earned-dividends-0-in-tax/article4599950/


Yes, the article is interesting. 
BTW, if somone was earning 45,000 and had a dividend stock in a none registered account they would pay no tax on the dividend. If the stock grew they would pay no cap gains tax until they sold as it grows in a tax free environment, and it would be about 11% upon sale. If they had the same stock in an RRSP, upon withdrawal, they would pay about 23% on the $ as they lose the cap gains deduction and the dividend tax credit. 

Which is better? To me the former is better at that income level and marginal rate.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> There are lots of people with DB pensions - cops, teachers/professors, firemen, and other government employees, so it is not rare. RRSP's don't necessarily work for them. The RRSP has been touted as the main go to investment path, and tax shelter, but it isn't necessarily so. Its great for self employed, but very iffy for those with a DB plan. Do the math ...


Doing the math for oneself is critical IMO.

Too many look at quick references info (i.e. max income is 60% of employment salary with max CPP adding more). Where the individual can at best qualify for 40% of employment salary, it is a different ball game.




Pluto said:


> ... For example one earning about 80,000 cap gains will get taxed at about 15% and dividends at about 8% outside a rrsp. But if one has those investments in a RRSP, withdrawals would be taxed at ones marginal rate which could easily be 30%, maybe more. So what is the advantage?


For my co-worker - it's that he regained the use of 43% to fund his TFSA/investments for years. This is before planned withdrawals for a decade at 24%. 

For someone who is withdrawing at the same rate, there isn't one.




Pluto said:


> ... I'm not misleading the OP. I'm just saying, if the OP fits this profile, and only the OP would know, do the math on the after tax return. Buy and hold dividend stocks strategy outside a RRSP will likly be better than an RRSP.


Trouble is ... most of what is being written is about why the OP should worry about what the commenter sees around them. 

Those who know people in higher tax brackets are against the RRSP while those who know people in lower tax brackets wonder why anyone would skip an RRSP while those who aren't sure are talking about doing a bit of both.


Cheers


*PS*

It looks like RRSPs should be gaining importance going forward as over the 2011 through 2015, the number of DB pension plans has dropped about 17% while the number of DC pension plans has dropped about 6%.


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## TomB16 (Jun 8, 2014)

Pluto said:


> There are lots of people with DB pensions - cops, teachers/professors, firemen, and other government employees, so it is not rare. RRSP's don't necessarily work for them. The RRSP has been touted as the main go to investment path, and tax shelter, but it isn't necessarily so. Its great for self employed..., but very iffy for those with a DB plan. Do the math. If ones RRSP does well, and one lives to a ripe age, forced RIFF withdrawals is likely to bump one into a higher tax bracket where dividends and capital gains are going to be taxed at a higher rate than if they were not registered.


I've done the math. Two things:

My wife has a DB plan and a very small RRSP. I've always known it didn't make sense to build a big RRSP for her.

I max contributed to my RRSP for many years when I was employed and in the highest tax bracket. It is sizeable. I don't have a pension, as I have transferred all of my corporate pensions into self directed and registered accounts. When I became self employed, I stopped contributing to my RRSP. I don't understand why it would make sense for me to contribute now.

To me, it makes sense to have the business pay the maximum non-taxable dividend to me each year until the business is depleted. It will pay several years after the receivables go to zero. We live an extremely modest life (used cars, don't eat out, etc., etc.) and we have other sources of income so this is no problem for us. I don't see an RRSP play in any of this.

My thought was to convert my wife's RRSP to a RRIF and I would take half, the first year I have no income. The following year, I will convert my RRSP to a RRIF and begin making withdrawals. When those withdrawals begin, I will have an MTR that is lower than when I was contributing to the RRSP.

It seems clear to me that the RRSP mechanism will save a significant amount of tax over my lifetime (based on lowered lifetime MTR for employed income), as will the TFSA. I don't see how to use the RRSP when I'm self employed. Am I missing something?


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## kungfuthug (Mar 14, 2017)

I see the consensus seems to be that we will be paying less taxes at retirement due to less income than we have now. Tax deference would make sense in that solution. But here is another likely scenario...


The way governments spend like drunken sailors and the national debts are skyrocketing, how can tax rates not be going anywhere but up in the future? If when it becomes time to start withdrawing RRSP and tax rates have skyrocketed than you may be paying the same rate as now with less income coming in...


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## OnlyMyOpinion (Sep 1, 2013)

kft, a very valid concern. It is another of those variables we have to make an assumption about.

I'm still of the opinion that - the more you can save in TSFA and RRSP - the better. Obviously you don't want to be so frugal that you defer living today - life's a journey, not a destination. 
The alternative is to save little, or try to fine tune now to stay in a low tax bracket with maximum government oas/gis years down the road. That seems an even riskier set of assumptions to me.
Remember, you can always adjust along the way, stop contributing to the RRSP, defer taking the tax deduction for a few years because you expect a large increase in income, retire at 55 because you have so much saved, etc.


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## Eclectic12 (Oct 20, 2010)

kungfuthug said:


> I see the consensus seems to be that we will be paying less taxes at retirement due to less income than we have now ...


Not that I have seen ... if there is any consensus, it reads to me that one should run the numbers for what one knows before making a decision. Another possible consensus is possibly that if in doubt, go TFSA first. 




kungfuthug said:


> ... The way governments spend like drunken sailors and the national debts are skyrocketing, how can tax rates not be going anywhere but up in the future? If when it becomes time to start withdrawing RRSP and tax rates have skyrocketed than you may be paying the same rate as now with less income coming in...


Question is ... will this come to pass or will it be like the people who worried about the RRSP being canceled outright for the last thirty years?

I'll have to check but I posted in a thread a link that shows that from 2004 to 2017, the bottom tax levels dropped while the upper limit went up due to indexing. At the top end, a new tax bracket was added that was from what I recall, about 6% higher.


If you dig around CMF enough, you'll find speculation that the TFSA will be capped, if not outright canceled. There's also speculation that the Liberals are desperate for money so that the capital gains inclusion rate would be increased last budget and this budget from 50% to either 60% or 75% (neither happened so far).


Personally, it would seem to be doing a bit of both would be a way to mitigate it but you are the one who will have to be happy when you see what does or does not happen.


Cheers


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## kungfuthug (Mar 14, 2017)

Eclectic12 said:


> +1.
> 
> 
> 
> ...



My income is $115,000. I currently have $45K in unused TFSA room and $125K in unused RRSP room. I am contributing to a DB pension plan and am under 40. I currently have $5K in TFSA and $50K in RRSP.


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## TomB16 (Jun 8, 2014)

It sounds like you have a specific idea of how you are going to approach this, and yet you still seem to be fishing for advice. Here's what I'd do, were I you.

I'd put $5K in my RRSP every year until it hits about $400K and then stop contributing. If you have a spouse that either earns less than you or does not have a DB pension, make a spousal contribution to her RRSP.

I'd take the tax refund and top it up to $10K and deposit that into the TFSA every year until it is topped up.

Yes, I see you are in a DB pension. I think it's unlikely you will still have that pension when you retire. If you do, it won't hurt you because you're already in the top tax bracket. Worst case, you will pay the same amount of tax as you would have (assuming the marginal rates don't change).

If you should ever find yourself unemployed for a significant time that you have a low income year, go ahead and withdraw a sizeable chunk from your RRSP, even if you don't need the money. Just make sure you stay in a lower tax bracket.


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## CalgaryPotato (Mar 7, 2015)

TomB16 said:


> Yes, I see you are in a DB pension. I think it's unlikely you will still have that pension when you retire. If you do, it won't hurt you because you're already in the top tax bracket. Worst case, you will pay the same amount of tax as you would have (assuming the marginal rates don't change).


At $115K he is in the third lowest of the 9 tax brackets in Alberta, not even close to the top tax bracket. Depending on how much goes off into his pension plan and what else he has for deductions he may be getting close to the second lowest tax bracket. If his pension is say 70% then it wouldn't take much RRIF withdrawals every year to bump him back up to the third lowest in retirement.

This again is why you have to be very careful with the assumptions you are putting into how many brackets you are going to drop (if any) upon retirement.


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## Eclectic12 (Oct 20, 2010)

Gee ... it almost sounds like checking factors to see what does or does not apply to the individual would be ... I don't know ... helpful? :rolleyes2:


Cheers


*PS*

Assuming the OP is an Alberta tax resident, in 2004 there were four tax levels where $115K paid 36%. In 2017, there are nine tax levels where $115K pays 36%.

As for being in a 70% pension ... it is yet another area to find what applies or could apply to oneself. If one started early where one has a shot a full pension, by all means the top payout is a factor to consider. Knowing people who are in 60% payout pensions, it is IMO misleading considering that some can at best earn 40% of income, based on the latest they way they want to work.


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## TomB16 (Jun 8, 2014)

CalgaryPotato said:


> At $115K he is in the third lowest of the 9 tax brackets in Alberta, not even close to the top tax bracket. Depending on how much goes off into his pension plan and what else he has for deductions he may be getting close to the second lowest tax bracket. If his pension is say 70% then it wouldn't take much RRIF withdrawals every year to bump him back up to the third lowest in retirement.
> 
> This again is why you have to be very careful with the assumptions you are putting into how many brackets you are going to drop (if any) upon retirement.


If the DB pension survives to his retirement and he remains in the same DB pension, he can split the pension with his partner once they retire. It would be a rare circumstance that would prevent him from mitigating his tax load, come pension time.

There seems to be an irrational phobia about RRSPs with a few of the folks here. There's nothing wrong with TFSAs but what if he is unemployed for an extended period? RRSP withdrawal would be ideal for that.


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## TomB16 (Jun 8, 2014)

I fail to understand the argument of using the TFSA over the RRSP because the TFSA tax liability might be the same as the RRSP in some situations. Unless his income is likely to go up when he retires, I think it would make sense to, at least, contribute _something_ to the RRSP.


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## latebuyer (Nov 15, 2015)

The difference between using an rrsp or tfsa for unemployment is your rrsp withdrawal is considered income. You'd still be taxed at 15% i believe on that withdrawal plus you lose your rrsp contribution room. Contrast that with tfsa which isn't taxed and contribution room replaced. There is no contest.


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## cashinstinct (Apr 4, 2009)

TomB16 said:


> I fail to understand the argument of using the TFSA over the RRSP because the TFSA tax liability might be the same as the RRSP in some situations.


TFSA tax liability?

It's tax free.


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## TomB16 (Jun 8, 2014)

cashinstinct said:


> TFSA tax liability?
> 
> It's tax free.


TFSA contributions are made with taxed money. RRSP contributions are made with pre-tax money.

The distinction is pretty clear clear.


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## OnlyMyOpinion (Sep 1, 2013)

latebuyer said:


> The difference between using an rrsp or tfsa for unemployment is your rrsp withdrawal is considered income. You'd still be taxed at 15% i believe on that withdrawal plus you lose your rrsp contribution room. Contrast that with tfsa which isn't taxed and contribution room replaced. There is no contest.


Aside from those with a healthy DB/DC pension plan, do you figure putting away $5500/yr into a TSFA will be enough for retirement savings?


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## latebuyer (Nov 15, 2015)

I never said to not invest in an rrsp. I have a db plan myself so am biased towards tfsa but i still invest in rrsp just can't max both. I actually think if you invested 5500 starting when you were young you could gain quite a bit. I wish i had invested in the tfsa early on instead of putting it in a savings account.


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## latebuyer (Nov 15, 2015)

I think i lost track of the OP as this is topical for me. With an income of over 100,000 i would invest in the rrsp. My income is only 60,000 and my tax refund is only 500. I imagine your tax refund would be substantially more and you could invest the refund in the tfsa. I forget people get substantial refunds because mine is small.


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## CalgaryPotato (Mar 7, 2015)

Eclectic12, I agree, I'm not trying to give him specific advise to do one or the other because we still don't know enough facts. I'm just showing an easy example, where the OP will not necessarily drop brackets upon retirement (and could potentially go up in them) whereas some seem to assume that everyone is going to drop from the top bracket to the bottom bracket the day they retire.



TomB16 said:


> I fail to understand the argument of using the TFSA over the RRSP because the TFSA tax liability might be the same as the RRSP in some situations. Unless his income is likely to go up when he retires, I think it would make sense to, at least, contribute _something_ to the RRSP.


There are a lot of unknowns that would have to be explored before giving him accurate advise on whether to go with a TFSA or an RRSP, like if he expects to retire with a full pension from the plan, what the benefit is, what his wife's situation is.

You seem to have it set in your mind that RRSPs are almost always better based on your own personal situation. Which is fairly unique and has little to do with the OPs situation. 

He uses the majority of his RRSP room every year for his pension every single year, so I don't know why it's necessary that he contributes "something" to the remainder of his RRSP room. 

And personally for someone who may have a fully funded retirement covered already through a pension plan, TFSAs may make more sense because it gives a lot more flexibility to use the money before retirement, take it out for an expensive one time purchase without getting a big tax hit in that year, or not withdraw money from it at all, and let it grow as a inheritable nest egg, that you don't have to pay tax on at the day of death. (A lot of RRSP money ends up getting taxes at the upper tiers for this very reason)


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## CalgaryPotato (Mar 7, 2015)

OnlyMyOpinion said:


> Aside from those with a healthy DB/DC pension plan, do you figure putting away $5500/yr into a TSFA will be enough for retirement savings?


Again it depends on what the pension will pay. If you retire with a full government pension (or equivalent) you'll basically have the same disposable salary in retirement that you did in your highest earning years. Unless the plan is to increase your cost of living that would be fine without the additional savings. If you start young with 5500 into a TFSA every year that is a nice insurance policy on the side.


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## Eclectic12 (Oct 20, 2010)

Eclectic12 said:


> ... *PS*
> Assuming the OP is an Alberta tax resident, in 2004 there were four tax levels where $115K paid 36%. In 2017, there are nine tax levels where $115K pays 36% ...


I should clarify here for those what are not familiar with how the tax levels work that the 36% is for the next dollar of income paid, not the tax bill as a whole. 

I'll update with numbers later but for what the total tax bill ends up being (with some assumptions) but for now to illustrate, where people at times mistakenly think $115K x 36% is the tax bill, how the 2017 Alberta tax numbers are applied is:
a) first $45,916 .... at 25%
b) over $45,916 up to $91,831 ... at 30.05%
c) over $91,831 up to the OP's $115K .... at 36%.


Cheers


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> TomB16 said:
> 
> 
> > I fail to understand the argument of using the TFSA over the RRSP because the TFSA tax liability might be the same as the RRSP in some situations. Unless his income is likely to go up when he retires, I think it would make sense to, at least, contribute _something_ to the RRSP.
> ...


I thought we were talking Alberta so the income in the year of unemployment plus whatever the RRSP withdrawals add up to will determine the final tax bill. Should the unemployed person end up with an income of say $42K, the final tax bill will be 25% for the Feds & Province.

Say the employer paid $30K and $12 was withdrawn from the RRSP. The first $5K has a withholding tax (similar to withholding tax on employment income) of 10%. The remaining $7K has a withholding tax of 20%. That's $500 + $1400 for a total of $1900 withholding tax or about 15.8% withheld.

When the tax return is filed, the credits/deductions will true up whatever the final tax bill will end up being, based on the final picture.




latebuyer said:


> ... Contrast that with tfsa which isn't taxed and contribution room replaced. There is no contest.


YMMV ... where all one is looking at is being able to use tax free income plus contribution room being returned ... sure.

Most people allocate after tax dollars so the post-tax status of the TFSA versus the tax deferred RRSP.

I will stick to the lowest Alberta tax level to illustrate the point.

*Use TFSA exclusively*
$1 paid, $0.25 tax is paid ... $0.75 is in the TFSA to invest.

*Use RRSP & TFSA*
$1 paid, $0.25 tax is paid ... $0.75 is in the RRSP to invest with a $0.25 refund contributed to the TFSA.


Where time ticks on before $$ are needed for the unemployment, it is not clear to me that $0.75 in the TFSA is better overall than $0.25 in the TFSA and $0.75 in the RRSP.
Now throw in that on at least $23+K, the OP should be receiving a $0.36 refund to put into the TFSA.


Personally, I like this hybrid approach as it keeps the RRSP small but also stocks up the TFSA. 


*Use RRSP exclusively*
$1 paid, $0.25 tax is paid ... $0.75 is in the RRSP to invest with a $0.25 refund contributed to the RRSP.

The tax part of the RRSP is going to grow just like the owner's portion so unless the tax level goes up at withdrawal time, the tax will be $0.25.


Cheers


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## none (Jan 15, 2013)

THe out of control misguided love for TFSAs is a bit out of control sometimes. For me the main advantages of the TFSA is just to avoid all the paperwork and somewhere to throw massively taxed bonds.

The superior tax treatment of RRSP and the very likely scenario that your tax bracket will likely at worst be the same but likely lower makes the RRSP a superior vehicle for retirement savings.


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> Eclectic12, I agree, I'm not trying to give him specific advise to do one or the other because we still don't know enough facts. I'm just showing an easy example, where the OP will not necessarily drop brackets upon retirement (and could potentially go up in them) whereas some seem to assume that everyone is going to drop from the top bracket to the bottom bracket the day they retire ...


Sorry ... I am getting annoyed at how so many are in favour of their preference despite there being a lot of factors at play.




CalgaryPotato said:


> ... You seem to have it set in your mind that RRSPs are almost always better based on your own personal situation ...


Aren't you reading what is not there into my comment?

How is checking the factors to see if it applies or doesn't mean I am set on an RRSP for everyone? 
All the way back in post #2 I said YMMV, check the factors for how one will fit them.

What I am set on is checking one's situation before making a decision, one way or the other. 




CalgaryPotato said:


> ... He uses the majority of his RRSP room every year for his pension every single year, so I don't know why it's necessary that he contributes "something" to the remainder of his RRSP room.


Necessary ... no.

Question is ... will the OP decide to avoid using what looks like $0.36 refund for a valid reason or will the decision be made on gut feel?




CalgaryPotato said:


> ... And personally for someone who may have a fully funded retirement covered already through a pension plan ...


I'd prefer the person who *may have* this did their learning/checking how it applies. Otherwise any success is random luck instead of a plan.

At one pension presentation, the max pension payout for full service (35 years I seem to recall) was listed at 60%. The person beside me gasped out "I won't get 100% of my employment salary!!!????". It is planning like this that drives my comments along the line of "YMMV ... review the factors".


Cheers


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## latebuyer (Nov 15, 2015)

I've been temped to go to a fee only planner to see what is best. But it seems no one knows what there income is going forward, whether they are going to have a pension that whole time, and if they will be forced into early retirement so i don't think that will help. It seems to me you have to accept the probability you will lose some money either way and choose what's right for you.


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## CalgaryPotato (Mar 7, 2015)

Eclectic12 said:


> Aren't you reading what is not there into my comment?


No, because I was responding to Tom's comment which I had quoted above right above where I said it. 

Sorry I was replying to two people in one post, I thought that was clear.

And again my comments are in regards to, if he's expecting to get a "full" pension the TFSA may make more sense. I'm not sure why you think that is saying that he must do the TFSA regardless of the specifics of his situation. My replies are too Tom and his comments on how it can't possibly be worse to do the RRSP, I very much agree with you, that you need all the facts before making a decision.

As far as the 60% pension. You've still got to remember that getting X dollars and paying CPP, EI and into a pension plan out of it, and then paying at your top tax rate. Then dropping down to 60-70% without the CPP, EI, pension payments, and possibly in a lower tax bracket, (often union dues too if you are in a place that pays a pension) the actual net doesn't differ as much as you might think.


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## CalgaryPotato (Mar 7, 2015)

none said:


> THe out of control misguided love for TFSAs is a bit out of control sometimes. For me the main advantages of the TFSA is just to avoid all the paperwork and somewhere to throw massively taxed bonds.
> 
> The superior tax treatment of RRSP and the very likely scenario that your tax bracket will likely at worst be the same but likely lower makes the RRSP a superior vehicle for retirement savings.


I think some people are misguided in their love for TFSAs and some are misguided in their love for RRSPs.

The one thing for TFSAs is that in a lot of ways it is erring on the side of caution. If someone comes in and they are 25 years old, they may know what their situation is right now and can do some #'s on that. But the reality is a lot can change over the next few years regarding their salary, marital status, before retirement expenses, pension plans, etc. 

If you put money into a TFSA then when your situation is more clear, you can take that money out and start putting it into the RRSP. You can take it out and use it to buy a house, pay for a wedding, put it into RESPs and it isn't really going to hurt anything. If you put it into RRSPs and it was the wrong decision, it can be a lot more painful to undo.

There are lots of clear cut cases for RRSPs though, I mean if someone is truly in one of the top tax brackets (40%+) and isn't putting using up a significant amount of their RRSP room (directly or through pension) they are probably making a bad decision.


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## GreatLaker (Mar 23, 2014)

latebuyer said:


> I've been temped to go to a fee only planner to see what is best. But it seems no one knows what there income is going forward, whether they are going to have a pension that whole time, and if they will be forced into early retirement so i don't think that will help. It seems to me you have to accept the probability you will lose some money either way and choose what's right for you.


IMO young people don't really need a financial planner. Just read a few good resources like Finiki.org, Millionaire Teacher by Andrew Hallam or If You Can by William Bernstein, then save somewhere between 10% and 20% of income in a low-cost balanced portfolio, saving regularly and rebalancing occasionally. Once they get a more complex financial situation like marriage, kids, need life insurance, own business or closer to retirement a fee-only planner can be useful for those that don't want (or don't have time) to analyze the what their retirement savings and pensions will produce in after tax retirement income.

You have to make rational predictions or estimates of your future savings, spending, pensions, career, etc, and test different alternatives. But if someone cannot come up with a reasonable plan by making estimates like that, how likely are they to succeed by not planning? As Dwight D. Eisenhower said "Plans are worthless, but planning is everything."


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## Pluto (Sep 12, 2013)

TomB16 said:


> I've done the math. Two things:
> 
> My wife has a DB plan and a very small RRSP. I've always known it didn't make sense to build a big RRSP for her.
> 
> ...


1. could be you are not missing anything. I never really paid much attention to RRSP effectivness for self employed. It may not be of much benefit. the fact is I don't like RRSP's due to the fact one loses the capital gains deduction and the dividend tax credit. Assuming one invests savings in quality dividend paying stocks, there whould be no reason to sell/trade them. If one just is a buy and hold investor they will grow tax free, same as if they are in a RRSP. then one is only taxed on 1/2 the capital gain, and the dividend tax credit keeps tax reasonable as well. Giving that up by putting the investments in a RRSP, is a big problem for me. 
2. however, as some others have mentioned, RRSP contributions give one a refund which can be invested in TFSA, or non-registered. So one does get the use of that $ that they would not otherwise have. That seems to dull the pain a bit. So there are a lot of moving parts and variables. Investing the refund could mitigate giving up the cap gains tax deduction and the dividend tax credit. If they buy a boat with their refund cheques, the RRSP probably won't help. 

so my answer is, I don't really know if it would help self employed. too many moving parts and variables to consider.


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## latebuyer (Nov 15, 2015)

GreatLaker said:


> IMO young people don't really need a financial planner. Just read a few good resources like Finiki.org, Millionaire Teacher by Andrew Hallam or If You Can by William Bernstein, then save somewhere between 10% and 20% of income in a low-cost balanced portfolio, saving regularly and rebalancing occasionally. Once they get a more complex financial situation like marriage, kids, need life insurance, own business or closer to retirement a fee-only planner can be useful for those that don't want (or don't have time) to analyze the what their retirement savings and pensions will produce in after tax retirement income.
> 
> You have to make rational predictions or estimates of your future savings, spending, pensions, career, etc, and test different alternatives. But if someone cannot come up with a reasonable plan by making estimates like that, how likely are they to succeed by not planning? As Dwight D. Eisenhower said "Plans are worthless, but planning is everything."


How can I plan when I don't know the future? I'm 43 now and a lot can happen in 20 years. If you can explain to me how to plan when I have no idea what will happen going forward, please do.


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## cashinstinct (Apr 4, 2009)

latebuyer said:


> How can I plan when I don't know the future? I'm 43 now and a lot can happen in 20 years. If you can explain to me how to plan when I have no idea what will happen going forward, please do.


They don't know either what will happen going forward 

If you save in TFSA, you can later withdraw that money and contribute to RRSP, if your income is going up for example.

If you save in RRSP, you can withdraw money early in retirement if you end up retiring before taking CPP/OAS for example.

If you mix both, well you have flexibility! 

Do what I do, I max out both, so I don't ask myself such questions anymore


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## CalgaryPotato (Mar 7, 2015)

latebuyer said:


> How can I plan when I don't know the future? I'm 43 now and a lot can happen in 20 years. If you can explain to me how to plan when I have no idea what will happen going forward, please do.


You can only work with the information you have. But some things you can make more educated guesses on than others. At 43 you probably have a fairly good idea if you plan to leave your company anytime soon or if you are expecting any major salary changes soon. I mean circumstances can always change, but at least go by your current plan. As for getting forced out, take a look at your company, how stable is it? Do people get forced out often there? Again things can always change, but the past history of the company is probably the best way to predict how they will deal with financial issues in the future. 

RRSPs and TFSA are really good plans for most people in most situations. One may be better than the other, but there doesn't have to be a wrong answer. Do the math, if it's a tie I would personally go with the TFSA because of it's aforementioned flexibility. But otherwise go with the winner and adjust if your circumstances change.


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## latebuyer (Nov 15, 2015)

Is it correct that there is an untaxed amount for rrsp withdrawal? I always just thought anything under 45000 would be taxed at 15% plus provincial rate but i'm not sure.


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## Eclectic12 (Oct 20, 2010)

As I understand it, all RRSP withdrawals are subject to the withholding tax that filing the annual tax return will true to (ex. paid too much withholding tax = refund, paid too little = tax bill). 

The 2017 Alberta combined Federal and Provincial rates at listed http://www.taxtips.ca/taxrates/ab.htm, on a "next dollar paid" basis.

There is the basic personal amount of $11,474. Should one be in a position to withdraw $10K from an RRSP that is one's only source of income, the first $5K will have 10% withheld, the next $5K will have 20% withheld (i.e. $500 and $1,000, which totals $1,500).

When filing the tax return, the basic personal amount will cover it so that the $1,500 would be refunded.


RRSP and RRIF is just a source of income ... what happens on the tax return will be determined by how the credits/deductions add up as well as any pension income splitting that is available. http://www.taxtips.ca/filing/pensionsplitting.htm


Should the money be coming from a RRIF instead of an RRSP, the minimum withdrawal amount is not subject to the withholding tax while amounts above the minimum will have the same scale applied.

http://www.taxtips.ca/rrsp/withholdingtax.htm



Cheers


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## latebuyer (Nov 15, 2015)

Wow thanks. That makes me look at the rrsp in a different light. Isn't it true that you are actually better off withdrawing 10,000 during a no income year then waiting until you are retired, drawing cpp and oas and potentially a pension? You aren't taxed while if you wait until you are 65 you would be. I'm not saying to withdraw the money but it is good to know it is there if you needed it during a period of unemployment and you wouldn't be penalized. I thought it was better to use tfsa in a period of unemployment but the rrsp almost seems preferable except you lose the room.


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## Eclectic12 (Oct 20, 2010)

CalgaryPotato said:


> No, because I was responding to Tom's comment which I had quoted above right above where I said it.
> Sorry I was replying to two people in one post, I thought that was clear.
> 
> And again my comments are in regards to, if he's expecting to get a "full" pension the TFSA may make more sense. I'm not sure why you think that is saying that he must do the TFSA regardless of the specifics of his situation ...


Somehow missed that part ... my apologies.





CalgaryPotato said:


> ... My replies are too Tom and his comments on how it can't possibly be worse to do the RRSP, I very much agree with you, that you need all the facts before making a decision.
> 
> As far as the 60% pension. You've still got to remember ...


Since you agree - I am not sure why the main point that people can be delusional ("60% not 100%?) and/or miss some key factors ( benefit accrues at approximately 1.7% per year, requiring 35 years of service to hit the maximum) for their pension due to the handy, dandy "here is the max pension with max CPP" charts means one should do their checking.

The OP may be fine with being under forty with another potential twenty five or so years to keep the benefit building. I'd prefer it was checked but that is up to the OP.




CalgaryPotato said:


> ... I think some people are misguided in their love for TFSAs and some are misguided in their love for RRSPs.


+1 ... 


Cheers


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> ... Isn't it true that you are actually better off withdrawing 10,000 during a no income year then waiting until you are retired, drawing cpp and oas and potentially a pension? You aren't taxed while if you wait until you are 65 you would be.


YMMV ... some will have such a reduced pension that a large RRSP is the counter balance. Some plan on early retirement with a decade or more of a small pension, zero CPP and zero OAS. Some plan on all three starting shortly after retirement. Some are contributing to a spousal RRSP where the refund is 46%, their spouse in a good year is making enough to pay 29% and the estimated retirement income the RRSP/RRIF withdrawal is expected to be at 20%.

Then too, does withdrawing the $10K mean one's age 65 income is going up due to whatever investments are held or is the $10K going into a TFSA?




latebuyer said:


> ... I'm not saying to withdraw the money but it is good to know it is there if you needed it during a period of unemployment and you wouldn't be penalized. I thought it was better to use tfsa in a period of unemployment but the rrsp almost seems preferable except you lose the room.


YMMV ... if one is laid off where say $80K of the $115K salary has already been paid, I'd be looking at TFSA withdrawals or tax advantaged investment income. If one hasn't been paid a lot, then some from the RRSP may be just as good as it will reduce the future tax bill (especially if one is close to retirement/CPP/OAS anyway).


Lots of variables to run some scenarios for.


Cheers


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## GreatLaker (Mar 23, 2014)

It also depends on when you retire vs. when your other sources of retirement income start. If you have a large RRSP and you retire early, consider withdrawing some from RRSP before CPP/OAS start, and especially before mandatory RRIF withdrawals start. That can prevent your tax rate from spiking up the year you turn 72 when RRIF withdrawals are mandatory (5.28% in the year you turn 72).


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## Pluto (Sep 12, 2013)

RRSP vs no RRSP 

An example to illustrate how low ones marginal tax rate will have to drop to make RRSP a benifit.
1. in non-registered account:
Investor buys ry in 1995 for $7. it is now $96 in 1017. 
if sold would be 89 cap gain and $44.5 is taxable.
@ 30% marginal rate tax is 13.5 and 
@ 40% it is 17.5
@25% it is 11.3

2. in registered RRSP.

The entire 96 is taxable upon withdrawal. 
@30% tax is 28.8
@40% tax is 38.4
@ 25% it is 24.

So how low, upon retirement, ones one's marginal tax rate have to go to make RRSP effective? 

I think each individual has to make their own assessment based on particular circumstances. Evne iwth this simiple issustration we dod not consider dividends now what one did thei the tax refund from RRSP contributions. Even so, from this example I think it is obvious that a RRSP is not the slam dunk winner it has been touted to be.


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## TomB16 (Jun 8, 2014)

Pluto said:


> The entire 96 is taxable upon withdrawal.


It wouldn't be for me.

I get a basic exemption of roughly $11K per year plus I will receive a retirement tax credit, when the time comes a few years from now. I expect to be able to withdraw $30K per year from the RRSP and pay very low tax.

I also look at the tax liability as a form of leverage. When I want to do something risky, I do it in my RRSP. If I lose money in my RRSP, I've lost less than face value because of the tax advantage. If I lose money in my TFSA, I lose face value.

The leverage aspect changed when my RRSP hit a level that knew I would have to pay income tax upon withdrawal. That's when my point of view changed such that I stopped contributing and started looking at it as a risk opportunity. Since then, it's done very well. More of the risks have paid off than not, so I have increased my tax liability but they are risks I would not have taken in my TFSA so I look at it as found money.

Also, I never had the opportunity or need to withdraw from my RRSP during my working career. I was laid off once but started a new job the next day. Some of the tax liability can be considered as insurance that was never drawn upon.

Perhaps some of this is a point of view but I look at how much tax I've saved over the years by contributing to my RRSP and I look at how much tax I project having to pay when I convert to a RRIF for withdrawal over the years and the number is smaller. Even if the number was the same, having to pay $x in the future is better than having to pay $x now based on inflationary devaluation of money.


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## TomB16 (Jun 8, 2014)

Further....

Based on the experience of my parents, it's possible to have $300~500K in an RRSP and not pay any income tax, depending on when you retire. Also, if one of the partners passes, it will halve the amount of money able to withdrawal tax free.

My parents were always in the lowest bracket. They were self employed. Their financial adviser suggested they build their RRSP, for some reason. That didn't make a lot of sense to me but they haven't paid any tax since retiring so it turned out to be a good move.

I'm in worse shape than my parents since my RRSP has gotten a bit larger than I would have expected and my wife has a DB pension. I met my wife 9 years ago. We've been together for 7.

I'm 50 and hoping to retire at the end of this calendar year. My plan is to pull a bit more out of the RRSP than I might otherwise do because she will undoubtedly outlive me by a lot and she will pay more tax withdrawing it on her own than she will with my help now so I intend to de-register as much as possible.

Perhaps that's a lesson for the anti-RRSP crowd but I still think that anyone would do well to have a couple of hundred thousand dollars in an RRSP when they retire.


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## latebuyer (Nov 15, 2015)

One thing I always thought that you could do that i've posted in another thread is that you could use tfsa withdrawals to delay when you apply to cpp and oas. I realize melting down your rrsp would work but it wouldn't work quite so well for those with a pension as they would have pension income right after retirement. The reality is you may need a combination of a melted down rrsp and tfsa if you want to delay cpp until your 70 tax effectively.


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## cashinstinct (Apr 4, 2009)

Pluto said:


> RRSP vs no RRSP .


This examples misses what happened with the tax return on $7 original RRSP contribution.

If you assume the person did spent the money (tax refund or smaller tax payable) it's a big reason why I say TFSA wins in real life for many people.

If you assume the person reinvested the refund in RRSP, the gain could be higher than $96...


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## Pluto (Sep 12, 2013)

TomB16 said:


> It wouldn't be for me.
> 
> I get a basic exemption of roughly $11K per year plus I will receive a retirement tax credit, when the time comes a few years from now. I expect to be able to withdraw $30K per year from the RRSP and pay very low tax.


Ok so 30K might give a marginal tax rate of about 20%. Non-registered cap gains would then be 10% and dividends would be taxed at less than zero. 
But any dividends that accumulated inside the rrsp, when withdrawn, would be taxed at 20% instead of less than zero. that's a disadvantage. 

so for a dividend stock investor, it still could be that outside the rrsp is very competitive, if not better than inside RRSP.


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## Pluto (Sep 12, 2013)

cashinstinct said:


> This examples misses what happened with the tax return on $7 original RRSP contribution.
> 
> If you assume the person did spent the money (tax refund or smaller tax payable) it's a big reason why I say TFSA wins in real life for many people.
> 
> If you assume the person reinvested the refund in RRSP, the gain could be higher than $96...


I agree. TFSA wins. And for many, RRSP eventually wins for the government due to the investor losing the cap gains deduction and the dividend tax credit. 

Look at TomB, for example, he will likly pay 20% on dividends withdrawn from RRSP, but if not invested in in RRSP the dividend tax credit would mean no tax at all.


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## TomB16 (Jun 8, 2014)

Pluto said:


> Ok so 30K might give a marginal tax rate of about 20%.


Yes, and a blended tax rate closer to 10%, assuming retired.


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## TomB16 (Jun 8, 2014)

Pluto said:


> Look at TomB, for example, he will likly pay 20% on dividends withdrawn from RRSP, but if not invested in in RRSP the dividend tax credit would mean no tax at all.


I project that it will be closer to 12%. Meanwhile, I've had years with a blended tax rate well over 30% and that was after an RRSP contribution.


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## Pluto (Sep 12, 2013)

OK, well I'm probably belabouring the point, but with dividends you would pay 12% vs zero, and cap gains, 12% vs 6%.

I should add that at your 12% marginal rate with dividends you would also get a non refundable tax credit of probably over 6% - if invested outside the rrsp. 

I got rid of my RRSP decades ago once it dawned on me that investing buy and hold in non-rrsp account was way better taxwise. As long as one does not sell, stocks grow tax free, and when you do sell, they are taxed a 1/2 the rate of RRSP withdrawals, while dividends are tax free up to income levels of about 46000 depending on Province. 

To me the RRSP is a great deal for the government.


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## My Own Advisor (Sep 24, 2012)

@Pluto,

I have no problem with the RRSP. I think it's a great retirement vehicle. But people need to understand the tax implications of this account, like the TFSA, like non-reg. dividend investing.

The reality is, most people couldn't give a crap about figuring it out. Only us #moneynerds in CMF.

Now - back to a small glass of scotch. It's a school-night after all!


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## Nerd Investor (Nov 3, 2015)

The fact is, you will never be worse off in an RRSP vs non-reg unless your tax rate upon RRSP withdrawal is higher than when it went in (and if the difference is small, you likely still come out ahead with the RRSP). 
The issue is, people tend to overvalue what is in the RRSP because they don't discount for the fact that it is pre-tax money.


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## Jaberwock (Aug 22, 2012)

Investing in a TFSA will give you exactly the same after tax return as investing in an RRSP, provided you are in the same tax bracket when you withdraw the funds as you were in when you contributed.

Here's how it works:

RRSP

Invest $10, get $3 tax rebate, net investment $7
Investment value increases by a factor 10 over 30 years, value inside RRSP is now $100.
Withdraw the $100, pay $30 tax, you are left with $70.

TFSA
Invest $7
Investment value increases by a factor of 10 over 30 years, value is $70
Withdraw the $70, no taxes, you are left with $70, the same as the RRSP.

Don't make a simple decision into a complicated one. If you expect to be in a lower tax bracket after you retire, use the RRSP.
If you expect to be in the same or higher tax bracket after you retire, use the TFSA


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## Nerd Investor (Nov 3, 2015)

Jaberwock said:


> Investing in a TFSA will give you exactly the same after tax return as investing in an RRSP, provided you are in the same tax bracket when you withdraw the funds as you were in when you contributed.
> 
> Here's how it works:
> 
> ...


Bang on.


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## GreatLaker (Mar 23, 2014)

Nerd Investor said:


> Bang on.


Agreed. Michael James on Money wrote a good analysis of this. It is important to note that his analysis is always in after-tax dollars. In his example he uses a 40% MTR so to have $1 in an RRSP after the tax rebate, $1.67 needs to be contributed. ($1.67 x (1-.4) = $1.00) Some of the comments in the article are worth reading.

It is the same analysis presented by Jaberwock except the tax rate 40% vs 30%. 

Here is the link: http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html


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## steve41 (Apr 18, 2009)

Generally true, however your life expectancy/health matters too. If you max/shelter your RRSP and die prematurely, you (your estate) loses. If you live to a ripe old age, you win. And the reverse holds.


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## none (Jan 15, 2013)

*Technically true. math is math - nothing general about it.

Anyway, to your point - leaving less money when you die is far less of a consequence than running out of money. That's why I'm probably going to one of those that delay CPP until 71. Math is math.


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## Pluto (Sep 12, 2013)

GreatLaker said:


> Agreed. Michael James on Money wrote a good analysis of this. It is important to note that his analysis is always in after-tax dollars. In his example he uses a 40% MTR so to have $1 in an RRSP after the tax rebate, $1.67 needs to be contributed. ($1.67 x (1-.4) = $1.00) Some of the comments in the article are worth reading.
> 
> It is the same analysis presented by Jaberwock except the tax rate 40% vs 30%.
> 
> Here is the link: http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html


he does claim that dividends are better earned in a TFSA compared to a RRSP, so that would sugest stocks should be in TFSA. 
Plus he is assuming a the investor is in a 40% tax bracket which implies an income of over 100,000. At that level one gets their dividends taxed a wee bit. At specific lower income levels one can get a tax credit on dividends. He is not talking about an average income earner, and so he is nto talking about most people. He picked an income level where dividends are taxed at about 20% vs average income levels where they are taxed less, and - below 45000 - get a tax credit. 

So we need to realiize that he picked an income level and marginal rate to suit his conclusions. And as such I'm not convinced one can generalize his conclusions to all income levels. 

Also he assumes that tax bracket will go down. Health care workers, police, firefighters, teachers and countless others have defined benifit pension plans and their pension + cpp +oas + RRSP withdrawals could easily keep them in the same tax bracket.


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## CalgaryPotato (Mar 7, 2015)

Even though the basics are so simple, there are no easy answers with this topic. 

I don't even know how to calculate out a basic assumption like how long I'm going to live. If I try to use an online calculator it has me living until my mid 90's. But is that a realistic assumption. No one in my family has ever lived past 93. I calculated out all of the relatives who I know the age they died at, and the average age was 70. So should that be my assumption? Half way? 

Calculations on tax rate at retirement are a best guess. You have to remember that every dollar you put into an RRSP raises your after tax income. So any decision to put money into RRSPs because you will be in a lower tax rate, will also force you to re-calculate based on all of the money you'll be putting in. If you plan to do the full RRSP contribution from ages 25-65, you'll probably end up in a higher tax bracket.

And I don't think it's insignificant to think about inheritance and how it will be affected. Anyone talking about retiring with more than a million dollars in liquid investments probably has a good chance of leaving a 6 figure chunk at the time of their death. Unless you are really good at timing out die broke. 

I think for most on this forum the hybrid strategy of filling both the TFSA & RRSP will probably work best. At lower income levels you have to factor in claw backs.


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## GreatLaker (Mar 23, 2014)

CalgaryPotato said:


> I don't even know how to calculate out a basic assumption like how long I'm going to live. If I try to use an online calculator it has me living until my mid 90's. But is that a realistic assumption. No one in my family has ever lived past 93. I calculated out all of the relatives who I know the age they died at, and the average age was 70. So should that be my assumption? Half way?


That's a thorny issue. The consequences of outliving your money are rather more severe than dying prematurely and leaving a larger than expected estate. So an individual retiree needs to ensure their finances can survive a longer than average life. That's a benefit of DB pensions and annuities. The market risk and longevity risk are spread out across multiple people so adequate funding is based on averages, not extreme cases.

One way to deal with it is to purchase an immediate life annuity that, when combined with CPP and OAS, will provide a floor to cover basic non-discretionary expenses. Once that is done you can spend more from your portfolio with less risk of outliving your money. Inflation is still an unknown risk in that scenario.

People hate annuities, especially with today's low interest rates, because in the case of premature death the money is gone, but it is a useful solution for some people. Wealthy retirees don't need to worry as long as they are prudent. Low income people for whom CPP/OAS/GIS provide all their non-discretionary expenses also don't have to worry because their basic needs are covered by guaranteed govt pensions. Similar with retirees with a large indexed DP pension, typically govt and large unions. But there are a lot of in-between people depending on their own savings. I plan to carefully evaluate an annuity around age 70-75.

I'm not advocating that people should buy an annuity, just that it should be considered by some people as one component of a retirement plan. This issue has been analyzed in the following Canadian books:

Unveiling the Retirement Myth by Jim Otar
Pensionize Your Nest Egg by Moshe Milevsky and Alexandra MacQueen


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## CalgaryPotato (Mar 7, 2015)

My whole point though, is I'm probably going to have to err on the side of caution and go with the mid 90's plan. So even if I plan out die broke at 95. The odds are strongly in my favor that I'm going to die with money leftover. And I'd guess that, this'll be the case for the majority of people in this thread.

For this reason I don't think the tax efficiency of the leftover money is necessarily a moot point, although it obviously isn't less important than having money to live on.

Still anyone who is debating TFSA vs. RRSP is probably getting full OAS & CPP, and will get more from those than many live off of anyway.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> ... Plus he is assuming a the investor is in a 40% tax bracket which implies an income of over 100,000. At that level one gets their dividends taxed a wee bit.


YMMV ... Quebec starts at combined Federal and Provincial tax at 41.12% at over $85,405. Eligible dividends are taxed lower at 23.01% while capital gains is at 20.56%. I haven't checked them all but the other provinces seem to hit this level at $91K, with Alberta needing $142K to hit this and BC at $108K.




Pluto said:


> ... He is not talking about an average income earner, and so he is nto talking about most people ... So we need to realiize that he picked an income level and marginal rate to suit his conclusions. And as such I'm not convinced one can generalize his conclusions to all income levels ...
> Health care workers, police, firefighters, teachers and countless others have defined benifit pension plans and their pension + cpp +oas + RRSP withdrawals could easily keep them in the same tax bracket.


This is the group that needs to factor it in, is it not?

Though, it seem that through a typo you are adding more pensions than the average person receives. Where one is in a DB pension, typically one is in one DB pension - especially with people worrying about leaving money that is not in their control as well as the viability of the pension plan when they a company. (Unless instead of "defined benifit pension plans and their pension" you meant DB pension and their taxable investment income?).

Yes, DB pension members may not have their tax level drop, especially where there is taxable investment income and/or forgetting to estimate for CPP, OAS and RRSP withdrawals. I'd need more stats to better gauge how much of an impact the DB pension will have as the ones I have been in have had a small, small number who stayed with that one company the 30+ years to end up with a full DB pension.

Never mind that I have met a lot of people working in areas like health care workers who are recent immigrants to Canada. They do have the DB pension but if they work to age 70, their years of service limits them about 40% of maximum benefit. Years of service in the pension is another key YMMV factor that few I have talked to seem to be paying attention to.


Cheers


*PS*

IMO, it is better to learn the factors, learn the details then look at what one's situation is. It is a moving target that will need adjustments along the way but most articles have built in assumptions (or posts) that may or may not be relevant.


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## Eclectic12 (Oct 20, 2010)

GreatLaker said:


> CalgaryPotato said:
> 
> 
> > Even though the basics are so simple, there are no easy answers with this topic.
> ...


+1 ... one of the nurses I was talking to at a nursing home said one of their residents planned based on their father as well as three brothers had all died of heart problems before the age of fifty. He decided to live it up as he knew he was a goner. At the last visit, he was pushing seventy-five. 


Cheers


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## CalgaryPotato (Mar 7, 2015)

Eclectic12 said:


> +1 ... one of the nurses I was talking to at a nursing home said one of their residents planned based on their father as well as three brothers had all died of heart problems before the age of fifty. He decided to live it up as he knew he was a goner. At the last visit, he was pushing seventy-five.
> 
> 
> Cheers


If he's in a nursing home already at 75, I think he made the right choice. Do you disagree?


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## Eclectic12 (Oct 20, 2010)

He's spend the last twenty five or so years penniless, with no contact with his wife and kids who weren't happy he had spent it all on wine, women and song in his forties.

I don't know about you but I'd think having a family plus a comfortable financial situation would have opened up a lot more possibilities for enjoying life versus being alone.


Cheers


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