# Should I Bother Increasing My RSP?



## Square Root (Jan 30, 2010)

I have been thinking about this for a while. The facts: 60 years old, been retired for 4 years. RSP balance about $125k, non registered portfolio in low 8 figures, pension starts in 2 years and very, very generous, cash on hand good for 2 years expenses. I have about $40k rooom in my RSP. This arose recently due to post retirement comp. Question: Should I bother topping up the RSP or does this just complicate things more for a relatively small benefit? Will always be paying at the max tax rates (Alberta). Portfolio consists of 100% blue chip dividend paying Canadian equities. Dividends and pension will cover expected expenses. What do you think? I know how lucking i am to be in this position-please only helpful advice.


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## humble_pie (Jun 7, 2009)

don't contribute. That rrsp is going to become an albatross around the neck. It's useless for you.

plan to collapse rrsp while making max charitable donations. Donate enuf to offset tax otherwise owing on rsp withdrawals.

lobby for an exemption for donating entire rrsps during taxpayer's lifetime. Like spousal rollover, except donor would still be alive & would get whopping tax benefit. Your alma mater should help here. Or any big hospital.

to spice things up right now, join today's red-hot canadian campaign to end a) death by stoning and b) execution for adultery in the middle east. Stop obsessing over your 40k it's making you a dull man.


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## kcowan (Jul 1, 2010)

Since you are not a typical member of this forum (8 figure portfolio), the only decision is to defer income tax from age 60 to age 72. Chances are the tax rate will be the same. You are already beyond the level of any clawbacks which are over by income of $105K.


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## Square Root (Jan 30, 2010)

humble_pie said:


> don't contribute. That rrsp is going to become an albatross around the neck. It's useless for you.
> 
> plan to collapse rrsp while making max charitable donations. Donate enuf to offset tax otherwise owing on rsp withdrawals.
> 
> ...


Why an albatross? Not obsessing-just wondering. RSP consists of blue chip dividend paying equities similar to non registered portfolio. I thought of collapsing it but why pay tax now? Thanks.


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## Cal (Jun 17, 2009)

I am a little confused as to how you could acumulate an 8 figure non registered portfolio, yet you only have 125K of RSP investments and 40K of unused room. I would have thought you would have had more RSP contribution room. But maybe you inherited it. None of my business.

Nonetheless. Agree with humble, you don't really have to worry that much about a decision. Charitable donations are an option.

If it bugs you, and you really want to use it, then use it to offset some of your dividend income. $10million in dividend payers at 4% would give you an income of 400K a year, so claiming all of the 40K against that won't make a difference.

Also, if the RSP tax bothers you, when the time comes to cover some of your taxes owing upon collapsing the RSP, you could get an investment loan, that the interest owing, would equal the taxes payable on collapsiing the RSP.

Although, I am sure that your accountant will be able to help you with these matters for further tax efficiency.


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## humble_pie (Jun 7, 2009)

glad you're wondering. I didn't mean collapse now, believe i said "plan to," no ? Mandatory withdrawals from that rsp will be 100% taxable when they commence. Take those appealing blue chip dividends that would, if not locked up within an rrsp, be generating valuable tax credits for you right now. But because of the rsp all such credits are lost. And it's a multiplier thing, as i see it. Favourably-taxed dividends w tax credits now, held in non-registered or even tax-free accounts, can be utilized to purchase other tax-favourable investments. Rinse & repeat. Whereas the same dividends in an rrsp will eventually get taxed at 100%.

pro-rrsp planners will argue that the compounding effects of such dividends banked up in rrsps outweigh their inevitable & dismal tax consequence. But i for one don't buy that argument, because frequently the non-registered portions of high net worth taxpayers' portfolios are compounding positively as well. It's in that sense that i view an rrsp as an albatross-in-waiting. More accurately one might say a pregnant albatross, one that's going to lay an unwanted egg.

there is a great deal to be said for tax-offsetting charitable donations to be made during the rrsp withdrawal years by high net worth taxpayers who don't need their rrsps in the first place. In addition, i don't know whether the likely beneficiaries of largesse - schools, hospitals, big social agencies like red cross & salvation army, etc - are currently lobbying also for special tax benefits associated with donation of entire superfluous rrsps, or a healthy portion of such rrsps, during a taxpayer's lifetime; but i think they should be doing that, or at least discussing how to do that.


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## Square Root (Jan 30, 2010)

Cal/Humble Thanks for the thoughtful responses. I agree that getting the dividends outside RSP are good-max rate in Alberta on divs this year under 16%. Donations also a good idea. By the way my RSP contribution limit while I was working was almost nil because my pension adjustment amount was so high. Recent room came after I stopped contributing to pension. In any event small numbers in the overall scheme of things.


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## andrewf (Mar 1, 2010)

Don't you have a tax/estate planner? If anyone here should, it's probably you.


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## steve41 (Apr 18, 2009)

> It's in that sense that i view an rrsp as an albatross-in-waiting. More accurately one might say a pregnant albatross, one that's going to lay an unwanted egg.


 When you run the math, you have to take the time-value-of-money effect into account. i.e. you are comparing a near term tax hit against a far term tax hit. Also, the tax rate goes down as you get older.... tax brackets are indexed, age credits pop into play.... I find it very hard to justify an RRSP-RRIF meltdown strategy for the average client (not SQRT!) when you subject the plan to a proper 'needs-based' analysis.


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## humble_pie (Jun 7, 2009)

cal taking out an investment loan whose interest would be sufficient to offset rrsp withdrawals is not a good idea during the current prolonged low-interest period, imho. The amount of $$$ that would have to be borrowed would be prodigious. They would have to be invested in dividend payors paying higher than the loan interest rate, so automatically there is risk. Now taxpayer not only has an additional substantial portfolio - which is generating taxable income of its own, please keep in mind - but also suddenly he's vulnerable to a 20-25% downward market correction or worse.

if taxpayer's secondary or loan-based portfolio is not as well-chosen as his original non-registered accounts or even his real estate, this would also add to the risk. Taxpayer would have enough margin to prevent margin calls thanks to his non-registered portfolio; however, if taxpayer were to pass away estate would likely be required to repay the loan; and this could occur during an unfortunate market period when executors would be reluctant to liquidate sound securities at low prices. All in all this is not a scenario you'd choose for a 75-year-old.

to steve - i never wrote anything about an rrsp meltdown. In fact, the above will show that i oppose them. I mentioned only the wisdom of increased donations during rrsp withdrawal years for high net worth individuals. There's a powerful and creative psychosocial benefit to this kind of activity that i don't believe your money maps are capable of perceiving, let alone measuring.

and i don't believe the tax rate goes down as today's citizens age. Whether through inheritances or lump-sum retirement benefits or fat govt-type pensions or sale of the appreciated & valuable but outgrown family home, incomes often actually increase in retirement, as maverick US actuaries were predicting decades ago. During the same phase of life outlays are often decreasing, while tax bites from all levels of government are increasing. So it makes sense to look ahead & analyze just how much that rrsp will mean & what role it will play in the grand scheme of things.

one detail that's never mentioned in this forum, which should give everyone pause if not stop them cold turkey, is that final 100% taxation of an rrsp balance at the time of the death of the survivor in a couple. This means that actual capital itself gets taxed, a system not unlike that in the US. On the other hand, only the final capital gain or loss in a security held In a non-registered account gets taxed as a deemed disposition under the present canadian system.


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## Four Pillars (Apr 5, 2009)

$10 million plus portfolio? Wow.

Deferring income tax in an rrsp won't help you much. Maybe using the rrsp room to shelter fixed income if you have any?

I wouldn't lose any sleep over it either way..


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## OhGreatGuru (May 24, 2009)

Square Root said:


> I have been thinking about this for a while. The facts: 60 years old, been retired for 4 years. RSP balance about $125k, non registered portfolio in low 8 figures, pension starts in 2 years and very, very generous, cash on hand good for 2 years expenses. I have about $40k rooom in my RSP. This arose recently due to post retirement comp. Question: Should I bother topping up the RSP or does this just complicate things more for a relatively small benefit? Will always be paying at the max tax rates (Alberta). Portfolio consists of 100% blue chip dividend paying Canadian equities. Dividends and pension will cover expected expenses. What do you think? I know how lucking i am to be in this position-please only helpful advice.


As someone above suggested, you should perhaps talk to an estate planner, or at least look at it from an estate planning point of view. If you have a spouse, she can inherit the RRSP without collapsing it, so that may be a consideration. 
From a pure investment point of view, you don't need to make withdrawals until age 71, so you are looking at possible 11-year tax-sheltered earnings in the RRSP, with graduated withdrawals afterward taxed as straight income. In the meantime you will have received a significant tax rebate in the year of contribution. So it might still be worthwhile.


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## Square Root (Jan 30, 2010)

Most of the points you make have previously crossed my mind and therefore I think status quo will continue in regard to the RSP. (ie no more contributions-collapse if opportunity arises) and thanks for the help. In response to a comment:I have no advisors and generally don't pay MER's. I feel qualified to manage my own affairs (CA, MBA, CFA) although one could make the case I have a fool as a client. Have received estate planning legal advice as a reirement perk. Do appreciate your comments though. Over the last few months I have read many useful posts on this site. Thanks again.


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## Square Root (Jan 30, 2010)

OhGreatGuru said:


> As someone above suggested, you should perhaps talk to an estate planner, or at least look at it from an estate planning point of view. If you have a spouse, she can inherit the RRSP without collapsing it, so that may be a consideration.
> From a pure investment point of view, you don't need to make withdrawals until age 71, so you are looking at possible 11-year tax-sheltered earnings in the RRSP, with graduated withdrawals afterward taxed as straight income. In the meantime you will have received a significant tax rebate in the year of contribution. So it might still be worthwhile.


Thanks. Deferral will only make a difference on the dividends as investments in a non registered account will attract tax only when sold. I trade very infrequenty both in or out of the RSP. Dripping in the RSP.


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## humble_pie (Jun 7, 2009)

believe it goes like this: a lawyer who has himself as a client is a client who has a fool for a lawyer.

we should all be such fortunate fools. And good household help is so hard to find these days.


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## Square Root (Jan 30, 2010)

humble_pie said:


> believe it goes like this: a lawyer who has himself as a client is a client who has a fool for a lawyer.
> 
> we should all be such fortunate fools. And good household help is so hard to find these days.


Yes. But I think investment advice isn't quite the same as legal representation. I would never represent myself legally. I think I could anticipate most of what I would hear from an investment advisor so the cost and aggravation wouldn't be worth it. We are doubly lucky that I will receive such a large pension and only need a 3% yield or so on the portfolio to continue with our current lifestyle.


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## steve41 (Apr 18, 2009)

Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.

For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.


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## Square Root (Jan 30, 2010)

steve41 said:


> Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.
> 
> For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.


Yes but I expect income to keep pace with inflation as dividends go up. Dividend tax rate is going up slightly in next few years in Alberta. Age tax benefits will be immaterial. Have resigned ourselves to paying fairly high taxes right to the end. Our way of giving something back


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## steve41 (Apr 18, 2009)

As I said, you (SQRT) are not normal. Unless you have an obscenely expensive life style (a fleet of corporate jets, a crushing drug habit, a bevy of fashion models hanging on your arm and an expensive 'posse' to maintain) you aren't in the live well-die broke category. You will be passing on a very sizable estate.... at least as large as it is currently. (ie... no return of capital) 

As mentioned. your situation is an estate planning issue.


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## Maltese (Apr 22, 2009)

steve41 said:


> Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.
> 
> For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.



Steve, you've often said that the marginal tax rate decreases for most seniors after retirement. I can see how this applies to couples because of the income splitting provisions but am confused how it applies to singles.

I just ran 2 scenarios for myself in Quicktax. One supposed a retirement age of 60 with a total of $51,000 of income that included CPP and the Disability Tax Credit was claimed. The second scenario also included $6203 OAS at age 65. The marginal tax rate for both is 35% - the same as now while working.

I'm not sure what I'm missing. The only thing I'm sure of is that singles pay more tax in retirement than couples but have many of the same base costs.


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## Square Root (Jan 30, 2010)

steve41 said:


> As I said, you (SQRT) are not normal. Unless you have an obscenely expensive life style (a fleet of corporate jets, a crushing drug habit, a bevy of fashion models hanging on your arm and an expensive 'posse' to maintain) you aren't in the live well-die broke category. You will be passing on a very sizable estate.... at least as large as it is currently. (ie... no return of capital)
> 
> As mentioned. your situation is an estate planning issue.


I guess our lifestyle has expanded to spend the money available. Unfortunately, I possess none of the vices you have listed. If things go well over next few years-perhaps a boat, even more exotic travel, exotic cars? Who knows. I agree this is an estate planning issue.


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## andrewf (Mar 1, 2010)

When it comes down to it, I don't think RRSPs make much of a difference either way for people with very high net worth. It's pay me now or pay me later. Essentially, you can speculate on changes in marginal tax rate or take advantage of tax-free compounding, with the trade-off of paying high rates on your capital gains and dividend income than necessary when you do finally withdraw the money.


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## Square Root (Jan 30, 2010)

Totally agree-thanks.


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## steve41 (Apr 18, 2009)

Maltese said:


> Steve, you've often said that the marginal tax rate decreases for most seniors after retirement. I can see how this applies to couples because of the income splitting provisions but am confused how it applies to singles.
> 
> I just ran 2 scenarios for myself in Quicktax. One supposed a retirement age of 60 with a total of $51,000 of income that included CPP and the Disability Tax Credit was claimed. The second scenario also included $6203 OAS at age 65. The marginal tax rate for both is 35% - the same as now while working.
> 
> I'm not sure what I'm missing. The only thing I'm sure of is that singles pay more tax in retirement than couples but have many of the same base costs.


 The marginal tax rates may not change, but the effective tax rates will. The effective tax rate is the measure which counts.


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## andrewf (Mar 1, 2010)

steve41 said:


> The marginal tax rates may not change, but the effective tax rates will. The effective tax rate is the measure which counts.


Marginal effective tax rate is what is relevant to the RRSP-or-not decision. Average tax is interesting but not useful from a decision-making POV.


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## steve41 (Apr 18, 2009)

The measure which ultimately counts is the present value of all those future tax pmts. Tax rates are part of the T1 formulation, and unless you forecast/fabricate a plan using the full T1 algorithm, effective/marginal/average tax rates aren't as important as the actual T1 as it is implemented with all its separate prov & fed (indexed) thresholds and marginal rates, clawbacks, credits, surtaxes... etc.

It is not a _"Hey, these are just rows and columns of numbers and math rules. How hard could it be? I'll just pull out my trusty Excel, and put this puppy to bed in a few hours."_ 

Good luck with that.


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## andrewf (Mar 1, 2010)

taxtips.ca has marginal effective tax rates for each type of income. No excel required.


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## MoneyGal (Apr 24, 2009)

Well, presumably you'd need a financial calculator or Excel macro for the PV calculation.


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## kcowan (Jul 1, 2010)

steve41 said:


> The marginal tax rates may not change, but the effective tax rates will. The effective tax rate is the measure which counts.


But if Maltese is making $51000 plus $6200 OAS, his age credit will be reduced substantially. The credit gets clawed back at income of $31470 and is all gone by $64000 so he will be well into the clawback. This is the major hit at those income levels. Above that his OAS will be clawed back.


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## steve41 (Apr 18, 2009)

Let me explain it better. I don't actually start out using the PV calculation..... my methodology involves a complex process based on deriving a set after tax income target.... It is along the lines of..."I need $40K after tax/adjusted for inflation. How much should I put in or take out of my RRSP and/or nonreg pots in order to drive that exact after tax amount?"

It doesn't take long before you realize you need to drive the tax formula (the T1) in reverse in order to solve the problem. Unlike simple functions such as PV, SQRT, etc there is no simple spreadsheet function which allows you to compute tax in reverse.

So... you have three entities which vary over time, tax, registered pmts in/out and nonreg pmts in/out.

You then try to force an after tax amount which preserves these cash flows while adhering to the tax rules. It is a huge recursive number crunch. For a simple plan, the full tax subroutine can get passed anywhere up to 20,000 times. Spreadsheets simply don't perform to this level. Anyone who has tried even the simplest 'goal-seeking' feature in a spreadsheet knows what I mean.

Hope this makes sense.

BTW... when I say the tax formula, I include the OAS and GIS clawbacks as part of the tax algorithm.


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## cardhu (May 26, 2009)

SquareRoot ... given the disparity of scale between your taxable portfolio and your RRSP portfolio, your lifestyle is not going to be significantly altered regardless of whether or not you take advantage of the $40k RRSP contribution room ... the question is, do you value tax-efficiency? ... if so, then your situation would seem to be a no-brainer in favour of the use of RRSP ... the suggestion that it would be an albatross around your neck is absurdly misguided ... the suggestions that the contribution would be useless to you, or that you would enjoy more favourable tax treatment holding your dividends outside of RRSP, are simply wrong. 

At present, you are taxed at a punishing rate of 15.88% on dividends received outside of RRSP ... and that will go up (to 19.29% (OUCH) in 2012) ... if you could reduce that to 0%, for at least a portion of your portfolio, wouldn't you want to do that? ... that’s what the RRSP does for you ... even if the benefit is small in the grand scheme of things (not because of any weakness or deficiency in the RRSP, but simply because you’re only allowed to contribute a tiny tiny proportion of your assets), it is nevertheless a positive benefit ... there is virtually no downside to using RRSP in your case. 

Whether you decide to let the dividends compound within the RRSP until your forced RRIF conversion, or to withdraw the dividends from the RRSP each year, you’d be ahead either way, as compared to not having made the contribution in the first place. 

I find it curious that charitable donations are so frequently brought up as a “solution” for RRSP withdrawals, but never seem to be mentioned as a “solution” for generous defined benefit pensions, large dividend-oriented portfolios, etc. ... charitable contributions are a fine thing, of course, but they are a separate topic, and they have no relevance whatsoever to the questions that you asked.


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## cardhu (May 26, 2009)

Maltese said:


> .... tax rate decreases for most seniors after retirement. I can see how this applies to couples because of the income splitting provisions but am confused how it applies to singles.


Your confusion results from the common, but incorrect, notion that marginal rates are how you measure the tax burden on RRSP withdrawals in retirement ... they aren’t ... RRSP withdrawals are taxed as ordinary income, not at your marginal rate ... there is a difference. 

How does a lower tax rate apply to a single person?? ... the answer is simplicity itself ... most people, including single people, stop working when they retire ... when they stop working, they stop receiving salary/wages ... thus their income drops ... when their income drops, they may or may not land in a lower bracket (lower marginal rate), but – again – it is neither the marginal rate, nor the tax bracket, that matters, in checking the efficacy of RRSP use. 

The various myths and legends about incomes increasing in retirement are just that, for the most part ... myths and legends ... if a single person was relying primarily on their own investments for retirement income (ie. no DBP), they’d need to have been a phenomenally successful investor, to generate sufficient income in retirement to face a higher tax rate on their RRSP withdrawals ... it can happen, but it is not the norm. 



andrewf said:


> taxtips.ca has marginal effective tax rates for each type of income. No excel required.


Marginal rates are interesting, but are not sufficient to make RRSP-or-not decisions ... in any event, I wouldn’t suggest relying on taxtips.ca for such data ... there are errors among their listings. Spreadsheets aren’t strictly necessary, but they are very useful, and they offer more than enough computing power to address most personal finance questions, including this one.


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## andrewf (Mar 1, 2010)

Cardhu, you seem to be neglecting the fact that dividends, once withdrawn, are taxed as income. Since sqrt is in the highest bracket and always will be (even without his employment income), that mean's he'd be trading a tax rate <20% for one closer to 45%. Yes, eventually the tax-free compounding in an RRSP would be worth more than this differential, but it would take a number of years. When that 'indifference point' occurs depends on the particular tax rates, the dividend yield and the dividend growth rate. It's not a clear choice.


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## cardhu (May 26, 2009)

No, Andrew, the advantage would be immediate, even if he started drawing the dividends from RRSP immediately... compounding has nothing to do with it ... you are neglecting the fact that the RRSP contribution is tax-deductible ... to make a $40k RRSP contribution, he need only carve $24.4k out of his non-reg portfolio ... (sqrt has referred to AB rates ... the top tax rate in AB is 39%) ... the rest he can raid from his CRA quarterly installments. 

So if he doesn’t make the contribution, that $24.4k would generate (assuming 3% div yield) $732 in dividends, on which $116 tax will be owed, for a net after-tax of $615 ... and if he does make the contribution, that $40k will generate $1200 in dividends inside the RRSP, which if withdrawn would result in a tax owing of $468, for a net after-tax of $732 ... he’d be exchanging a tax rate of ~20% for a rate of 0%. 

Granted, these are crumbs to someone with an 8-figure portfolio, and perhaps SQRT considers his time to be more valuable than the $464/hr (assuming 15 min/yr) this would gain him ... but from a tax efficiency point of view, it is a very clear choice.


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## andrewf (Mar 1, 2010)

cardhu said:


> No, Andrew, the advantage would be immediate, even if he started drawing the dividends from RRSP immediately... compounding has nothing to do with it ... you are neglecting the fact that the RRSP contribution is tax-deductible ... to make a $40k RRSP contribution, he need only carve $24.4k out of his non-reg portfolio ... (sqrt has referred to AB rates ... the top tax rate in AB is 39%) ... the rest he can raid from his CRA quarterly installments.
> 
> So if he doesn’t make the contribution, that $24.4k would generate (assuming 3% div yield) $732 in dividends, on which $116 tax will be owed, for a net after-tax of $615 ... and if he does make the contribution, that $40k will generate $1200 in dividends inside the RRSP, which if withdrawn would result in a tax owing of $468, for a net after-tax of $732 ... he’d be exchanging a tax rate of ~20% for a rate of 0%.
> 
> Granted, these are crumbs to someone with an 8-figure portfolio, and perhaps SQRT considers his time to be more valuable than the $464/hr (assuming 15 min/yr) this would gain him ... but from a tax efficiency point of view, it is a very clear choice.


Ah, I think you're right. My apologies. I forgot that you essentially borrow the tax you paid from the government, interest-free, for the duration the money is in the RRSP. It's this 'leverage' that makes the RRSP contribution more advantageous. Capital gains on a long-term investment is still better taxed outside RRSP than within.


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## cardhu (May 26, 2009)

andrewf said:


> Capital gains on a long-term investment is still better taxed outside RRSP than within.


Well, the same ‘leverage’ effect works for cap gains as for dividends ... when the tax rate on withdrawal is the same as the tax rate on contribution, *ALL *forms of investment return earned within the RRSP are effectively taxed at 0% ... capital gains in a non-reg account can’t come close to 0% tax, no matter how long the holding period ... 

No, the *ONLY* way that either capital gains or dividends would fare better in a non-reg account than in an RRSP is if the tax rate on withdrawal were substantially higher than the tax rate on contribution ... not just a little bit higher, mind you, but substantially higher ... SQRT is already in the highest tax bracket that exists in AB, and there is no possibility that his RRSP withdrawals would result in any program clawbacks, so the only potential fly in the RRSP ointment, for someone in SQRT’s position, would be future income tax hikes ... that can happen, obviously, but the question is how high are they likely to go? ... and how soon? ... the RRSP can overcome a small rise in rates over the short term and the longer the holding time, the greater the tax hike it can overcome ... some of the variables that affect the crossover are: 

•	length of holding ... the longer the holding time, the greater the tax hike would have to be, to negate the RRSP advantage.
•	rate of return ... the greater the return, the greater the future tax hike would have to be, to negate the RRSP advantage.
•	components of return ... the greater the proportion of dividends in the overall return, the greater the future tax hike would have to be, to negate the RRSP advantage. 
•	timing of tax hike ... the later the tax hike occurs, greater the future tax hike would have to be, to negate the RRSP advantage. 
•	disparity between marginal rates for dividend/income ... the narrower the disparity, the greater the future tax hike would have to be, to negate the RRSP advantage. 

There are uncertainties, of course ... there always are ... but if the magnitude of the change required to derail any particular approach is so great that it is difficult to imagine it happening in our lifetime, then the probabilities are pretty solidly in favour of that approach.


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## Square Root (Jan 30, 2010)

Thanks Cardhu. Excellent series of posts. I agree with your analysis. Created a spreadsheet this AM that compared 2 cases: 1)Contribute $40K to RSP buying an equity paying 4% which I would DRIP. Get 39% back as tax refund next year. Assume equity appreciates by 4% on top of the dividend. When I turn 71 (11 years) sell RSP paying tax at the marginal rate of 39% 2) Buy $40k of same equity outside RSP, also DRIP'ed. Pay 19% tax on DRIP'ed shares as I go. In 11 years sell equity position paying cap gains tax on sale (difficult to model the ACB because of DRIP'ing but not impossible). Comparing NPV's of both streams (@3%) the RSP is better by about $9k. Although not terribly significant to me, I would say still worth it. I guess I should have done this analysis first myself instead of asking the board but I really appreciate the thoughtful responses. Especially the correct one


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## kcowan (Jul 1, 2010)

Yes there is no substitute for rational analysis to decide amongst various viable choices. Congratulations!


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## humble_pie (Jun 7, 2009)

i for one don't agree with this model, and it puzzles me. The way i see it, taking the rrsp route will cost this taxpayer roughly more than 8,000.

1) the rrsp route. Taxpayer injects 40k & saves 15,600 in taxes up front (40k x 39%.) Taxpayer's model assumed 4% cap gain per annum - a gain that seems somewhat on the high side if one intends to include loss years - that will produce est 20,000 in gains after 11 years. Stk pays est 4% dividend, or 1,600 per annum, dripped, so holding also increases by est 20,000 attributable to dividend payouts over 11 years. After 11 years, when taxpayer reaches age 71, holding is worth est 80,000.

taxpayer then withdraws entire holding, paying 31,200 in taxes @ 39%. Less the 15,600 in taxes avoided up front, the total tax burden using the rrsp approach becomes an estimated (31,200-15,600), or 15,600.

2) held in outright ownership. Taxpayer receives 1,600 per annum in eligible dividends & pays tax @ 19%, or $304 per annum, or 3,344 over 11 years. At age 71 taxpayer disposes of holding, paying tax on 1/2 of his capital gain of 20k. Tax on cap gain = 10,000 x 39%, or 3,900. Total tax burden = 3,344 + 3,900, or an estimated 7,244.

the penalty for taking the rrsp route looks to be roughly 8,300.

there are countless modifications that should be made to crude models like spreadsheets. A spreadsheet cannot handle the full monty. Why would we believe, for example, that eligible dividend tax credits will even continue to exist, let alone remain at a fixed level. And why would we assume that the dividends for this particular stock will continue to be paid. And why would we assume such a healthy capital gain, or assume that capital gains tax itself would not be either increased or, alternatively, abolished.

the distillery is fine but perhaps the spirit is weak.


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## kcowan (Jul 1, 2010)

humble_pie said:


> ...Why would we believe, for example, that eligible dividend tax credits will even continue to exist, let alone remain at a fixed level. ...


The bonus tax treatment of dividends is systematically being reduced to compensate for lowering corporate taxes. The net effect is neutral from a tax perspective but will the corporation increase their dividends when this tax treatment benefits them?


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## Square Root (Jan 30, 2010)

In the case of the RSP: T1 $-40k : T2 +$15.6K :T11 +$56.9 = NPV of about $28k. In the case of non registered: Don't forget I have to inject $40k to buy the shares outside the RSP too so T1$-$40k: T2...T11 tax on dividends (start at $304 & go up from there) Also at T11 sell shares for about $93k but only have to pay about $5k in cap gains tax @19.5% Don't forget the ACB goes up as I pay taxes on divs. NPV about $19k. So RSP ahead by about $9k. Not sure what the comment on the distillery means? Agree that spreadsheets aren't always perfect but what is? 4% cap gain every year may be high but if I use 2% results are the same.


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## Square Root (Jan 30, 2010)

humble_pie said:


> i for one don't agree with this model, and it puzzles me. The way i see it, taking the rrsp route will cost this taxpayer roughly more than 8,000.
> 
> 1) the rrsp route. Taxpayer injects 40k & saves 15,600 in taxes up front (40k x 39%.) Taxpayer's model assumed 4% cap gain per annum - a gain that seems somewhat on the high side if one intends to include loss years - that will produce est 20,000 in gains after 11 years. Stk pays est 4% dividend, or 1,600 per annum, dripped, so holding also increases by est 20,000 attributable to dividend payouts over 11 years. After 11 years, when taxpayer reaches age 71, holding is worth est 80,000.
> 
> ...


I think your biggest problem is not taking into account the time value of the $15,600 RSP tax refund.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> ... when the tax rate on withdrawal is the same as the tax rate on contribution, *ALL *forms of investment return earned within the RRSP are effectively taxed at 0% ... capital gains in a non-reg account can’t come close to 0% tax, no matter how long the holding period ...


This statement is manifestly incorrect. I am shocked that no one else has questioned it. RRSPs allow for compounding tax-deferred, not tax-free or even “effectively tax-free.” For example, let’s assume (as you’ve stated) that tax rates (marginal or average) are the same at contribution as on withdrawal. Let’s also assume that the marginal tax rate is 40%, and the investor receives a one-time windfall of $10,000. That $10,000 invested in an RRSP gives a $4000 deduction while $10,000 invested in a non-registered account does not. 

So what happens to the $10,000 in RRSP vs. non-registered accounts? In a non-registered account, assuming capital gains only and a constant return of 8% per year for 10 years, that $10,000 will grow to about $21,589.25. The capital gain is $11,589.25 ($21,589.25 - $10,000), half of which ($5794.63) is added to the investor’s income and taxed at 40% for a tax payable of $2,317.85. After paying tax, the non-registered investor has $19,271.40.

In the RRSP, that $10,000, also compounding at 8% per year for 10 years, will grow to $21,589.25. However, upon withdrawal, the *entire amount* (including invested capital) will be added to the investor’s income and taxed like interest. After paying 40% tax on the entire amount, the investor has $12,953.55 – significantly less than the non-registered account. Thus, the RRSP does not “magically” reduce the investor’s tax to zero – quite the contrary.

However, the key point is: what did the investor do with the original $4,000 deduction? Most analyses promoting the value of the RRSP assume that the investor will re-invest the deduction in an RRSP. That’s a bad assumption. I’ve seen people spend tax refunds on vacations and boats. Other times, I’ve seen them waste the refund! 

Let’s assume that our investor did re-invest the $4,000 in a RRSP the next year. That $4,000, assuming a growth rate of 8% per year for 9 years, will grow to $7,996.02 or $4797.61 after withdrawal at a 40% tax rate for a total of $17,751.16 ($4797.61 + $12,953.55) – less than the non-registered account. Please note that this calculation assumes that the investor does not re-invest subsequent deductions in a RRSP. 

What if the investor does re-invest all future deductions into a RRSP? The $4,000, if invested in year 2, will yield a $1,600 deduction in year 3 and so on. That $1,600, if invested in a RRSP at 8% per year for 8 years, will grow to $2,961.49 or, after tax, $1,776.89. The $1,600, contributed to a RRSP next year, will also give a deduction of $640, which re-invested at 8% per year for 7 years will lead to $1,096.85 pre-tax ($658.11 post-tax). If all subsequent deductions are re-invested the next year at 8% in a RRSP then, upon withdrawal, the investor has ~ $20,573 – more than the non-registered account.

What if the $4,000 from the initial RRSP deduction is invested in a TFSA in year 2? Let’s assume that the $4,000 grows at 8% per year for 9 years. Again it grows to $7,996.02. However, upon withdrawal, the tax payable is zero. Therefore, after tax, the investor has $7,996.02 + $12,953.55 = $20,949.57 – more than the non-registered account alone or the RRSP alone.

However, we should remember that the RRSP (or RRIF) has some advantages that non-registered investments don’t. After age 65, withdrawals are eligible for pension credits and income-splitting, 2 separate methods of reducing one’s average tax rate and, thus, tax payable. Income-splitting is especially advantageous when a high-earning spouse is able to receive a tax deduction at a high marginal rate then pay tax at a lower marginal (or average) tax rate.

Cardhu, I agree with your conclusion but disagree completely with your rationale. The RRSP does not reduce the “effective” tax rate of investment to zero. The RRSP pulls ahead—marginally—because it uses pre-tax dollars (i.e. it has more dollars invested than the non-registered account). Also, withdrawals from the RRSP are eligible for pension credits and income-splitting while the same from a non-registered account are not. Please note that I assumed a constant 8% return—likely an invalid assumption given recent events! In case of capital losses, the non-registered account may be more advantageous than the RRSP.


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## MoneyGal (Apr 24, 2009)

Once again I request a "thumbs up" emoticon.


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## Square Root (Jan 30, 2010)

OK But has anyone else tried to model the original question and done an NPV on the cash flows. I have and unless I screwed up somewhere (always a good possibility) - The RSP wins out. Let's not quibble about the finer points of language. I think we all know the mechanics of how RSP's work. Do we agree that i should top my RSP up?


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## MoneyGal (Apr 24, 2009)

I can do an NPV calculation, but likely not this weekend. What discount factor do you want to use? What return assumption do you want to use?


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## Larry6417 (Jan 27, 2010)

Square Root said:


> I have and unless I screwed up somewhere (always a good possibility) - The RSP wins out. Let's not quibble about the finer points of language. I think we all know the mechanics of how RSP's work.


Actually, "we'" don't all know how RRSPs work. That was the point of my post. I agree with what Humble said many posts ago: given your financial circumstances, obsessing over 40K is making you a dull boy. You haven't said if you have a TFSA. If not, then contributing to one (and your spouse's) would be perfectly reasonable.

I get the sense that your looking for a magic spreadsheet to tell you with absolute certainty which choice is better. What Moneygal and Humble have tried telling you is that the answer you get depends on the assumptions you build into your model. Most models touting the RRSP assume that the refund generated is re-invested in the RRSP. For you that's a bad assumption because *you're retired* i.e. no more employment income.

Estate planning issues may actually be more important to you than what you've already mentioned. For example, if you invest in a non-registered account and you pre-decease your spouse, your non-registered assets undergo a deemed disposition. With a RRSP, your assets can pass directly to your spouse without a deemed disposition. 

P.S. Spend more time enjoying your money and less time obsessing over a small (for you) amount!


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## Larry6417 (Jan 27, 2010)

*Quick, crude calculations*

Let’s assume that you’re comparing contributing $40,000 to a RRSP + the deduction it generates at a marginal rate of 39% ($15,600) to $40,000 (after tax) contributed to a non-registered account. In essence, we are comparing $55,600 invested pre-tax vs. $40,000 invested after-tax. Within a RRSP, $40,000 growing at 8% per year for 11 years (capital gains only) will grow to $93,265.56. In a non-registered account, the amount reaches the same level.

After 11 years, let’s assume that the securities are disposed of at the same marginal rate. In a non-registered account, the capital gain is $53,265.56 ($93,265.56 - $40,000), half of which is added to your income and taxed at 39% for tax owing of $10,386.78. After tax, your non-registered account has ~ $82,879. The same amount withdrawn from a RRSP generates tax of $93,265.56 X 0.39 = $36,373.57, leaving (after tax) ~$56,892.

What about the $15,600 deduction generated by the RRSP contribution? Because you’re retired, you can’t re-contribute this amount to a RRSP. Therefore, I’ll assume that you invest the $15,600 in a non-registered account at 8% (capital gains only) per year for 10 years, which leads to $33,679.23 total for a capital gain of $18,079.23, half of which is added to your income and taxed at a marginal rate of 39% which leads to tax payable of $3,525.45. Thus, the $15,600 invested in a non-registered account leads to $30,153.78 after tax.

Now let’s compare the RRSP vs. non-registered. The non-registered investment leads to $82,879 while the RRSP yields $56,892 + $30,153.78 = $87,045.78 ($4,000 more than the non-registered account alone).

Please note that I did not account for dividends, nor did I factor in capital losses. Capital losses, obviously, would skew the results towards the non-registered account. Estate planning issues e.g. the ability to roll over RRSP to your spouse without triggering a deemed disposition at death favours the RRSP.


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## Square Root (Jan 30, 2010)

MoneyGal said:


> I can do an NPV calculation, but likely not this weekend. What discount factor do you want to use? What return assumption do you want to use?


See my post- 3% discount 4% dividend yield 4% capital appreciation. Alberta tax rates- Reg income 39% dividends 19% Thanks.


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## steve41 (Apr 18, 2009)

OK.... I haven't done one of these for a while....

I picked these numbers (salary, rates, ages etc) directly out of the blue. I have no idea how representative the numbers are, but here is what I picked.

-30 year old
-45K gross salary increasing at 3%
-retiring at 60
-full cpp&oas
-rate of growth 5%, inflation 2%
-province... BC
-existing RRSP $10,000
-dying broke at age 95.

Scenario 1. Maxing RRSP.... resulting 'smooth spending' ATI $33,143

Scenario 2. Instead of saving to the RRSP, direct all savings to TFSA. This results in a smooth ATI of $33,139.

This assumes current taxation rules hold going forward... indexed brackets, etc.

The only inaccuracy is that the $5000 TFSA limit is violated in the future, but for this study it really doesn't matter. The RRSP in this case is better (just) than tax neutral.

As mentioned, the time value of the tax refund (near term) vs tax hit (far term) is a major influence on these numbers as is the effect of the tax bracket indexing.

RRSP strategy
TFSA strategy


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## Square Root (Jan 30, 2010)

I don't think i'm obsessing about this. It's just that there has been such divergent views and I've gotten a little caught up in the dialogue. TSFA's maxed out. I can assure you that I am enjoying life. Actually don't intend to do anything with the RSP-it's just an intellectual exercise or puzzle and I like these. Also I understand that there will not be a deemed disposition on death for non registered assets (these are held jointly) as long as assets go to spouse.


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## MoneyGal (Apr 24, 2009)

I don't think you are obsessing over this either! I think this is an interesting issue, that it is good to be curious about these issues, and also that there are a lot of factors, lots of different points of view, and hence lots of room for discussion. 

I dislike financial forums when they simply revert to "I think you should do this" without actually solving the problem presented. It's actually slightly frustrating to me that I have not had time to build a model to explore this. (And I might as well be honest with myself here: I am participating in an extended family reunion this weekend and upcoming week; I am not going to have the time.)

I also think that taking apart this problem and demonstrating multiple paths or approaches to solving it is a good exercise just to hash through how to think about financial questions. We all seem to agree on this forum that greater financial literacy is warranted in the population at large; surely working through financial questions systematically provides a concrete example of how to increase financial literacy!

All that said, I am hoping that Steve41 will model the problem given SquareRoot's parameters. I got the "essentially-no-difference" outcome S41 provided earlier; I am wondering what, if anything, changes given an extreme case.


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## Larry6417 (Jan 27, 2010)

Square Root said:


> I don't think i'm obsessing about this. It's just that there has been such divergent views and I've gotten a little caught up in the dialogue. TSFA's maxed out. I can assure you that I am enjoying life. Actually don't intend to do anything with the RSP-it's just an intellectual exercise or puzzle and I like these. Also I understand that there will not be a deemed disposition on death for non registered assets (these are held jointly) as long as assets go to spouse.


I'm glad you're enjoying life, Square Root.  I'm curious about how non-registered securities are held jointly. Presumably, you were the higher-earning spouse. Wouldn't this violate attribution rules? Do you mean that you've arranged for a testamentary spousal trust?


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## Larry6417 (Jan 27, 2010)

steve41 said:


> OK.... I haven't done one of these for a while....
> 
> I picked these numbers (salary, rates, ages etc) directly out of the blue. I have no idea how representative the numbers are, but here is what I picked.
> 
> ...


Thanks for running this scenario, Steve. I'm curious about something. This scenario compares $5,000 after-tax (TFSA) to maximum RRSP contributions, which would be $45,000 X 0.18 = $8,100. In BC, $45 K puts one at a combined federal + provincial tax rate of 29.7%, so $5,000 after tax is equivalent to ~ $7,112 pre-tax (less than the full RRSP contribution). Doesn't this skew the scenario towards the RRSP?


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## Square Root (Jan 30, 2010)

Larry6417 said:


> I'm glad you're enjoying life, Square Root.  I'm curious about how non-registered securities are held jointly. Presumably, you were the higher-earning spouse. Wouldn't this violate attribution rules? Do you mean that you've arranged for a testamentary spousal trust?


I'm glad your glad Larry Just a joint brokerage account. I attibute all income to myself as the sole copntributor to the account. Doesn't make much difference because pension income split plus the money she invested while working gets her income pretty well up to max bracket anyway.


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## steve41 (Apr 18, 2009)

LARRY said: _"Thanks for running this scenario, Steve. I'm curious about something. This scenario compares $5,000 after-tax (TFSA) to maximum RRSP contributions, which would be $45,000 X 0.18 = $8,100. In BC, $45 K puts one at a combined federal + provincial tax rate of 29.7%, so $5,000 after tax is equivalent to ~ $7,112 pre-tax (less than the full RRSP contribution). Doesn't this skew the scenario towards the RRSP? "_The essence of the RRIFmetic cash flow model is to examine not tax, but after tax income. The amount we get to spend on beer and groceries is the main financial planning determination.

When I picked that scenario, you'll notice that the subject's salary was projected to grow at 3% whereas inflation was only 2%. This is a more realistic projection. When you set those parameters, and at the same time, force out a constant ATI (smooth spending level) you find that early on the RRSP won't get maximized (at that salary level, anyway), but as time goes by, he is able to eventually max his rrsp and in order to conform with the ATI level, he has to save additionally outside his RRSP... in this case to his TFSA. If his salary had been set at 2%, this wouldn't have happened.


MG said: _"All that said, I am hoping that Steve41 will model the problem given SquareRoot's parameters. I got the "essentially-no-difference" outcome S41 provided earlier; I am wondering what, if anything, changes given an extreme case."_

I tried that, unfortunately, the program balks at running a 'die-broke at 95' projection for someone with a humongous nest egg like SQRT's. Plus, I don't have SQRT's actual numbers. If I could run it specifying an estate value such as .... 'a net to estate of $10 million at 95' rather than 'die broke at 95' I would give it a go.


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## humble_pie (Jun 7, 2009)

larry your message of 17 july at 11:15 am is certainly illuminating. It's the best explanation of various strategies - non-registered, rsp, combo rsp + tfsa - in this thread, and the fact that you used an example that is more universal than square root's unusual case produces results that are more applicable across the board.

one notices that your conclusions are ambiguous, as i think they should be. In the case of losses in registered plans, for example, you mention that non-registered plans would function better. On the other hand, there are advantages to rrsps in addition to tax savings and the time value of compounding savings, such as income splitting and pension credits.

i found your paragraphs 5 & 6 hard to follow, because the example we were following - square root's - is that of a retired person who is making one last contribution from earned income to his rrsp. So i don't quite see how this retired person can continue to contribute every year thereafter.

there is also a significant ultimate taxation aspect that nobody is treating in this thread. This is the near-certainty of the 2011 re-imposition of US estate taxes including taxation of large foreign non-resident estates with US holdings. This could be important in square root's case, as it would be unlikely that he would hold all 10 million dollars in canadian assets only.
all of a deceased's rrsp will be included in the global inventory of estate assets to be taxed by washington and spousal rollovers won't be recognized. The top tax bracket for US estates scheduled to be restored in january 2011 is 55%. This is more serious than alberta's maximum 39%.

turning back to canada, and assuming no US investments, in a more standard example a lifetime investor could end up with an rrsp worth 500,000 or more. So i find myself wondering whether such an investor's paltry 2k pension credits will matter much when he eventually becomes forced to withdraw from that plan in chunks of 40k, 50k, 70k and 100k.

thank you for your trouble in explaining your points so carefully, larry. This has been a useful exercise. It has brought home to me that, even if the outcomes mean six-of-one and half-a-dozen-of-the-other to me taxwise, nevertheless i have a powerful outlaw's bias against the fully taxable nature of all future forced withdrawals from an rrsp. A large part of my investment income is capital gains. I'd rather pay modestly as i go if it means i won't be saddled with draconian tax rules in the future. What's more, i for one really enjoy making charitable contributions, and this thread has caused me to think again about what more i could do in this regard, something that might make an iota or two of difference to a needy planet.


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## cardhu (May 26, 2009)

You’re welcome, SquareRoot … yes, unfortunately incorrect answers often outnumber correct answers in online forums*, as this thread continues to demonstrate …

A couple of observations about your calc, if I may … 

When you compare $40k RRSP to $40k nonreg, you are comparing apples and oranges … mixing different units of measurement … the RRSP contribution is measured in before-tax dollars and the non-reg investment in after-tax dollars … you would never suggest that 40 meters is equal to 40 feet, and the same principle applies here … your question _“is it worthwhile using the $40k rrsp contribution room”_ is a very simple question, and although it is possible to get to a valid answer the long way by starting with unequal amounts and attempting to correct for that along the way, the analysis invariably falls apart because it is more convoluted, it introduces unnecessary biases, and it is more susceptible to errors, especially errors of logic as some of the recent posts have shown. … the direct apples to apples comparison would be a $40,000 RRSP contribution versus a $24,400 investment in non-reg … those are equivalent amounts, stated using different units of measurement.

Why would you wait until “next year” to account for your tax break? … indeed, why would you refer to it as a “refund”? … with such a vast sum of dividend income flowing in, surely you must be obliged to make quarterly installment payments to CRA … if so, then your tax break is effectively immediate … the very minute that you make the RRSP contribution, your obligation to CRA is reduced by the applicable amount … $15,600 in this case … your out-of-pocket cost, for that $40k contribution, as measured in after-tax dollars, is only $24.4k. 

I’m not quite sure how you’re compensating for the “refund” once you receive it, and I can’t replicate your results … I had modeled your case already before posting last week, although I used different return assumptions ... using your input assumptions, I show the RRSP ahead by $7,295 in nominal dollars after 11 years, which equates to an NPV of $5270 ... I hadn’t done a cash-flow analysis until now, but it produces the same result, with the same input assumptions (as it should, of course). 

*the views expressed in this post are not directed specifically toward CanadianMoneyForum, its owners, or its members … past performance is no guarantee of future results … contest void where prohibited by law.


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## Larry6417 (Jan 27, 2010)

humble_pie said:


> larry your message of 17 july at 11:15 am is certainly illuminating. It's the best explanation of various strategies - non-registered, rsp, combo rsp + tfsa - in this thread, and the fact that you used an example that is more universal than square root's unusual case produces results that are more applicable across the board.
> 
> one notices that your conclusions are ambiguous, as i think they should be. In the case of losses in registered plans, for example, you mention that non-registered plans would function better. On the other hand, there are advantages to rrsps in addition to tax savings and the time value of compounding savings, such as income splitting and pension credits.
> 
> ...


Thanks for your comments, Harold. My apologies for my lack of clarity. I was using a theoretical example (not related to the OP) for illustration in which an investor receives a one-time lump sum of $10,000. That $10,000 is invested in a RRSP at 8% for 10 years. That $10,000 contribution would trigger a $4,000 deduction the next year. That $4,000 is reinvested in a RRSP next year at 8% for 9 years. The $4,000 contribution would trigger a $1,600 deduction, which is re-invested at 8% for 8 years, and so on. I’m assuming that the investor’s marginal rate is 40%, that the contribution earns a deduction at the full marginal rate of 40% i.e. the investor isn’t straddling a tax bracket, the investor re-contributes all of the subsequent refunds, and the rate of return is a constant 8% capital gain only (we wish!). As you can see there are a lot of “ifs.” Basically, I calculated the future values of the initial $10,000 + the future values of all subsequent refunds at 10 years and then calculated the after-tax value when withdrawn at a marginal tax rate of 40%. Only by assuming all of the above does the RRSP pull ahead – marginally. It’s likely after year 2 or 3 that the tax refund would get mixed in with the investor’s general revenue and not necessarily be re-invested. 

RRSPs are marginal savings vehicles, but I still like them for different reasons. RRSP withdrawals (after 65) are eligible for pension credits and income splitting. Also, most (but not all) people are in a lower tax bracket at retirement. Also, RRSPs are creditor-proof. I accept the marginal savings value in exchange for the insurance i.e. saving my "***"-ets. But I also invest significant amounts outside my RRSP.


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## Larry6417 (Jan 27, 2010)

*the root of the problem*



cardhu said:


> You’re welcome, SquareRoot … yes, unfortunately incorrect answers often outnumber correct answers in online forums*, as this thread continues to demonstrate …
> 
> 
> … the direct apples to apples comparison would be a $40,000 RRSP contribution versus a $24,400 investment in non-reg … those are equivalent amounts, stated using your out-of-pocket cost, for that $40k contribution, as measured in after-tax dollars, is only $24.4k.
> ...


People are comparing the wrong pre and after tax amounts. Let’s review the assumptions made: $40,000 pre-tax is equivalent to $24,400 after payment of 39% marginal tax. That’s true. Some have then gone on to compare $24,400 invested in a non-registered account to $40,000 invested in a RRSP. That’s not correct. I’ll explain why.

To get $40,000 in a RRSP you need to contribute a certain amount – we’ll call it “x” – and then take the tax deduction received from contributing x (we’ll call that 0.39(x)) and re-contribute that amount such that x + 0.39(x) = $40,000. I agree that the investor doesn’t have to wait until next year to contribute the funds generated by the initial contribution. So:

$40,000 RRSP contribution = x + 0.39(x) 

Therefore (it’s been a while since I’ve done algebra!):

X = $40,000/(1 + 0.39) = $28,776.98 not $24,400

To convince yourselves that this is true, you can do a few things.

$24,400 contributed to a RRSP will trigger a refund (at a 39% marginal rate) of $9516. $24,400 + $9516 = $33,916 not $40,000 

$28,776.98 contributed to a RRSP will trigger a deduction of $11,223.02, which, when added to $28,776.98 = $40,000

That’s an “apples-to-apples” comparison. If you calculate the future, after-tax values of the above amounts (assuming capital gains), you’ll find that the RRSP has marginal savings value.


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## cardhu (May 26, 2009)

Humble … the calc you described upthread is wrong ... that’s not a matter of agreeing or disagreeing … its just wrong, plain and simple ... as I explained upthread, the ONLY way that either capital gains or dividends would fare better in a non-reg account than in an RRSP is if the tax rate on withdrawal were substantially higher than the tax rate on contribution … there is actually another way, described below, which is so highly unlikely to occur that I discounted it altogether … since you did not hike rates in your example, your result is therefore mathematically impossible. 



humble said:


> taxpayer then withdraws entire holding, paying 31,200 in taxes @ 39%. Less the 15,600 in taxes avoided up front, the total tax burden using the rrsp approach becomes an estimated (31,200-15,600), or 15,600.


Its been a long time since I’ve seen anyone make this particular mistake … you presume that the tax break from 2010 gets stuffed into a shoebox, in cash, not to have the dust blown off it until 2022, when the taxes finally come due … an irrational approach, and in the long history of RRSPs I’m quite sure that no one has actually done such a thing ... as SQRT noted, you erred by failing to take into account the time value of that money, but that was only part of the problem. 

A valid comparison would put $40,000 invested in an RRSP against its corresponding equivalent in a non-reg account ... with a 39% tax rate on contribution, that amount would be $24,400 … not only does this account for the tax break in a much simpler manner (therefore the comparison is not as prone to being polluted by illogic), but it also reflects what actually happens in real life. 

You say you don’t like spreadsheets, but what would you prefer as an alternative? Tea leaves? Dice? ... Spreadsheets are just fine for such analysis and your objections to them are irrational ... yes, you must make assumptions in order to make a projection ... but with a spreadsheet, you can see the effect of changes in those assumptions, by changing the assumptions ... can you do the same with tea leaves? 

Tax treatment of dividends or cap gains may very well change over the next 11 years (or it might not) ... for the purpose of this exercise, though, the questions you have to ask yourself are ...

1.	What magnitude of change is within the realm of possibility? ... and
2.	Would such a change alter the conclusion?

In the case of SQRT’s specific question, as long as tax rates on contribution/withdrawal are held equal, the tax treatment for dividends or cap gains can meander all over the map, but until the gov’t starts paying him to receiving dividends and generate gains (ie. until they introduce negative marginal tax rates for these forms of income, for those in the highest tax bracket) the conclusion that RRSP outperforms will not change ... barring such a drastic change to dividend/cap gain taxation, the ONLY way that either would fare better in a non-reg account than in an RRSP is if the tax rate on withdrawal were substantially higher than the tax rate on contribution. 

The change in the US estate tax laws may very well impact SQRT’s case, if your description of them is accurate ... but it has no bearing on his very simple and straightforward question ... “should he utilize the remaining RRSP contribution room he has available to him?”


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## cardhu (May 26, 2009)

Larry … the model I described is correct, which may be why others haven’t questioned it ... the RRSP does indeed result in an effective tax rate of 0%, on all forms of investment income, when the tax rate on withdrawal is the same as the tax rate on contribution ... you have posted quite a collection of misinterpretations, factual errors, irrelevant distractions, misconceptions, and myths, but nothing that refutes that fundamental character of RRSP. 



Larry6417 said:


> Let’s assume that you’re comparing contributing $40,000 to a RRSP + the deduction it generates at a marginal rate of 39% ($15,600) to $40,000 (after tax) contributed to a non-registered account.


You’ve already recanted on this mistake, but for completeness lets address it anyway ... you begin by investing unequal amounts ... $40k in before tax dollars is not the same amount as $40k in after-tax dollars ... even so, that would be fine if you were to correctly compensate for the fact that the RRSP contribution is tax-deductible, but you don’t ... your efforts to account for the tax effect are irrational and illogical, and your conclusions are therefore suspect. 



> _Most analyses promoting the value of the RRSP assume that the investor will re-invest the deduction in an RRSP._


Not mine ... I make no assumption whatsoever about what the investor may or may not do with the tax break ... if that’s what you think you see in my posts, then you simply didn’t understand what was written ... (déjà vu) ... from what I’ve seen, most analyses promoting the value of RRSPs assume that the RRSP contribution is tax deductible, and generally, I think that might be more accurately described as a “fact” than an assumption, although there is the possibility of overcontributions that are not eligible for deduction (I’m ignoring that possibility, as outside the bounds of this discussion). 

One of the common criticisms about RRSPs is that _“people might not reinvest the tax break”_ ... that is a serious lapse of logic ... it makes no difference whatsoever (to the question of RRSP efficacy) whether the tax break is reinvested or spent on a luxury vacation ... EVERY dollar contributed to RRSP has an associated cost, measured in after tax dollars, which does not change regardless of whether or not the tax break is reinvested. 

When you begin an analysis with unequal amounts, and make no effort to correct for that (ie. you assume the tax break is not reinvested), then you are no longer comparing RRSP to non-reg ... you are now comparing the investment of *“more money”* to an investment of *“less money”* ... and it should come as no particular surprise that investing “more money” often (though not always) generates a larger nest egg than investing “less money” ... but if you presume that the type of account has anything to do with the result, then you are hallucinating a causal relationship that doesn’t actually exist ... it is absurd reasoning. 



> _What if the investor does re-invest all future deductions into a RRSP? _


Ahhh, yes, the old _“refund on a refund on a refund on a refund on a refund ”_ trap ... that’s another error you don’t see very often, and it takes the illogic to a whole new level ... it does at least, eventually arrive at the correct ratio between before-tax dollars and after-tax dollars but it simply does not take multiple years to realize the benefit of the tax break on an RRSP contribution ... most of the population has the opportunity to realize their tax break immediately, or very close to immediately ... to wait 8 years for the last bits to dribble in would represent incompetence on a staggering scale. 



> X_ = $40,000/(1 + 0.39) = $28,776.98 not $24,400_


No ... the correct comparison is $40,000 to $24,400 ... you continue to stumble over this irrational insistence that “the refund must be reinvested” in order for the RRSP to benefit ... that premise is, uh, manifestly incorrect ... it doesn’t matter what the investor does with that the tax break ... the cost of a $40k RRSP contribution, as measured in after-tax dollars, is $24,400 ... THAT is the amount that comes out of your grocery budget in order to make that contribution. 



> _That’s an “apples-to-apples” comparison. If you calculate the future, after-tax values of the above amounts (assuming capital gains), you’ll find that the RRSP has marginal savings value. _


Nope, still apples & oranges ... so of course when you start with sketchy assumptions, you’ll produce sketchy results ... the RRSP is, in fact, an excellent savings vehicle, for most people ... and the beauty of it is it doesn’t discriminate ... it works equally well for those who understand its workings, as those who don’t. 



> _What if the $4,000 from the initial RRSP deduction is invested in a TFSA in year 2? _


Irrelevant distraction ... TFSA has no bearing on the question at hand. 



> _In case of capital losses, the non-registered account may be more advantageous than the RRSP._


Myth … nobody wants to sustain losses, but if you must have some losing positions among your portfolio, much better to have them inside the RRSP than in non-reg ... 



> _Estate planning issues ... if you invest in a non-registered account and you pre-decease your spouse, your non-registered assets undergo a deemed disposition. _


False ... they roll over to spouse’s ownership with no tax effect. 



Larry said:


> Actually, "we'" don't all know how RRSPs work.


Congratulations, Larry ... acknowledging you have a problem is the first step.


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## humble_pie (Jun 7, 2009)

mein führer.


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## steve41 (Apr 18, 2009)

This thread and the "anyone not using" thread should be bookmarked by everyone here and made "sticky" by the management of this forum. The "RRSP is Evil" crowd should be made to commit this to memory. 

Cardhu somewhere said "The RRSP has a zero tax rate." Bingo.


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## andrewf (Mar 1, 2010)

humble_pie said:


> mein führer.


I don't think that's necessary or appropriate.


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## humble_pie (Jun 7, 2009)

ja mein kommandant.


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## Larry6417 (Jan 27, 2010)

Quotes taken out of context, facts misrepresented, arguments misunderstood. Help me! Help me! I’ve been “Cardhu-ed.”



cardhu said:


> Larry … the model I described is correct, which may be why others haven’t questioned it ... the RRSP does indeed result in an effective tax rate of 0%, on all forms of investment income, when the tax rate on withdrawal is the same as the tax rate on contribution


Will the conjoined twin fairy magically reduce the tax to zero?



cardhu said:


> $40k in before tax dollars is not the same amount as $40k in after-tax dollars ... even so, that would be fine if you were to correctly compensate for the fact that the RRSP contribution is tax-deductible, but you don’t


Actually, I did. I assumed that the tax refund of $15,600 was invested. You really should read posts more carefully. 



cardhu said:


> Not mine ... I make no assumption whatsoever about what the investor may or may not do with the tax break ... if that’s what you think you see in my posts, then you simply didn’t understand what was written ...


You clearly don't even understand your own arguments, never mind anyone else's. When you say that a $40,000 RRSP investment is equivalent to $24,400 (which is wrong BTW) you are assuming that the refund generated by a RRSP contribution is invested within the RRSP.

I’ll explain thoroughly (for the whole forum) and slowly (just for Cardhu, not the whole forum). Cardhu has stated that a $40,000 contribution costs only $24,400. That’s not correct for the reasons stated in my prior post. Cardhu assumes that the refund generated by a contribution of $24,400 will be re-invested within a RRSP. However, a contribution of $24,400 does not generate a refund of $15,600; it generates a refund (at a 39% marginal tax rate) of $9516, so that a contribution of $24,400 + the refund it generates ($9516) results in $33,916 invested in the RRSP, not $40,000. It’s easy enough for anyone to calculate these results and verify. Cardhu, you rely on demonstrably illogical assertions, myths, and misconceptions. I, on the other hand, rely on *math and logic.*






cardhu said:


> One of the common criticisms about RRSPs is that _“people might not reinvest the tax break”_ ... that is a serious lapse of logic ... it makes no difference whatsoever


That's clearly nonsense. If one invests $40,000 within a RRSP, one gets a $40,000 investment + the refund it generates ($15,600 at a 39% marginal rate). $40,000 invested in a non-registered account does not come with a tax deduction. Let's imagine that the OP, for whatever reason, decides to waste his refund (say, on books titled "Tax Tips for Penury" by Cardhu) and withdraw that $40,000 from his RRSP. After paying tax on the $40,000, he's left with only $24,400. The non-registered account still has $40,000.



cardhu said:


> No ... the correct comparison is $40,000 to $24,400 ... you continue to stumble over this irrational insistence that “the refund must be reinvested” in order for the RRSP to benefit ... that premise is, uh, manifestly incorrect ... it doesn’t matter what the investor does with that the tax break ... the cost of a $40k RRSP contribution, as measured in after-tax dollars, is $24,400 ... THAT is the amount that comes out of your grocery budget in order to make that contribution.


Refer to above



cardhu said:


> Myth … nobody wants to sustain losses, but if you must have some losing positions among your portfolio, much better to have them inside the RRSP than in non-reg ...


I'm shocked that even you would think this. Well, maybe not. Outside an RRSP, capital losses can be used to reduce capital gains. Within a RRSP, there's no similar provision.




cardhu said:


> False ... they roll over to spouse’s ownership with no tax effect.


In the OP's case, he has a joint non-registered account. Otherwise he would trigger a deemed disposition. A spousal testamentary trust would also delay a deemed disposition.



cardhu said:


> Congratulations, Larry ... acknowledging you have a problem is the first step.


The true Cardhu reveals himself. The snide, illogical, drive-by idiocies on-line that we’ve all come to know..


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## steve41 (Apr 18, 2009)

For a 'save for retirement, live off the retirement capital' strategy, there is only one measure which determines whether a particular investment strategy is better than another (RRSP vs NonReg say):- the amount of money one gets to spend -after tax- on groceries, both prior to and after retirement.

Nothing else matters.... neither the size of your nest egg nor the amount of tax you pay at any point in time. For 2 plans with the same starting parameters (current savings, salary, retirement age, rate assumptions....) surely the plan which delivers the highest after tax spending (lifestyle) over the life of the plan, should be deemed to be 'best'.

When you compare the RRSP strategy with a taxfree (TFSA) alternative, the plans deliver very close to the same net income over the full length of the projection. This is why Cardhu says the RRSP delivers an effective tax rate of zero.

If, instead of a taxfree vehicle, we use a dividend or capgains taxed nonreg alternative, the RRSP performs even better.

The only exception to this rule is when the subject dies earlier than expected, however if estate is of no particular concern, then, for the 'saving for retirement' wage earner, living a smooth after tax lifestyle out to a ripe-ish old age (85-90-95) the RRSP has an effective tax rate of zero.


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## Larry6417 (Jan 27, 2010)

Steve, in a prior post, you compared a 45K earner saving within a RRSP to someone using TFSA alone. As I mentioned earlier, I'm not convinced that you can directly compare the efficacy of the RRSP vs. a TFSA because you were using different amounts invested. You said that you assumed the RRSP user maxed his RRSP later *and* used non-registered savings while the TFSA maxed out at $5000. How can the "effective" tax rate be zero if different amounts are invested?

P.S. The CD Howe institute disagrees with your analysis. The RRSP is better than the TFSA only when the tax rate in retirement is lower than upon contribution.


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## Larry6417 (Jan 27, 2010)

*scenarios*

I ran some scenarios to test some of the statements made in this thread. I don't have my financial calculator with me so I used a future value calculator at www.investopedia.com/calculator/FVCal.aspx

I encourage people to use this (or any other site) to draw their own conclusions.

I’ll assume that we’re comparing RRSP vs. non-registered savings for a period of 10 years, that 8% per year (capital gains only) is the return, that the investments are liquidated after 10 years, and the tax rate is the same at contribution as withdrawal (39%) for the RRSP.

$40,000 invested in a non-registered account at 8% per year for 10 years will grow to $86,357 for a taxable capital gain of $23,178.5 {($86,357 - $40,000)/2}. At a 39% marginal rate that yields tax of $9039.62, so the investor has $77,317.4 after tax.

Let’s compare this to a $40,000 RRSP contribution that generates a $15,600 deduction that is re-invested in the RRSP the same year. I know the OP doesn’t have anymore RRSP room. This example is for illustration only. $55,600 growing at 8% per year for 10 years becomes $120,036.23 – far larger than the non-registered account, but tax hasn’t been paid yet. $120,036.23 taxed at a marginal rate of 39% yields $46,814.13 in tax, so the investor is left with $73, 222.1: $4,000 less than the non-registered account. Therefore, the “effective tax rate” of the RRSP is greater than zero.

Let’s also test the statement that investment of the refund generated by the initial contribution “doesn’t matter.” In both cases, $40,000 grows to $86,357. In the case of the non-registered account, after tax, the investor has $77,317.4. In the case of the RRSP, the $86,357 is taxed at 39%, leaving the investor with only $52,677.8. Therefore, it very much matters what the investor does with the refund.

Let’s also test the statement that capital losses are better suffered in a RRSP rather than a non-registered account. Let’s assume that there is a 25% loss in the first year with subsequent returns of 8% per year for 9 years. The non-registered account will grow to $59,970.14 ($30,000 compounded at 8% per year for 9 years). The taxable capital gain is still based on the original cost of $40,000, so the taxable capital gain is ($59,970-$40,000)/2 = $9985.07. At 39% the tax is $3894, so the investor has $56,076 left after tax. 

Let’s compare this with a RRSP. After a 25% loss, the investor still has $41,700 left. That $41,700 compounds (at 8% per year for 9 years) to $83,358.49. There is no provision for capital loss, so the entire amount is taxed at 39% for tax of $32,510, which leaves $50,842.7 i.e. the difference between RRSP and non-registered is magnified.

Again, I encourage people to calculate the results themselves.


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## Square Root (Jan 30, 2010)

Thanks for all the input-didn't expect such controversy. Just a few clarifications: refund in year 2 because I don't need to make installments. Large alimony deduction covers non withheld income effect. All investment assets are Canadian-I am aware of US estate tax issue and for this reason have no US real estate. Effectively assume tax refund is invested at discount rate (3%). I believe (based on my analysis and your input) that the RSP route has a modest (to me) but not insignificant advantage over the non registered alternative. Just started a vacation in Istanbul so signing off.


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## steve41 (Apr 18, 2009)

Larry6417 said:


> Steve, in a prior post, you compared a 45K earner saving within a RRSP to someone using TFSA alone. As I mentioned earlier, I'm not convinced that you can directly compare the efficacy of the RRSP vs. a TFSA because you were using different amounts invested. You said that you assumed the RRSP user maxed his RRSP later *and* used non-registered savings while the TFSA maxed out at $5000. How can the "effective" tax rate be zero if different amounts are invested?
> 
> P.S. The CD Howe institute disagrees with your analysis. The RRSP is better than the TFSA only when the tax rate in retirement is lower than upon contribution.


OK.... here is the same $45K earner. This time I forced the first 10 years spending down to $29K such that he invests fully in his RRSP. Also, instead of the TFSA, I made his nonreg taxable.... 50% taxed as dividends and 50% taxed as capgains.

In one plan, I had him max his RRSP and in the other plan, he avoided the RRSP completely and directed all his contributions to his taxable savings.

The results speak for themselves.

BTW.... I ran the same plan taking the taxation off the nonreg capital, and this time the RRSP was very slightly worse than the "TFSA". It was a small difference, not enough to challenge the "RRSP is tax neutral" statement though.

RRSP strategy
Nonreg strategy

As far as that CD Howe report, I didn't read it, however, I believe Cardhu made the comment that you shouldn't take everything you read on the internet as gospel. This goes for calculators on the net as well, including RRIFmetic.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> The results speak for themselves.


Not really. The results depend on the assumptions you make. The only way to truly compare would be invest equivalent amounts (pre-tax, vs. after tax) in registered vs. TFSA vs. non-registered.




steve41 said:


> you shouldn't take everything you read on the internet as gospel. This goes for calculators on the net as well, including RRIFmetic.


Does this mean you disbelieve the results? If so, then please do the same scenarios with your calculator, program, or site and disprove the results (using the same assumptions).


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## steve41 (Apr 18, 2009)

Larry6417 said:


> Not really. The results depend on the assumptions you make. The only way to truly compare would be invest equivalent amounts (pre-tax, vs. after tax) in registered vs. TFSA vs. non-registered.
> 
> 
> Does this mean you disbelieve the results? If so, then please do the same scenarios with your calculator, program, or site and disprove the results (using the same assumptions).


This equivalent amount comparison thing needs to be explained properly. You can't take this approach without looking at the entirety of the analysis. An investment is not a single item... it co-exists with many other elements.... your paycheck, income tax, tax refunds, entitlement income, and most importantly, the lifestyle that these elements deliver. The cash flow model, which is what those PDFs display, takes everything into account. Furthermore, you can verify these cash flows with a calculator... an accountant would sign off on these numbers... including tax (T1) accuracy.

The formulas and internet calculators you quote don't do that. I want to know the important stuff.... what aftertax spending/lifestyle can I enjoy based on 2 separate strategies.... investing in my RRSP, or investing outside my RRSP. The amounts aren't important. Examine those PDF carefully... the important column is the second to last on the 6th page (the green col)

To make it easy, you define the parameters.... age, salary, savings (rrsp, nonreg) retirement age. I will crunch the numbers.


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## kcowan (Jul 1, 2010)

This should be done via PM. If Larry want to share the results, it is his call.


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## MoneyGal (Apr 24, 2009)

Disagree. Aren't we just talking about a hypothetical investor? Why should this go to PM?


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## steve41 (Apr 18, 2009)

There is another interesting set of numbers which I have alluded to before... at the top of the 6th page of each report is buried "(Tax total/PV)=...."

These two numbers represent the raw total of the numbers in the income tax column and those same numbers discounted in PV terms.

For the nonreg analysis, the total tax is 496K whereas for the RRSP it is a whopping 706K.

This would seem to indicate the nonreg strategy is better, right? Well, no. It is the PV of the tax column which determines the better outcome. In PV terms, the RRSP scenario returns a tax-pv of 194K whereas the nonreg scenario's tax-pv is 221K.


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## Larry6417 (Jan 27, 2010)

Thank you for your analysis, Steve. I genuinely appreciate discussing things with you. I apologize to this forum if I've been a bit (well, more than a bit) too feisty. I get excited about money! I think we're approaching this from different angles. Steve is looking at aftertax spending, and what level of saving is necessary for a level after-tax income.

What I'm looking at is what means of saving will appreciate to the highest, after-tax future value when investing equivalent amounts. This is academic for me (I've maxed out my RRSP and TFSA, as well as using non-registered saving). But for someone with, say, $5000 to save, the question is quite germane. With $5000 it makes more sense to save completely within a TFSA rather than use non-registered accounts, but does it more sense to contribute the $5000 to a RRSP and re-invest the resulting deduction?

I looked at your 2 analyses, and it appears that different amounts are being saved in each scenario. For example, in your RRSP scenario $8100 is invested in the RRSP with $567 invested (at age 30) outside the RRSP at the marginal tax rate of 29.7% until his taxable income reaches $40,970, at which point his marginal rate (and tax deduction from a RRSP deduction) reaches 22.7%. Assuming that the investor re-contributes the resulting refund into the RRSP, he needs a certain after-tax amount. $45000 - $40,970 (the amount at 29.7% marginal rate) requires an after-tax contribtion of $3107.17 i.e. $3107.17 contributed to a RRSP will trigger a refund of $922.83, which is re-contributed to the RRSP ($3107.17 + $922.83 = $4030). 

Once the investor reaches, $40,970 (in BC), he crosses a tax bracket, 22.7% (combined federal and provincial). He needs another contribution to his RRSP that will trigger a deduction that will total $4070 (to reach $8100 total). He needs to contribute $3317.03 (when the marginal rate is 22.7%), which will trigger a refund of $752.9, which is then re-contributed to the RRSP ($752.97 + $3317.03 = $4070. Therefore, the after-tax contribution that is equivalent to a RRSP investment of $8100 is $3317.03 + $3107.17 = $6424.20, which added to the $567 (the non-RRSP, after-tax amount invested included in your RRSP scenario) equals ~ $6991.2. 

in your non-RRSP scenario, you assume $6603 invested after-tax, less than the RRSP scenario. If unequal amounts are invested (taking into account pre vs. after-tax), then I don't believe that you can say that the RRSP has an effective tax rate of zero.


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## steve41 (Apr 18, 2009)

OK.... let's rephrase "equal amounts being saved" to "based on a given or fixed after tax spending level (life-style being the amount you get to spend on groceries), the RRSP is very close to being tax neutral". It almost always beats the nonreg alternative and can be close to the TFSA strategy.

There are exceptions to that rule.... if you are saving for a particular large lump sum purchase, the TFSA is a hands-down winner, and in the event that you happen to die early, your estate would have been better off if you had saved outside your rrsp. However, for someone saving for retirement under the traditional retirement trajectory.... a smooth constant aftertax income, sustained out to a reasonable ripe old age of 90-95-100 say, the RRSP is very close to being tax neutral.

If you examine those PDFs, you will see I have fixed the aftertax level at 29,000 in both cases. The amounts directed to the RRSP and nonreg are not equal, the aftertax incomes are equal.

I show my projections. You are welcome to do the same, or at least specify a set of parameters and I will crunch a plan.

My results can be checked with an adding machine and a T1. How else would one verify the model?


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## Larry6417 (Jan 27, 2010)

steve41 said:


> If you examine those PDFs, you will see I have fixed the aftertax level at 29,000 in both cases. *The amounts directed to the RRSP and nonreg are not equal, the aftertax incomes are equal.*


That's exactly my point. You fix the "output" (the after-tax income) and then look at what "inputs" (invested capital) are needed to arrive at that after-tax income. I want the opposite. I want to fix the amount of capital invested so that we can compare after-tax investing (TFSA or non-registered) vs. pre-tax investing (RRSP) to see what leads to the higher, future after-tax income.





steve41 said:


> I show my projections. You are welcome to do the same, or at least specify a set of parameters and I will crunch a plan.
> 
> My results can be checked with an adding machine and a T1. How else would one verify the model?


I don't doubt the model or the numbers. What I doubt is the conclusiion drawn from the model. You've already stated that the capital invested in the non-RRSP scenario is less than the amount invested in the RRSP scenario, yet the future after-tax incomes are the same. Doesn't that indicate that the RRSP is only so-so as a savings vehicle i.e its effective tax rate is above zero?


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## steve41 (Apr 18, 2009)

The only problem with the 'fix the investment' amount is that it distorts the present (current) after tax income (ATI).

My philosophy is that there is no such thing as retirement.... there is simply a continuous cash flow calculation starting now.... There are periods of time when there is more money coming in the door than needed, and the program saves money, when not enough is coming in, the program draws capital out.

The RRIFmetic model looks at income for the entire projection, not just starting at some future time. Hope this makes sense.

Steve


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## Larry6417 (Jan 27, 2010)

steve41 said:


> The only problem with the 'fix the investment' amount is that it distorts the present (current) after tax income (ATI).
> 
> Steve


I disagree. In the "life cycle" theory of investing, people have different needs, and will spend different amounts depending on their stage of life i.e. different amounts are saved according to what they're doing. I find it quite unlikely that people will spend a constant, after-tax, inflation-adjusted amount from age 30 to 95. It's more likely that people will be strained by other committments early in life then increase their saving when they are able to do so. At that stage, the important question people ask is: how do I save for the largest nest egg possible?

I agree that some people never "retire," in the traditional sense of the word, but even those people would be helped by saving in the most effective way possible.


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## steve41 (Apr 18, 2009)

I allow for changing lifestyle levels at various times... you generally need more during your working years than after retirement, etc. I am saying that when comparing two scenarios (RRSP investing vs nonreg investing say), the two scenarios should follow the same ATI profile throughout the entire projection.


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## cardhu (May 26, 2009)

“Feisty” is a wee understatement, wouldn’t you say, Larry? ... you stepped far far over that line. 

You claim illogic, but have yet to prove even a single instance of error or illogic in my posts ... in this thread or any other ... I understand my own arguments with crystal clarity, as I do yours ... I understand your argument perfectly because I have seen it hundreds of times in the past decades ... the same set of errors keep reappearing on a very regular basis. 

To make a rational analysis of RRSP, you need to understand two things ... firstly, that money invested inside an RRSP is *before-tax* money, while money invested in a non-reg account is *after-tax* money ... secondly, you need to understand the relationship between before-tax and after-tax ... that relationship is ... 
A = ( 1 – t ) * B ... so when the tax rate is 39% the relationship is ... A = 0.69 * B ... 
An investment of $24,400 in a non-reg account has a cost to the investor, measured in after-tax dollars, of $24,400. 
An investment of $40,000 in an RRSP account, has a cost to the investor, measured in after-tax dollars, of $24,400.
Its easy enough for anyone to calculate these results and verify. 

The effective tax rate is 0% because the tax due on withdrawal is exactly offset by the tax avoided at contribution, when tax rates at contribution and withdrawal are the same ... thats how an RRSP functions, for the reasons I have given in prior posts. No magic, and no faeries required. 



Larry said:


> Cardhu assumes that the refund generated by a contribution of $24,400 will be re-invested within a RRSP.


I’ve assumed no such thing ... as I mentioned upthread, Larry, you simply didn’t understand what was written ... firstly, the RRSP contribution is $40,000, not $24,400, and secondly, there is no “re-investment” ... I merely assumed that the tax break exists ... as long as it exists, then the after-tax cost of a $40k RRSP contribution is, quite obviously, $24,400, for the reasons given upthread. 

The expression _“reinvest the tax refund”_ suggests two things. Firstly, it suggests that there will be a refund in the first place, but a refund only occurs when you have overpaid your taxes throughout the year, and not everyone does that. Secondly, it suggests that some additional amount will be invested, at a later date. As I have explained very clearly upthread, it is critical that the tax break be accounted for ... *correctly* accounted for, that is ... the problem occurs when people frame all of this in a way that suggests, implicitly or explicitly, that there is some specific separate action an investor must take at some later date, or he jeopardizes the tax-efficiency of his RRSP ... and that, of course, is complete and utter rubbish ... EVERY dollar contributed to an RRSP (ignoring overcontributions) is entitled to a corresponding tax break that reduces the after-tax cost of that investment, regardless of what he or she does with “the refund”

If someone does make subsequent additional contributions, they’re merely investing more money. There’s nothing wrong with that, of course, but the notion that they “HAVE TO” make that subsequent contribution, in order to maximize the tax-efficiency of PREVIOUS contributions, is clearly nonsense. 

It makes no difference whatsoever , to the efficacy of an RRSP, what one does with their tax “refund”. 



Larry said:


> Outside an RRSP, capital losses can be used to reduce capital gains. Within a RRSP, there's no similar provision.


Myth ... the alleged loss of the ability to use capital losses to offset other returns is one of the more prevalent myths circulating about the RRSP, and is often used to incorrectly support the view that cap-gain producers ought to be held in taxable accounts ... the tax treatment of a loss is usually better in the RRSP. 



Larry said:


> In the OP's case, he has a joint non-registered account. Otherwise he would trigger a deemed disposition.


Wrong ... assets can roll over to spouse’s ownership with no tax effect ... neither a joint account, nor a testamentary trust is necessary.


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## cardhu (May 26, 2009)

Larry said:


> I ran some scenarios to test some of the statements made in this thread. ...
> $40,000 invested in a non-registered account .....
> *Case A* ... Let’s compare this to a $40,000 RRSP contribution that generates a $15,600 deduction that is re-invested in the RRSP the same year. ...
> *Case B* ... Let’s also test the statement that investment of the refund generated by the initial contribution “doesn’t matter.”
> *Case C* ... Let’s also test the statement that capital losses are better suffered in a RRSP rather than a non-registered account.


Your logic is flawed ... in all of these cases, you have different amounts invested ... 
•	in Case A you’ve invested $6,084 more in non-reg, than in the RRSP.
•	in Case B you’ve invested $15,600 more in non-reg, than in the RRSP.
•	in Case C you’ve again invested $6,084 more in non-reg, than in the RRSP.
... all as measured in after-tax dollars.

Apples and oranges. These comparisons of unequal amounts invested introduce significant distortion on their own ... but there are other problems as well.

Case A

The tax break on a $55,600 RRSP contribution would be $21,684 ... not $15,600 ... and the corresponding equivalent investment in the non-reg would be $33,916 ... not $40,000 ... this scenario exposes a significant portion of the RRSP investment to double-taxation ... the “extra” $15,600 contributed purportedly gets no tax break on contribution, but is taxed on withdrawal ... simply put, this is a scenario that no one in their right mind would ever find themselves in. 

Case B 

A ludiculous argument, that deliberately ignores the tax-deductibility of the RRSP contribution ... when you begin an analysis with unequal amounts, and make no effort to correct for that along the way, then you are no longer comparing RRSP to non-reg ... you are now comparing the investment of “more money” to an investment of “less money” ... and as I explained very clearly upthread, it should come as no particular surprise that investing more money can generate a larger nest egg than investing less money ... and when you attribute that performance solely to the type of account the investment was in, then you are claiming a causal relationship that simply doesn’t exist ... it is absurd reasoning. 

It doesn’t matter, to the efficacy of the RRSP, whether or not the “refund” is “reinvested”, for reasons given in my prior post. 

Case C 

You begin by saying you will test the scenario with capital losses, but then you proceed to describe an example in which there are none ... a fluctuating rate of return, over time, is not what is meant by “capital loss” ... you then imply that the magnification of the differential is caused by preferential handling of capital losses, and that is an irrational leap of logic .... there is no connection between one and the other ... since there are no capital losses in the first place, capital losses clearly cannot be the cause ... the REAL reason the differential changed is because you reduced the annualized rate of return from 8.0% to 4.9% ... the greater the rate of overall return, the greater the RRSP’s advantage, in tax efficiency, as stated  upthread.... and vice versa ... you reduced the rate of return, so the RRSP’s advantage diminished ... you are claiming a causal connection where none exists. 

Capital losses are treated exactly the same in RRSP & non-reg, where capital gains are concerned ... losses offset gains ... but inside an RRSP, those losses also serve to offset dividend income, interest income, and any other form of income, including your original invested capital ... try doing that in a non-reg account ... nobody wants to sustain losses, but if you must have some losing positions among your portfolio, much better to have them inside the RRSP than in non-reg ...

The catastrophic loss of the ENTIRE portfolio is another matter ... but I’ve met few people who plan their retirement on the basis of such assumptions. 

*******

In each of the above cases, the RRSP was the more tax-efficient investment, but that advantage was overshadowed by the fact that there was more money invested in the non-reg, than in the RRSP. These examples do prove several things, but they clearly don’t prove the assertions that they were intended to. It is not the numbers that are at issue - any simple calculator can generate numbers - the problem lies in the conclusions drawn from those numbers.


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## humble_pie (Jun 7, 2009)

boom coming over all hands below


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## steve41 (Apr 18, 2009)

It appears we are luffing.


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## humble_pie (Jun 7, 2009)

aye tis hard to jibe the sails while the one-eyed salt jibes the landlubbers.

but tis a fine course ye are sailing with larry.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> “Feisty” is a wee understatement, wouldn’t you say, Larry? ... you stepped far far over that line.


I did overstep the line, and I apologize for that, but let’s not pretend that you’re blameless. 



cardhu said:


> You claim illogic, but have yet to prove even a single instance of error or illogic in my posts ... in this thread or any other ...


Truly, Da Nile ain’t just a river in Egypt. Pension credits and income-splitting are conjoined twins!

Let’s start with some basic assumptions. An investor (at a 39% marginal rate) has $24,400 in savings. The investor can invest that in a non-registered account or invest in a RRSP and get a tax deduction too. How much is the tax deduction? Assuming that the entire $24,400 is applied at a rate of 39%, it yields a refund of 0.39($24,400) = $9516. $24,400 + $9516 = $33,916. Please explain, if you can, how a contribution of $24,400 (at 39% MTR) yields a deduction of $15,600 (the amount needed to add up to $40,000). You can’t because it doesn’t.



cardhu said:


> To make a rational analysis of RRSP, you need to understand two things ... firstly, that money invested inside an RRSP is *before-tax* money, while money invested in a non-reg account is *after-tax* money ... secondly, you need to understand the relationship between before-tax and after-tax ... that relationship is ...
> A = ( 1 – t ) * B ... so when the tax rate is 39% the relationship is ... A = 0.69 * B ...
> An investment of $24,400 in a non-reg account has a cost to the investor, measured in after-tax dollars, of $24,400.
> An investment of $40,000 in an RRSP account, has a cost to the investor, measured in after-tax dollars, of $24,400.
> Its easy enough for anyone to calculate these results and verify.


That’s nice. 1+1 = 2, 2+2 = 4, and $24,400 + $9516 = $33,916, not $40,000.



cardhu said:


> I’ve assumed no such thing ... as I mentioned upthread, Larry, you simply didn’t understand what was written ... firstly, the RRSP contribution is $40,000, not $24,400, and secondly, there is no “re-investment” ... I merely assumed that the tax break exists ... as long as it exists, then the after-tax cost of a $40k RRSP contribution is, quite obviously, $24,400, for the reasons given upthread.


See above.



cardhu said:


> If someone does make subsequent additional contributions, they’re merely investing more money. There’s nothing wrong with that, of course, but the notion that they “HAVE TO” make that subsequent contribution, in order to maximize the tax-efficiency of PREVIOUS contributions, is clearly nonsense.
> 
> It makes no difference whatsoever , to the efficacy of an RRSP, what one does with their tax “refund”.


I'll repeat what I said previously. Cardhu clearly doesn't understand his own argument. Let’s review Cardhu’s assertions from prior posts: It doesn’t matter what the investor does with the refund. Nonsense! If the investor fritters away the refund, how much is left in the RRSP? The answer is obvious: $24,400, the same amount as the non-registered account. The RRSP is a “pre-tax” investment only if the refund generated by the deduction is invested as well. 



cardhu said:


> Myth ... the alleged loss of the ability to use capital losses to offset other returns is one of the more prevalent myths circulating about the RRSP, and is often used to incorrectly support the view that cap-gain producers ought to be held in taxable accounts ... the tax treatment of a loss is usually better in the RRSP.


Prove this statement. How is a RRSP, which has no provision for capital losses, better than a non-registered account which allows the investor to deduct losses from gains? If, as you say, RRSPs allow the deduction of capital losses from gains, then you ought to be able to direct us to a CRA circular (or equally credible source) that details exactly that. While you’re searching, feel free to generate as many capital losses in your RRSP as you want.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> The tax break on a $55,600 RRSP contribution would be $21,684 ... not $15,600 ... and the corresponding equivalent investment in the non-reg would be $33,916 ... not $40,000 ... this scenario exposes a significant portion of the RRSP investment to double-taxation ... the “extra” $15,600 contributed purportedly gets no tax break on contribution, but is taxed on withdrawal ... simply put, this is a scenario that no one in their right mind would ever find themselves in.


You really need to read posts more carefully. $55,600 is from the $40,000 contribution + the refund it generates, $15,600. That $15,600 would not generate a refund until a subsequent year. Also, you previously said that it “didn’t matter” what the investor did with the refund. Therefore, I agree that no *rational* person would ignore the refund.  You’re changing your tune because you know what you previously said was nonsensical. 

As usual, you’re late to the party. You invoke the “refund on the refund” scenario – something I’ve already discussed in a prior post. I used an example of an investor receiving a one-time $10,000 windfall (MTR 40%). The initial $10,000 contribution yields a refund of $4,000. If that $4,000 is contributed to a RRSP it yields a deduction of $1,600 in a subsequent year and so on. The “refund on the refund” scenario pulls ahead of the non-registered account but only marginally with important provisos: no capital losses within the RRSP (highly unlikely), and the investor keeps track of the “refund on a refund,” and the refunds don’t get subsumed by the investor’s general income (again unlikely). In fact, some yahoo (called Cardhu) considered the “refund on the refund” scenario unlikely.





cardhu said:


> It doesn’t matter, to the efficacy of the RRSP, whether or not the “refund” is “reinvested”, for reasons given in my prior post.


Again, drivel



cardhu said:


> You begin by saying you will test the scenario with capital losses, but then you proceed to describe an example in which there are none ... a fluctuating rate of return, over time, is not what is meant by “capital loss” ... you then imply that the magnification of the differential is caused by preferential handling of capital losses, and that is an irrational leap of logic .... there is no connection between one and the other ... since there are no capital losses in the first place, capital losses clearly cannot be the cause ... the REAL reason the differential changed is because you reduced the annualized rate of return from 8.0% to 4.9%


Fluctuating returns? Wow! I guess 2008 wasn’t really a down year. It was just a negative gain! Do you write press releases for the Pentagon? If, as you say, capital losses are better taken in a RRSP than a non-registered account, then the RRSP should pull ahead. In fact, the opposite happens. Reducing the rate of return shouldn't make a difference if capital losses are better taken in a RRSP. Again, you don't understand your own argument.



cardhu said:


> Capital losses are treated exactly the same in RRSP & non-reg, where capital gains are concerned ... losses offset gains ... but inside an RRSP, those losses also serve to offset dividend income, interest income, and any other form of income, including your original invested capital ... try doing that in a non-reg account ... nobody wants to sustain losses, but if you must have some losing positions among your portfolio, much better to have them inside the RRSP than in non-reg ...


Again, provide evidence that capital losses can be deducted from capital gains inside a RRSP.

Let’s recap. We’ll start with $40,000 in a non-registered account vs. $55,600 ($40,000 contribution to a RRSP + the $15,600 refund it generates) in a RRSP. Again, the investments suffer a 25% loss in the first year. After the loss, there’s only $30,000 in the non-registered account and $41,700 in the RRSP. The investors could sell the investments and re-invest the proceeds in other investments or hang on to the original investment. *It doesn’t matter (in a non-registered account) because the capital loss can be carried forward indefinitely.* Let’s say the investors sell the original investments. The non-registered investor has a capital loss of $10,000, which can be carried forward indefinitely. The RRSP investor has no such provision. Let’s say that the subsequent investments perform better: 8% per year for 9 years. The $30,000 in the non-registered account grows to $59,970.14. Because the capital loss of $10,000 is carried forward, the capital gain is $59,970.14 – ($30,000 + $10,000) = $19,970.14, half of which is taxable ($9985.07). When the $9985.07 is added to the investor’s income (at a 39% MTR) the tax payable is ($9985.07)0.39 = $3894.18. When tax is deducted, the investor is left with $59,970.14 - $3894.18 = $56,076.

What about the RRSP? At 8% per year for 9 years, the $41,700 grows to $83,358.49. After tax (at 39%), the RRSP investor has $50,848.68 [$83,358.49 - $83,358.49(0.39)], still less than the non-registered account. Again, I encourage people to calculate these numbers themselves.



cardhu said:


> The catastrophic loss of the ENTIRE portfolio is another matter ... but I’ve met few people who plan their retirement on the basis of such assumptions.


Again, you don't understand your own argument. If the RRSP treats capital losses better, then ALL losses are better taken inside a RRSP.

Cardhu, your ability to deny reality and fabricate assertions is...interesting.


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## steve41 (Apr 18, 2009)

I've never had experience arguing Evolution with a Creationist in light of the reality of carbon14 dating, the fossil record, etc.... but this discussion with Larry seems as close as I could imagine. Wild.


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## cardhu (May 26, 2009)

Larry, I am not to blame for your hostile mud-slinging and petty personal attacks ... that’s all on you ... I have pointed out the errors in your statements *when there were errors in your statements*... I have pointed out your weak logic *when your logic was weak*, and I have pointed out that you misunderstood what was written, *when you clearly misunderstood what was written* ... if you think any of that justifies your hostile outbursts, think again. 

You’re not qualified to judge whether or not I know my own argument ... obviously I do, and obviously you don’t ... you might think you know something about me, but I can assure you that you haven’t a clue. 

It is you who are denying reality and propogating myth ... despite what you might like to think, the test for whether something is true or not is quite as bit more rigorous than whether Larry believes it or understands it ... despite your bizarre efforts, you have neither proved your assertions, nor disproved any of my statements, in this thread or any other ... I’ve pointed out dozens of separate instances of poor logic in your arguments which render your conclusions, um, interesting ... your latest chapter includes several dozen more cases, including several spectacular new varieties of illogic not seen before in this thread ... a particular gem being the absurd claim that money in an RRSP is not before-tax money unless and until the investor reinvests the tax break ... ludicrous.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> Larry, I am not to blame for your hostile mud-slinging and petty personal attacks ... that’s all on you ... I have pointed out the errors in your statements *when there were errors in your statements*... I have pointed out your weak logic *when your logic was weak*, and I have pointed out that you misunderstood what was written, *when you clearly misunderstood what was written* ... if you think any of that justifies your hostile outbursts, think again.
> 
> You’re not qualified to judge whether or not I know my own argument ... obviously I do, and obviously you don’t ... you might think you know something about me, but I can assure you that you haven’t a clue.
> 
> It is you who are denying reality and propogating myth ... despite what you might like to think, the test for whether something is true or not is quite as bit more rigorous than whether Larry believes it or understands it ... despite your bizarre efforts, you have neither proved your assertions, nor disproved any of my statements, in this thread or any other ... I’ve pointed out dozens of separate instances of poor logic in your arguments which render your conclusions, um, interesting ... your latest chapter includes several dozen more cases, including several spectacular new varieties of illogic not seen before in this thread ... a particular gem being the absurd claim that money in an RRSP is not before-tax money unless and until the investor reinvests the tax break ... ludicrous.


When I initially responded to your posts in this thread, I took pains do so politely, without personal invective. You conveniently forget who started the hurling of insults. That was you.

I've come to the conclusion that you simply don't know what you don't know. You've claimed, without a shred of evidence, that capital losses can be deducted from capital gains inside a RRSP. You've also claimed that it is unnecessary for the investor to re-invest the tax savings from the RRSP contribution, again without evidence. You've also claimed that a $24,400 RRSP contribution at a MTR of 39% yields a 15,600 tax saving. The math simply doesn't work.

However, I've also concluded that your rudeness did not justify my own. I should have been polite even when you were not.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> I've never had experience arguing Evolution with a Creationist in light of the reality of carbon14 dating, the fossil record, etc.... but this discussion with Larry seems as close as I could imagine. Wild.


Let's review your posts in this thread, Steve. 



steve41 said:


> This thread and the "anyone not using" thread should be bookmarked by everyone here and made "sticky" by the management of this forum. The "RRSP is Evil" crowd should be made to commit this to memory.
> 
> Cardhu somewhere said "The RRSP has a zero tax rate." Bingo.


As evidence, you posted a couple of scenarios. Except there are a couple of problems with your scenarios. First, there is more after-tax capital invested with the RRSP plan than the non-RRSP plans, but the after-tax incomes are equivalent. You responded as follows:



steve41 said:


> If you examine those PDFs, you will see I have fixed the aftertax level at 29,000 in both cases. The amounts directed to the RRSP and nonreg are not equal, the aftertax incomes are equal.


Let's ponder that statement. The after-tax incomes in the scenarios you provided are equivalent, but the capital required is higher in the RRSP scenario. This is your idea of "better"? 

Just an aside, but do your clients know this? What rational person would choose the option requiring higher after-tax capital invested given equivalent outcomes? Do people actually pay for this?

There's one more major problem with your scenarios. You assume that the RRSP/RRIF is withdrawn at a lower rate than when contributed. That's a reasonable assumption for most Canadians, but that's not what you were agreeing to. Cardhu claimed that the RRSP was "effectively tax-free" even when the tax rates at contribution and withdrawal were the same. You happily agreed.

I'm agnostic about RRSPs. I don't think they're "evil." In fact, I've stated that they are useful for many, but not necessarily all, Canadians. I just don't regard them with the same religious fervour that you do.

Steve, we do agree on one thing. Watching people contort their arguments to preserve their precious, pre-conceived notions, all the while congratulating themselves for their purported rationality, truly is...wild.


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## steve41 (Apr 18, 2009)

Let's look at this problem another way. Say there were two individuals, one of whom has bought into the wisdom that the RRSP was the preferred way to save for retirement, and one who believed that it was better to save outside the RRSP in taxable savings (interest/dividends/capgains-based nonreg capital)

They were identical in every respect... age, salary, planned retirement age. The same taxation rules, RRSP and RRIF contribution and withdrawal limits, etc.

Forgetting the amounts saved in each investment, taxes paid over time, etc.... the question is, which individual will enjoy a higher standard of living over his entire life span? Answer: the RRSP contributor. Can it be simpler? Please check those two PDFs with a calculator and a T1. The cash flows add up. They friggin well add up! What else can I say? And, you don't need a fancy financial calculator, just one with a +, - and = sign.

I have been supplying this program for 15 plus years, to both FP organizations as well as DIY individuals. Don't you think that someone would have stumbled on such an error as you claim to have found? Give your head a shake.

Again, I ask you to give me a set of reasonable parameters (not a Donald Trump, or a homeless individual)... a normal working guy, just starting out.

This can't be hard, and who knows, we may disprove the 'RRSP is tax neutral' theory yet.


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## Larry6417 (Jan 27, 2010)

As I mentioned previously, I'm an agnostic on RRSPs. They work best - perhaps only - when the tax rate on withdrawal is lower than on contribution. Your scenarios/program assume a lower tax rate on withdrawal, which is a reasonable assumption for most Canadians. However, running scenarios assuming lower tax rates on withdrawal cannot prove or disprove the "RRSPs are tax-free" assertion (when contribution and withdrawal rates are the same).

Also, since the capital invested in the RRSP scenario you provided is higher than the non-RRSP one, how can you make any meaningful comparison?

Can you run the same scenarios assuming the same tax at contribution and withdrawal?


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## steve41 (Apr 18, 2009)

Larry6417 said:


> Can you run the same scenarios assuming the same tax at contribution and withdrawal?


I don't set tax rates. The program uses the actual tax (T1) algorithm. I don't identify any tax parameter except the province of residence. You would have to play around with the major parameters such as salary, current savings (reg,nonreg) in order to come up with a plan where the pre retirement and post retirement effective tax rates were the same.


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## steve41 (Apr 18, 2009)

OK... I finally forced out a scenario where the post retirement tax rate is the same as the pre retirement tax rate. I had to boost our 50 year old up the asset ladder ($2M in RRSP and a $200K salary with a $45K pension stream) Also, there was no way to achieve the result with a die-broke plan.... Instead of dying broke, I set a $3M estate target at 95.

I ran one plan at full RRSP contribution level, and the second plan reducing his RRSP contribs to $15K.

The full RRSP plan solved at $120,701 When the RRSP contribution was scaled back to $15000, the ATI solved at $120,128.

I guess this sort of answers the question posed in the title of the link. See if you can spot anything wrong.

Here are the results...

Full RRSP contribs
Reduced RRSP contribs


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## humble_pie (Jun 7, 2009)

rrsp gurus i would just like to know about cases like these ... and they involve plain ordinary working people - ok plain ordinary professional working people - not highfalutin millionnaires.

1) about-to-retire couple recently sold their family home, which they'd bought for 34k in 1964, for 1.75 million. They also have a healthy non-registered investment portfolio that didn't exist in the 60s or 70s. Now they hate & loathe their rrsps because there's no tax strategy possible with the forced withdrawals.

2) retired university prof (pure sciences) has pension equal to final salary AND he still attracts the big corporate research grants, still has all his graduate students, still goes to work every day, plus has a successful investment portfolio. Bref his post-retirement income is more than 3 times his salary a decade ago. This one hasn't sold his house yet - the one he bought 45 years ago for 27k when it was a run-down rooming house. A mansion that his wife slowly restored to glory, it'll go for more than a million. He also hates & loathes his rrsp.

slightly similar to the well-pensioned folks that MG is discussing in a sister thread nearby, these retirees don't need the blankety-blank rrsp income. Ideally, what should be happening in their cases, as well as with those who are dead-assured of a great pension, is creation of capital gains so as to benefit the heirs and any charities they fancy in the meantime.


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## steve41 (Apr 18, 2009)

They probably didn't "hate and loathe" the nice tax rebate they received when they first took out their RSP. When you balance the near term tax reduction at purchase against the far term tax hit when you are forced to take it out, it's pretty much a wash.


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## Four Pillars (Apr 5, 2009)

humble_pie said:


> rrsp gurus i would just like to know about cases like these ... and they involve plain ordinary working people - ok plain ordinary professional working people - not highfalutin millionnaires.
> 
> 1) about-to-retire couple recently sold their family home, which they'd bought for 34k in 1964, for 1.75 million. They also have a healthy non-registered investment portfolio that didn't exist in the 60s or 70s. Now they hate & loathe their rrsps because there's no tax strategy possible with the forced withdrawals.
> 
> ...



An RRSP/RRIF account is just a financial tool which can be used or not. Maybe what they should "hate and loath" is their ignorance of the RRSP/RRIF rules? Or maybe their good luck with having "too much money"?


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## humble_pie (Jun 7, 2009)

pillars you having a bad day or what. That's a spiteful, jealous post imho.

in the early 1960s, the young engineer & the junior prof were both making less than 10k. They had 7 children between them. Deductible children. Other dependents. Paid no income taxes. It was to protect their young families that they carried insurance & thought they had better save up in those newfangled accounts called registered.retirement.savings.plans.

far from being ignorant or lucky, one would have to say they lived out the canadian dream. They didn't get divorced. Their kids grew up & graduated university. Their careers thrived due to native talent & hard work. The prof was named to the order of canada. The run-down houses with good bones that they had bought for a song & restored with their own labour turned out to be valuable castles in the end.

may your own life be half as successful as these achievers.

ps would you like to re-consider your assertion that tdwaterhouse is levying a $50 fee in non-registered accounts. Sounds like a fairy tale to me.


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## Four Pillars (Apr 5, 2009)

humble_pie said:


> pillars you having a bad day or what. That's a spiteful, jealous post imho.
> 
> in the early 1960s, the young engineer & the junior prof were both making less than 10k. They had 7 children between them. Deductible children. Other dependents. Paid no income taxes. It was to protect their young families that they carried insurance & thought they had better save up in those newfangled accounts called registered.retirement.savings.plans.
> 
> ...


I was being facetious when I said they should loathe their success. I thought that was obvious.

My life is already very successful - thanks.

My point is that I've heard many people complain about RRIFs (mandatory withdrawal, pay tax on withdrawals etc). I don't think they should complain.

As for TD - I read about the $50 fee here http://www.tdwaterhouse.ca/trading/ascs.jsp#trading

It doesn't say anything about the fee being waived - do you know if it does get waived under certain circumstances?


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## cardhu (May 26, 2009)

Larry6417 said:


> When I initially responded to your posts in this thread, I took pains do so politely, without personal invective. You conveniently forget who started the hurling of insults. That was you.
> 
> I've come to the conclusion that you simply don't know what you don't know. You've claimed, without a shred of evidence, that capital losses can be deducted from capital gains inside a RRSP. You've also claimed that it is unnecessary for the investor to re-invest the tax savings from the RRSP contribution, again without evidence. You've also claimed that a $24,400 RRSP contribution at a MTR of 39% yields a 15,600 tax saving. The math simply doesn't work.
> 
> ...


Your first post was remarkably restrained, it is true ... then you took the first shot, and I took a *single* shot in response ... a shot across the bow, as it were ... aside from that *one *line, I focused my comments on the matter at hand, while you ... didn’t ... you have no claim to any high road, and to imagine that you have is laughable. 

Evidence to support my statements is present upthread ... in any case, your repeated complaint _“not a shred of evidence”_ rings hollow since you’ve offered none of your own ... sure you’ve put forward plenty of cases/scenarios/examples, but none of those are “evidence” in any normal sense of the word ... they are too tainted by logic-errors to serve that purpose. 

You continue to ignore what is actually written, in favour of your own distorted misrepresentations ... there have been no $24,400 RRSP contributions in any of my posts ... such contributions exist only as a product of your misinterpretation ... you are arguing over something that no one has said. 

I have no preconceived notions, therefore none to preserve ... I find it ironic, though, that you would choose to go down this path, given the circumstances ... you seem to forget that other people can still see this thread in its entirety ... others can see, just as easily as I can, the many and varied logic-gaffes in your argument and in your reasoning ... perhaps we ought to let those others decide for themselves who is contorting their argument to preserve their precious preconceived notions.


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## cardhu (May 26, 2009)

humble pie said:


> rrsp gurus i would just like to know about cases like these


These are not plain ordinary working folks ... these are outliers ... be that as it may, there don’t seem to be any questions in your posts ... what is it you want to know?


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## Larry6417 (Jan 27, 2010)

cardhu said:


> Your first post was remarkably restrained, it is true ... then you took the first shot, and I took a *single* shot in response ... a shot across the bow, as it were ... aside from that *one *line, I focused my comments on the matter at hand, while you ... didn’t ... you have no claim to any high road, and to imagine that you have is laughable.


Let’s summarize. You admit that I was polite to start. You admit that you were the first to hurl insults, but now you’re aggrieved that I responded in kind. Your behaviour reminds me of an old joke. An only child murders his parents then begs for mercy because he’s an orphan. If you hurl insults, expect them in return. It’s not complicated. Also, I make no claims of moral superiority. I merely refute your claims.



cardhu said:


> You continue to ignore what is actually written, in favour of your own distorted misrepresentations ... there have been no $24,400 RRSP contributions in any of my posts ... such contributions exist only as a product of your misinterpretation ... you are arguing over something that no one has said.


I’m not surprised that you deny making this statement. This thread has been a fascinating observation of your attempts to deny reality. I’ll refresh your memory.



cardhu said:


> No, Andrew, the advantage would be immediate, even if he started drawing the dividends from RRSP immediately... compounding has nothing to do with it ... you are neglecting the fact that the RRSP contribution is tax-deductible ... to make a $40k RRSP contribution, he need only carve $24.4k out of his non-reg portfolio ... (sqrt has referred to AB rates ... the top tax rate in AB is 39%) ... the rest he can raid from his CRA quarterly installments.


Let’s enumerate your errors. The most egregious error is your failure to properly calculate the tax savings from a RRSP contribution. The RRSP contribution is deducted from income. Therefore, the tax saving = RRSP contribution X marginal rate (assuming the deduction doesn’t cause income to cross a tax bracket). I’d call this equation RRSP 101, but it’s even more basic than that – more like RRSP: kindergarten. Amazingly, you miscalculate this amount!

Shockingly, you claim that a $24,400 contribution (at 39% MTR) yields a $15,600 tax savings (to equal $40,000). Obviously, it doesn’t. A $24,400 contribution will trigger savings of $24,400(0.39) = $9,516. Therefore, the investor can have $24,400 in a non-registered account or $33,916 ($24,400 + $9,516) in a RRSP.

By the way, the number you’re looking for is $28,776.98. I explained how to derive this number in a prior post. $28,776.98 + $28,776.98(0.39) = $40,000

The second error is that you claim (in a different post) the RRSP retains a tax advantage even if the tax saved is not contributed. Nonsense! To return to the above example (which was yours to begin with BTW), an investor can have $24,400 in a non-registered account or $24,400 in a RRSP + $9,516 in tax savings. If the investor wastes the tax saving (you claim it’s unimportant to re-invest within a RRSP) then the RRSP investor has within his RRSP…$24,400 – the same amount as the non-registered account. However, the RRSP investor now faces tax rules which treat RRSP withdrawals like interest (even if they’re dividends and capital gains) while the non-registered account retains favourable treatment of dividends and capital gains. Again, you clearly misunderstand your own arguments. You repeat the same blunder again…



cardhu said:


> the direct apples to apples comparison would be a $40,000 RRSP contribution versus a $24,400 investment in non-reg … those are equivalent amounts, stated using different units of measurement.


and again...



cardhu said:


> that $40k contribution, as measured in after-tax dollars, is only $24.4k.


and again...



cardhu said:


> A valid comparison would put $40,000 invested in an RRSP against its corresponding equivalent in a non-reg account ... with a 39% tax rate on contribution, that amount would be $24,400


Cardhu, you’ve made incredibly basic, elementary errors in your arguments. You’ve miscalculated the amount saved from a RRSP contribution. You’ve fabricated outrageous lies to bolster your argument e.g. capital losses deducted from capital gains within a RRSP. You’ve conveniently ignored future value calculations contradicting your arguments. Only stupendous arrogance prevents you from recognizing the falsity and innumeracy of your arguments. Again, you don’t understand your own arguments, and you don’t know what you don’t know.


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## steve41 (Apr 18, 2009)

Larry. What is it you are afraid of? I am looking for a minuscule data set.... age, salary, retirement age, current amount in RRSP, ditto nonreg, province, a rate of return and an inflation rate.

Give me a reasonable set of the above data and I will run the numbers. They will add up, and the tax will check out. This can't be hard.


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## Larry6417 (Jan 27, 2010)

steve41 said:


> Let's look at this problem another way. Say there were two individuals, one of whom has bought into the wisdom that the RRSP was the preferred way to save for retirement, and one who believed that it was better to save outside the RRSP in taxable savings (interest/dividends/capgains-based nonreg capital)
> 
> They were identical in every respect... age, salary, planned retirement age. The same taxation rules, RRSP and RRIF contribution and withdrawal limits, etc.
> 
> ...


Is that a wisp of desperation I hear in your post? Perhaps even a frisson of panic? The question isn't what am I afraid of. The question is: What is Steve afraid of? Are you afraid that the position you've supported unconditionally (RRSPs are always better than non-registered savings) will be proven incorrect? Or are you afraid that you've been advising clients incorrectly for 15 years? 

I don't doubt that the cash flows in your scenarios are correct, given the assumptions you've made.

Let's review from prior posts. You've stated, many times, that the most important consideration for you is after-tax income i.e. how much money is left for "beer and groceries." You've also stated that the after-tax incomes from your scenarios (RRSP vs. non-registered) are equal. Therefore, touting the RRSP as superior is contrary to your prior posts.

Since the after-tax incomes are equal, the obvious question is: how much after-tax capital is required to fund each scenario? I've pointed out - and you've admitted - that the RRSP scenario requires more after-tax capital. Therefore, your continued touting of the RRSP is contrary to logic. Achieving the same after-tax income with lower after-tax investment sounds "better" to me. However, as I've stated in the past, the RRSP has some advantages (e.g. income-splitting, safety from creditors) that make it attractive despite its marginal use as a savings vehicle.

I haven't provided you with a set of numbers because your program can't tell me what I really want to know. Given the same after-tax investment, what would be the difference in future, after-tax incomes in non-registered vs. RRSP scenarios?

P.S. In your new scenarios there is still a higher, after-tax amount invested in the RRSP scenario.


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## steve41 (Apr 18, 2009)

Larry6417 said:


> Are you afraid that the position you've supported unconditionally (RRSPs are always better than non-registered savings) will be proven incorrect? Or are you afraid that you've been advising clients incorrectly for 15 years?
> 
> I don't doubt that the cash flows in your scenarios are correct, given the assumptions you've made.


I haven't made any assumptions. All I have to work with are the rules of taxation, compound interest and the RRSP max/RRIF min deposit-withdrawal rules.

What part of "you can take the printout to an accountant and he will sign off on it" don't you understand? (I have accountants who use my program BTW)

The default logic (RSP vs nonreg) will preferentially choose the RRSP however the user can opt to change that logic if he chooses. That is how I created those examples.

I am not afraid of anything.... I have submitted several examples comparing the RRSP vs nonreg (taxed as capgains). The RRSP slightly wins, although I have stated you may come up with an example which gives a slight edge to nonreg. I have always said that.

You haven't supplied me with an example. Who's afraid?


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## Larry6417 (Jan 27, 2010)

steve41 said:


> I haven't made any assumptions. All I have to work with are the rules of taxation, compound interest and the RRSP max/RRIF min deposit-withdrawal rules.
> 
> What part of "you can take the printout to an accountant and he will sign off on it" don't you understand? (I have accountants who use my program BTW)
> 
> ...


The stench of desperation from your posts is overwhelming. First, I don't doubt any accountant would sign off on your projections. That's not the point.

The point is that your program is too...limited (perhaps a flaw carried over from the developer). You've fixed the after-tax incomes to be equal, you've admitted that the after-tax investment required in the RRSP scenario is higher than the non-RRSP scenario, yet you insist that your scenarios "prove" the RRSP is superior. Truly, truly bizarre.


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## cardhu (May 26, 2009)

Larry, my arguments are neither false, nor innumerate … you continue to labour under the false impression that unless you personally understand something, then it must be wrong … but as we have established, that just ain’t so.

You are again ignoring what is actually written, in favour of your own fabricated distortions … what I said was _“you took the first shot”_ … the record is available for viewing, if you’d like to check.

There are no $24,400 RRSP contributions in any of my posts … in all cases the RRSP contribution is $40,000, for which the after-tax cost is $24,400, as measured in after-tax dollars ... I explained how to derive this number in a prior post … I have made this point again, and again, and again … and again … allow me to highlight the applicable phrases out of each of the passages you quoted … 

_“… to make a *$40k RRSP contribution*…”
“… a *$40,000 RRSP contribution* …”
“… that *$40k contribution*…”
“…*$40,000 invested in an RRSP*…”
_

I’m sure you WANT my argument to be what you say it is … but alas, it’s not.

I haven’t ignored your future value calculations at all … I’ve shown them to be invalid … there is a big difference … your characterization of reality as an _“outrageous lie”_ is interesting … but again I would point out that the test for whether something is “real” is quite a bit more rigorous than whether or not you understand it. 

Larry, your argument is badly flawed … you’ve made math errors, but those aren’t the real problem … those are just numbers … the real problem lies in the “conclusions” that you draw from those numbers, and your willingness to toss logic and reason aside as an inconvenience, if they interfere with your precious preconceived notions … you have repeatedly discounted or ignored the *real* cause of an observed effect, in favour of concluding whatever it is you _want_ to conclude, regardless of whether or not there is any rational connection between the underlying argument and these so-called “conclusions”. You are plucking these “conclusions” out of thin air.


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## steve41 (Apr 18, 2009)

I am of the belief that a certain segment of the population are convinced that the RRSP is a bad way to save for retirement. They equate taxes to an evil scheme to deprive them of their hard-earned wealth, taxes are spawned by the government (who can trust the government?), and finally, the government introduced the RRSP, and so, squaring that circle... RRSPs are evil.

Subsequently, they have avoided RRSPs as a savings vehicle all their lives, and faced with mathematical proof that they would have been ahead if they had opted to save inside rather than outside a registered savings plan, they cling to this fantasy.

The problem is that the 'needs based / tax accurate' financial planning model is a ***** to solve. (ask someone who has tried to do it with a spreadsheet) 
Because it is tricky math-wise, it is really easy for someone to pull out a pen and doodle a few 'beforetax/aftertax/marginal tax rate' numbers on a napkin along with that time-honored bogeyman ...._"those forced RRIF withdrawals are 100% taxable"_, and their audience will be quaking in their boots.

That is my theory anyway.


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## Four Pillars (Apr 5, 2009)

steve41 said:


> I am of the belief that a certain segment of the population are convinced that the RRSP is a bad way to save for retirement. They equate taxes to an evil scheme to deprive them of their hard-earned wealth, taxes are spawned by the government (who can trust the government?), and finally, the government introduced the RRSP, and so, squaring that circle... RRSPs are evil.
> 
> Subsequently, they have avoided RRSPs as a savings vehicle all their lives, and faced with mathematical proof that they would have been ahead if they had opted to save inside rather than outside a registered savings plan, they cling to this fantasy.
> 
> ...


+1


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## Larry6417 (Jan 27, 2010)

steve41 said:


> I am of the belief that a certain segment of the population are convinced that the RRSP is a bad way to save for retirement. They equate taxes to an evil scheme to deprive them of their hard-earned wealth, taxes are spawned by the government (who can trust the government?), and finally, the government introduced the RRSP, and so, squaring that circle... RRSPs are evil.


That's nice. And completely irrelevant. Apparently, you haven't read my posts. I never claimed the RRSP was evil. In fact, I've said that they can be useful tools. I just don't ascribe mystic powers to them e.g. effectively tax-free even with same MTR on withdrawal as contribution.


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## Larry6417 (Jan 27, 2010)

cardhu said:


> There are no $24,400 RRSP contributions in any of my posts … in all cases the RRSP contribution is $40,000, for which the after-tax cost is $24,400, as measured in after-tax dollars…


I am truly, truly amazed that you still don't understand. The after-tax cost of a $40,000 RRSP is higher than $24,400. $40,000 minus 39% of itself is $24,400, but (as we've seen in RRSP: kindergarten) that's not how RRSPs work. A RRSP contribution will trigger tax savings based on the amount contributed i.e. $24,400 + 39% of itself cannot equal $40,000.

I'll explain once more. Let's assume that a RRSP contribution ("x") is made that triggers a tax saving of (0.39)x such that x + 0.39x = $40,000. Again, x = $40,000/(1 + 0.39) = $28,776.98 - the true after-tax cost of a $40,000 RRSP contribution.

Cardhu, every word you post shows how little you understand your own argument.


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## andrewf (Mar 1, 2010)

Larry, if you need a third party to chime in here, allow me: you're wrong.

If it helps you, imagine you contribute $40k at the end of February, $24.4k out of pocket and the remainder ($15.6k) from an RRSP loan at 0%. When you get your refund from the government, it will be equal to the amount of the RRSP loan, which you then pay off (as you acknowledge earlier, the refund on a $40k contribution at 39% MTR is $15.6k). 

I don't see how it can be explained any simpler, but there it is.


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## steve41 (Apr 18, 2009)

OK. I am calling a troll alert.


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## Larry6417 (Jan 27, 2010)

andrewf said:


> Larry, if you need a third party to chime in here, allow me: you're wrong.
> 
> If it helps you, imagine you contribute $40k at the end of February, $24.4k out of pocket and the remainder ($15.6k) from an RRSP loan at 0%. When you get your refund from the government, it will be equal to the amount of the RRSP loan, which you then pay off (as you acknowledge earlier, the refund on a $40k contribution at 39% MTR is $15.6k).
> 
> I don't see how it can be explained any simpler, but there it is.


Thanks for your input, AndrewF. I respectfully disagree though. If you recall from my FV calculations, I did compare $40,000 non-registered to $55,600 in a RRSP. Also, the original claim did not deal with leveraged investing:



cardhu said:


> to make a $40k RRSP contribution, he need only carve $24.4k out of his non-reg portfolio ... (sqrt has referred to AB rates ... the top tax rate in AB is 39%) ... the rest he can raid from his CRA quarterly installments.


That is, the claim was that $24,400 contributed to a RRSP yields tax savings to equal $40,000. I disagreed because $24,400 + 0.39($24,400) = $24,400 + $9,516 = $33,916.

In a non-leveraged setting, one needs $28776.98 after-tax to generate a refund that will equal $40,000 i.e. $28776.98 + (0.39)$28776.98 = $40,000.


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## kcowan (Jul 1, 2010)

Four Pillars said:


> +1


+2


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## Square Root (Jan 30, 2010)

As the OP. I vote we shut this thread down.


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## MoneyGal (Apr 24, 2009)

+1 for that!!!


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