# Not a fan of RRSPs



## MrMatt (Dec 21, 2011)

Okay, someone said they weren't a fan or RRSPs in another thread. I can accept that there are situations where they aren't great.
For example if you don't like the clawbacks, or if you aren't at peak earning years.


However let me suggest a way that RRSPs can be used, even if you don't want to use them the traditional way.


Put money in the RRSP, let it grow, but don't claim the deduction.
When you take the money out, instead of being taxed, claim the deduction on that.

Any growth will simply be taxed as income, at the time you take money out.

Lets say you have $10k , you get a magical 1% GIC, and you're at a 50% marginal tax rate (to make it easy)
Outside of RRSP you get $100 income and you have to claim it, that year, leaving you with a principle of $10,050 at the end of the year. (and no tax owing)
Inside RRSP you don't pay any income tax you end up with a principle of $10,100, with $50 tax owing on the $100 growth when you withdraw.

Year 2, outside you get $100.50 in growth, after tax you're left with $50.25 in growth for a total principle of $10,100.25, with no tax owing.

Inside the RRSP you get $101 growth, for a total principle of $10,201, with $100.50 tax owing. 
Year 3 it's slightly better and so on.

Plus you don't have to worry about tracking taxes etc, and you can pull out the growth and pay the taxes at any time it's convenient for you.

Not huge, not complex (can actually simplify record keeping).

Myself I like RRSPs in the appropriate context, ie those in highest income years and marginal tax rates.

This was mostly a thought exercise to see if there was a "no downside" way to use RRSPs, for someone who doesnt' like them much.


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## Beaver101 (Nov 14, 2011)

^


> ... Put money in the RRSP, let it grow, but don't claim the deduction.
> When you take the money out, instead of being taxed, claim the deduction on that.


 ... so just how long are you going to not claim the RRSP deductions? ... after 3 years, 10? And are you allowed that long?


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## MrMatt (Dec 21, 2011)

Beaver101 said:


> ^ ... so just how long are you going to not claim the RRSP deductions? ... after 3 years, 10? And are you allowed that long?


In my example, you'd claim the deduction when you withdraw the principal.

In my example, the tax free compounding, paying only at withdrawal is how an RRSP can help.

I really don't get what problems someone could have with RRSPs.


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## Spudd (Oct 11, 2011)

Beaver101 said:


> ^ ... so just how long are you going to not claim the RRSP deductions? ... after 3 years, 10? And are you allowed that long?


You're allowed to not claim them for as long as you want. There's no limit.


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## Beaver101 (Nov 14, 2011)

^ Maybe someone is not earning enough to make a difference on whether they contribute to an RRSP or not? Plus knowing that they "have to pay the tax eventually" doesn't help either. 

Google on what percentage of Canadians have contributed to their RRSPs? I'm abit behind on this as last I read was something like less than 50%???


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## Beaver101 (Nov 14, 2011)

Spudd said:


> You're allowed to not claim them for as long as you want. There's no limit.


 ... seriously? I didn't know that as that seems to be a tax-deferral scheme.

Imagine someone who never claimed an RRSP deduction ... say lowball it at $1K per year ... x 30 working years ... appearing on your NOA.


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## Spudd (Oct 11, 2011)

Beaver101 said:


> ... seriously? I didn't know that as that seems to be a tax-deferral scheme.


If you don't claim the deduction on your taxes this year, then you pay tax on the full income you made this year. You're actually doing the opposite to deferring taxes. The government doesn't mind getting more money this year in exchange for maybe getting less in a future year. Anyway, the whole RRSP concept is for tax deferral (you don't pay tax on the money when you claim the deduction, and then you do pay tax on it years later when you withdraw it).


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## like_to_retire (Oct 9, 2016)

The advantage of an RRSP is tax free compounding over many years. The more the better.

An additional advantage is gained if your tax rate on deposit is higher than on withdrawal. If your tax rate on withdrawal starts to exceed the deposit rate by too much, the advantage of all that compounding can become a wash.

I had an RRSP from the day I started working and deposited the maximum every year for 35 years. Unfortunately the amount I was able to deposit every year was small as my job reduced the amount allowable quite significantly.

I know for myself, the tax rate I deposited the funds at was significantly lower than my tax rate in retirement, so it didn't work out that great for me - somewhat less than a wash.

But I still feel RRSP's can be a good thing for most people.

ltr

edit: 
oh yeah, I didn't address the notion of not claiming the deduction every year. Unless you know what your tax rate will be in future years, I don't feel it's good to leave money on the table. That cash is losing value by the rate of inflation every year and compounding. 
If you claim the deduction every year, you can invest those refunds, and over the years that value can be significant as opposed to someone who just left them to degrade with inflation? Not really a good idea in my view. Sure, some people might know that the next year will be an unusual high income year and they might want to play around with the deduction, but generally I would claim it and invest it or pay off your mortgage.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> ... Put money in the RRSP, let it grow, but don't claim the deduction.
> When you take the money out, instead of being taxed, claim the deduction on that.


Sure ... though if one would have received a refund, the cost of deferring the deduction from income is whatever the refund money would have made in say a TFSA or taxable account.


Cheers


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> ... I really don't get what problems someone could have with RRSPs.


For those I have talked to that resist using them - there is something they don't understand or assume.
One example are my co-workers who thirty years ago figured the gov't would tax RRSPs "any day now" and kept their money in a non-registered account.


Cheers


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> Imagine someone who never claimed an RRSP deduction ... say lowball it at $1K per year ... x 30 working years ... appearing on your NOA.


Sure ... but if any of those years would have give one money to fund a TFSA or invest - what's that worth?

Unless one somehow was paying no tax for all thirty years - there is going to be a cost for deferring the income deduction.

Cheers


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... Google on what percentage of Canadians have contributed to their RRSPs? I'm abit behind on this as last I read was something like less than 50%???


The numbers suggest more investigation is needed.

For some, it is a decision that was thought through and for others, it was based on a faulty assumption (ex. gov't will convert all RRSPs to be taxed next year).


Cheers


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> The numbers suggest more investigation is needed.
> 
> For some, it is a decision that was thought through and for others, it was based on a faulty assumption (ex. gov't will convert all RRSPs to be taxed next year).
> 
> ...


Well if you contribute and claim at a low marginal tax rate, then withdraw and pay at a high marginal tax rate (including benefit clawbacks) you could end up behind.

I'd suggest the tax free compounding alone is a significant benefit.

Myself I think TFSAs are amazing and RRSPs are pretty good, particularly if you expect flat or declining marginal tax rates..


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## doctrine (Sep 30, 2011)

What people don't get is that RRSPs are effectively the same as TFSAs if your marginal tax rate is the same at contribution and withdrawal. If there is an opportunity for your marginal rate to be actually lower, it is actually far superior to a TFSA as you are effectively paying negative tax at that point.


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## Retiredguy (Jul 24, 2013)

Full Disclosure: Contributing to a RRSP was not really viable for me during my working years as I had mandatory contributions to a pension plan.

For interest bearing GIC's or the like the deferring strategy may be good but I've always invested for CG and e/divs. CG of course are deferred until sold even in a non reg account and then effectively taxed at 50% of one's marginal rate. Edivs are taxed in the year earned at a preferential rate. Both CG and e/divs earned in a RRSP/RRIF are taxed at the full marginal rate when withdrawn or upon death. If my present income from my non reg account (edivs and some occasional CG) was from a RRSP/RRIF my yearly taxes would be substantially more. Yes, I understand I had no deduction when I put the money in the non reg account and agree that has to be factored in. Today if I sold all in my non reg account I would have a large 6 figure amount owing, it would be double if it was in a RRSP/RRIF. In addition in a very few years for me RRIF withdrawals would be mandatory. Not so with my non reg accounts. Also as things have turned out my contributions and tax savings years ago would have been at a lower marginal rate than my rate now. For many during your working years its impossible to know your tax rate 25-30 years down the road.

On the issue of deducting the contribution in the year made I wonder what % of people actually invest the taxes "saved" I think not many.


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## ian (Jun 18, 2016)

RSP's and spousal RSP's have enabled us to avoid a fair amount of tax during years of purchase AND enabled us to avoid a fair amount of tax that we would have otherwise paid on the growth.

They are not for everyone. They are simply one tool that we have to save for retirement and avoid taxes. Not everyone will benefit, not everyone will benefit in the same manner or to the same extent.

I put the bulk of money into RSP's/spousal RSP's when I was in the 53 percent incremental tax bracket. They earned tax free income over a period ranging from fifteen plus years. I expect to draw them down at an incremental tax rate of approx 22-28. For their life, they provide tax avoidance for many years to come.

There were many years when my pension plan limited me to a $3300 limit and another $3300 group RSP limit. Nonetheless they have paid off well. We use them for income generating investments. We try keep our capital appreciation investments outside of our RSPs Either in TFSA's or non registered accounts.

Like any other financial or tax avoidance tool the trick is to do some research, understand the nuances of our tax regime, and make an informed decision. Clearly they are not for everyone. Just don't get sucked into the bank adverts without understanding what you are buying and how it may impact you in later years.

Banks had it made in the shade for a long time. They advertised bank loans for RSP's. Then they directed the consumer to place the money in funds that carried obscene 3 percent management fees. It was a license to print money. The banks were creaming it on both ends. No wonder Canadian bank stocks have performed so well over the years.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> Well if you contribute and claim at a low marginal tax rate, then withdraw and pay at a high marginal tax rate (including benefit clawbacks) you could end up behind ...


Sure ... but that's part of thinking it through.

Some read that the RRSP is good and contribute no matter what. Some start out that way, read that one can have too much in an RRSP and plan to liquidate their RRSP while working, even though they haven't figured out what their retirement income pre and post gov't pensions will be.


There's also the changes in the RRSP rules over time where originally, it was use it or lose it with no carry forward.
Then it was a seven year carry forward and now it is an indefinite carry forward.

*Edit:*
I am sure others were more affected than me ... but I could put a lot more into my RRSP if I had the "use it or lose it" RRSP contribution room back.
I'm also lucky in that my co-worker left the company one year before I did so that leaving the DB pension did not give back RRSP contribution room through the pension adjustment reversal like I received.




MrMatt said:


> Myself I think TFSAs are amazing and RRSPs are pretty good, particularly if you expect flat or declining marginal tax rates..


Since I am likely to have between a 15% to 23% drop for the tax rates in retirement versus working, I'd put the RRSP ahead of the TFSA.
I'm glad to have the TFSA to absorb some of my retirement RRSP withdrawals.


But again, one's situation and retirement income/plans is going to be important.

Cheers


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## Retiredguy (Jul 24, 2013)

ian said:


> RSP's and spousal RSP's have enabled us to avoid a fair amount of tax during years of purchase AND enabled us to avoid a fair amount of tax that we would have otherwise paid on the growth.
> 
> They are not for everyone. They are simply one tool that we have to save for retirement and avoid taxes. Not everyone will benefit, not everyone will benefit in the same manner or to the same extent.
> 
> ...


My brother who I assist is in his early 70's lives on OAS, GIS and CPP. A few months ago he was contacted by a bank and told as he was turning 72 he would have to deal with his RRSP. RRSP ! ? Evidently he had put some money into an RRSP in the late 1980's or early 90's and then forgot all about it. He was working then and I know he got a small inheritance so suspect thats why he got a RRSP. When they phoned they asked what he wanted done so he said just move it to his chequing account which now and for many years has been with a different institutiuon. So he got 6000.00 (approx) which of course will affect his GIS for one year (Reduces his GIS by more than 3000) and because of the additional 6K income for 2020 he actually had to pay a small amount of tax. I don't know for sure but expect the RRSP money was just sitting in an account earning low or no interest all these years and the friendly bank was I'm sure very content to have it that way. Of course it's his fault but where has the bank been? He lived at a different address when he put the money in the RRSP account but has been at his as present address for more than 20 years and has had the same phone number, the phone number they just used to contact him.


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## latebuyer (Nov 15, 2015)

ian, its interesting you contributed to your rrsp as from what i’ve read they say don’t invest in the rrsp if you have a pension. I saw one financial planner who said invest in your tfsa first, the other said invest in rrsp based on income (65000). I don’t know who to believe so i split my contribution between tfsa and rrsp.It seems some financial planners say it doesn’t hurt to have a decent sized tfsa if you need to make a large withdrawal.


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## bgc_fan (Apr 5, 2009)

Retiredguy said:


> Of course it's his fault but where has the bank been?


Just out of curiosity, what are you expecting from the bank? Would you prefer that they called on an annual basis to do a check up? I think CIBC and TD do, but at some point it becomes a nuisance. At $6k, I suspect the bank probably didn't think it was worth the effort to check up on it.



latebuyer said:


> ian, its interesting you contributed to your rrsp as from what i’ve read they say don’t invest in the rrsp if you have a pension. I saw one financial planner who said invest in your tfsa first, the other said invest in rrsp based on income (65000). I don’t know who to believe so i split my contribution between tfsa and rrsp.It seems some financial planners say it doesn’t hurt to have a decent sized tfsa if you need to make a large withdrawal.


Keep in mind of the timeframe. Depending on the pension, your marginal tax rate may still be lower than the marginal tax rate at the time of contribution.

TFSAs are relatively new, so RRSPs would have been the only option before TFSAs were introduced. If you wanted to reduce your income tax, then RRSPs were one of the few options. TFSAs are definitely more flexible, so there's no harm in contributing to it.


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## Retiredguy (Jul 24, 2013)

bgc_fan said:


> Just out of curiosity, what are you expecting from the bank? Would you prefer that they called on an annual basis to do a check up? I think CIBC and TD do, but at some point it becomes a nuisance. At $6k, I suspect the bank probably didn't think it was worth the effort to check up on it.


 I certainly do not think a annual phone call was required OR warranted, but surely if the bank had any interest in helping a client they would have made at least one or two telephone calls after several years of seeing a lonely several K RRSP amount siting in an account, rather than waiting nearly 30 years and only then when regulation required it. Obviously no one in the bank was curious and the bank had no vested interest. It was a fairly small amount, agreed. Bro probably not the first person to forget about an account. A phone call would have been a opportunity to one, remind him of it's existence and offer to steer him into a better investment with it and two, solicit more of his business. Then when the phone call was made. Dated note to file "client contacted and reminded of this account and offer was made to ... ,client also advised of our current good rate for car loans, GIC rates. (or whatever). Of course if a bank thinks someone's 5-6K siting dormant in an account is a nuisance, maybe a telephone call to tell them to take their money elsewhere!. Having said the foregoing I re-iterate my earlier comment that this was his fault/responsibility. The bank could have helped with a earlier phone call, but did not.

Unrelated to the above. . a few years ago I setup a joint account with my brother with VanCity Credit Union to help him. The account didn't get used for 1 year and only had a very few $ in it. I received a letter saying if it is not used they were going to close it. So these institutions can do these reminders when it suits them. When that happened my own account (both accounts linked to my online profile) had 15-20K in it and very activly used. Their letter (reminder) prompted me to deal with the dormant - nuisance - account.


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## ian (Jun 18, 2016)

latebuyer said:


> ian, its interesting you contributed to your rrsp as from what i’ve read they say don’t invest in the rrsp if you have a pension. I saw one financial planner who said invest in your tfsa first, the other said invest in rrsp based on income (65000). I don’t know who to believe so i split my contribution between tfsa and rrsp.It seems some financial planners say it doesn’t hurt to have a decent sized tfsa if you need to make a large withdrawal.


We invested in both. In RSP prior to TFSA's and to both after TFSA's were established. Our DB plan left room for some RSP. I was in a 53 percent incremental tax bracket. I was buying equities in our RSP's with 47 cent dollars and the income of gains were sheltered for 30 odd years. That meant that we got to re-invest 100 cents of every dollar that was spun off inside the RSP. It was a no brainer. Now, had my incremental rate been significantly lower I would expect that this would have different.

RSP's, TFSA's etc are very good investment vehicles. They serve a dual purpose for the Govenment...to hopefully reduce income supplements to seniors by encouraging people to save for retirement.

I believe that the order in which you fund TFSA's and RSP's may be down to your individual financial situation at that time.


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## bgc_fan (Apr 5, 2009)

Retiredguy said:


> I certainly do not think a annual phone call was required OR warranted, but surely if the bank had any interest in helping a client they would have made at least one or two telephone calls after several years of seeing a lonely several K RRSP amount siting in an account, rather than waiting nearly 30 years and only then when regulation required it. Obviously no one in the bank was curious and the bank had no vested interest. It was a fairly small amount, agreed. Bro probably not the first person to forget about an account. A phone call would have been a opportunity to one, remind him of it's existence and offer to steer him into a better investment with it and two, solicit more of his business. Then when the phone call was made. Dated note to file "client contacted and reminded of this account and offer was made to ... ,client also advised of our current good rate for car loans, GIC rates. (or whatever). Of course if a bank thinks someone's 5-6K siting dormant in an account is a nuisance, maybe a telephone call to tell them to take their money elsewhere!. Having said the foregoing I re-iterate my earlier comment that this was his fault/responsibility. The bank could have helped with a earlier phone call, but did not.
> 
> Unrelated to the above. . a few years ago I setup a joint account with my brother with VanCity Credit Union to help him. The account didn't get used for 1 year and only had a very few $ in it. I received a letter saying if it is not used they were going to close it. So these institutions can do these reminders when it suits them. When that happened my own account (both accounts linked to my online profile) had 15-20K in it and very activly used. Their letter (reminder) prompted me to deal with the dormant - nuisance - account.


Well, FWIW, I have a couple of accounts with TD, including a USD account that I used to use somewhat regularly, but hadn't for a while. After a while they did send me a notice about the inactivity and that it was dormant unless I did some transaction with it.

With HSBC, I used to have an account and hadn't touched it for a while until I decided to check up on it, and I was charged an inactive fee, but was never contacted about it, as far as I recall.

You misunderstood by what I meant as $6k being a nuisance. They'll happily use it for lending and what not, but not all that interested in finding better use for it for the customer. Another way to think about it, $6k isn't that much when you consider something like TD, and Scotiabank have a $5k minimum to waive fees for their highest tiered package. BMO has a $6k minimum.


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## Retiredguy (Jul 24, 2013)

bgc_fan said:


> You misunderstood by what I meant as $6k being a nuisance. They'll happily use it for lending and what not, but not all that interested in finding better use for it for the customer. Another way to think about it, $6k isn't that much when you consider something like TD, and Scotiabank have a $5k minimum to waive fees for their highest tiered package. BMO has a $6k minimum.


I actually did understand what you meant about it being a nuisance. My reply to your "nuisance" comment was meant to be facetious . The bank account minimums weren't 5 or 6k in the 1990's..... but we agree whatever the amount it was not big enough for them to be interested or care. I'm skeptical if 100K would have been treated differently as I also think they're not all that interested in finding a better use for it for the customer.


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> ian, its interesting you contributed to your rrsp as from what i’ve read they say don’t invest in the rrsp if you have a pension ...


The question is what assumptions are they basing this advice on and how close does it match one's situation.

If I had started my career at my current company that has a DB pension so that I would have a lot more pension credits that result in a much higher retirement pension - this would make sense.
Instead I have changed companies multiple times, left multiple DB pensions and even if I work to age 65, won't have that large a pension.

The combination of my LIRA and RRSP is what will enable a much better retirement, which will likely start years before age 65.




latebuyer said:


> ... I saw one financial planner who said invest in your tfsa first, the other said invest in rrsp based on income (65000).


Sounds reasonable ... though in my case, the TFSA wasn't an option when I was making $65K. 




latebuyer said:


> ... I don’t know who to believe so i split my contribution between tfsa and rrsp.It seems some financial planners say it doesn’t hurt to have a decent sized tfsa if you need to make a large withdrawal.


I like using both, unless one really has a good understanding and a solid plan.

The advantage of having in the TFSA is if one's income/taxes jumps - one can withdraw from the TFSA, contribute to the RRSP and the next year potentially have an easier time re-stocking the TFSA with refund money.

The RRSP, TFSA and non-registered accounts are all tools in the toolbox, IMO.


Cheers


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## Eclectic12 (Oct 20, 2010)

Retiredguy said:


> ... I'm skeptical if 100K would have been treated differently as I also think they're not all that interested in finding a better use for it for the customer.


Depends on how far behind quota the investment rep selling MF's at 2.8% MERs was. 

Cheers


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> The RRSP, TFSA and non-registered accounts are all tools in the toolbox, IMO.


I think that's the key part, they're just tools. To get the best result use the right tool.

When you use a hammer to drive a screw, you won't get optimal results.


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## bgc_fan (Apr 5, 2009)

Retiredguy said:


> I'm skeptical if 100K would have been treated differently as I also think they're not all that interested in finding a better use for it for the customer.


Maybe, and maybe not. I know when my bank account got to a certain value, it usually triggered the bank to give me a call. But, it depends on the bank. One of the big five may do that sort of thing, but I know Simplii doesn't seem to care if I'm holding larger amounts of cash.


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## MrMatt (Dec 21, 2011)

bgc_fan said:


> Maybe, and maybe not. I know when my bank account got to a certain value, it usually triggered the bank to give me a call. But, it depends on the bank. One of the big five may do that sort of thing, but I know Simplii doesn't seem to care if I'm holding larger amounts of cash.


TD never calls me.
BNS assigns me a new "advisor" every few years, who gives a call.
it basically goes, no i don't want to move my emergency fund to your investment solutions, yes I know that it's not making much money. No I don't want an expensive credit card that has worse benefits than my costco card.

To their credit, they have shuffled things around a bit to make them a bit easier.


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## cainvest (May 1, 2013)

doctrine said:


> What people don't get is that RRSPs are effectively the same as TFSAs if your marginal tax rate is the same at contribution and withdrawal. If there is an opportunity for your marginal rate to be actually lower, it is actually far superior to a TFSA as you are effectively paying negative tax at that point.


RRSP can be a real winner, especially for those a bit younger that can use it with TFSA for retirement. RRSP could also be used to fund early retirement years when taxed income sources should be lower.


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## ian (Jun 18, 2016)

People move. Across town, across the country, and out of the country. Often more than once. It is a challenge for financial institutions and former employers to keep track of these people if they do not follow up with change of address etc.

I certainly do not expect a bank to call me once a year.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> TD never calls me.
> BNS assigns me a new "advisor" every few years, who gives a call ...


I wonder what I did as there was no calls for a long time and now I get regular calls from TD.
BNS has always called, trying to expand from a loan to more business.

Not sure how or why but randomly over the years Royal and BMO have called. 
Never CIBC so far.


Cheers


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## off.by.10 (Mar 16, 2014)

Another thing people forget is that their true marginal tax rate can be significantly higher when they have kids. I think most child related benefits are clawed back based on net income. And there are several of those around here. I remember we had a voluntary low income year several years back and I was surprised at all the extra money that came pouring in the following year from adjusted benefits.

Had I known that a long time ago, I might have considered keeping my RRSP deductions until I had children.


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## MrMatt (Dec 21, 2011)

off.by.10 said:


> Another thing people forget is that their true marginal tax rate can be significantly higher when they have kids. I think most child related benefits are clawed back based on net income. And there are several of those around here. I remember we had a voluntary low income year several years back and I was surprised at all the extra money that came pouring in the following year from adjusted benefits.
> 
> Had I known that a long time ago, I might have considered keeping my RRSP deductions until I had children.


Yeah, thanks for pointing that out.
Though it makes more sense to contribute to RESP for matching than RESP






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Just for my interest, that means $10k into RRSP, would be an $570 more CCB (which is tax free). Gonna have to delay that midlife crisis sportscar a bit longer.


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## latebuyer (Nov 15, 2015)

Ian, how do you calculate your incremental rate?


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## MrMatt (Dec 21, 2011)

latebuyer said:


> Ian, how do you calculate your incremental rate?


What do you mean "incremental rate"?

taxtips.ca has nice info on marginal tax rates, but you have to watch for clawbacks in other programs.

They're really making things far more complicated than they need to be.


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## ian (Jun 18, 2016)

And keep in mind that your tax, and your incremental tax rate, is based on your TAXABLE income.


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## Tostig (Nov 18, 2020)

What a nice problem to have. I'd rather have too much money than not enough.


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## ian (Jun 18, 2016)

Tostig said:


> What a nice problem to have. I'd rather have too much money than not enough.


I know. I feel exactly the same way when I hear about people moaning and bitching about the OAS claw back as thought they think it is an entitlement.


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## MrMatt (Dec 21, 2011)

ian said:


> I know. I feel exactly the same way when I hear about people moaning and bitching about the OAS claw back as thought they think it is an entitlement.


Well OAS is by definition a government entitlement, so it isn't surprising that some people think that it is.


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## off.by.10 (Mar 16, 2014)

MrMatt said:


> Yeah, thanks for pointing that out.
> Though it makes more sense to contribute to RESP for matching than RESP


Or do both. Use RRSP deduction to knock down your net income and get extra grant in your RESP. Assuming that also uses net income. I couldn't find a definition for the "adjusted income" they use.


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## MrMatt (Dec 21, 2011)

off.by.10 said:


> Or do both. Use RRSP deduction to knock down your net income and get extra grant in your RESP. Assuming that also uses net income. I couldn't find a definition for the "adjusted income" they use.


I recall that if you can afford to max out an RESP, you don't qualify for the bonus match.
Bit fuzzy on the details, but really I try to focus on the big picture actions. I only get into the details when I feel particularly motivated.


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## Covariance (Oct 20, 2020)

One way to think about it is the Government owns (portfolio value x tax rate) of the total value of the RRSP. Since everything that comes out of the RRSP attracts the tax rate at withdrawal. If that’s a big number - sorry to make you picture it.
In contrast the TFSA withdrawals are tax free so you own it all. Hence the Feds quickly capped it at 5K/year.


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## james4beach (Nov 15, 2012)

Covariance said:


> One way to think about it is the Government owns (1-tax rate) of the total value of the RRSP. Since everything that comes out of the RRSP attracts the tax rate at withdrawal. If that’s a big number - sorry to make you picture it.
> In contrast the TFSA withdrawals are tax free so you own it all. Hence the Feds quickly capped it at 5K/year.


For this reason, on my personal balance sheet, I knock 25% off the value of my RRSP. You're right, the government owns part of my RRSP.

This is obviously just an estimate but I think 25% is a reasonable guess, in the right ballpark, and (as you say) helps me picture it.


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## Eclectic12 (Oct 20, 2010)

Covariance said:


> One way to think about it is the Government owns (1-tax rate) of the total value of the RRSP. Since everything that comes out of the RRSP attracts the tax rate at withdrawal. If that’s a big number - sorry to make you picture it ...


Sure .... but if one is paying attention and adjusting the plan, it may not end up with the big withdrawal (except maybe on the death of the second spouse).




Covariance said:


> In contrast the TFSA withdrawals are tax free so you own it all. Hence the Feds quickly capped it at 5K/year.


The Feds rushed to put in a $5K per year cap? 

Seems far fetched and a revision of history as the TFSA program including the $5K cap was announced in Feb 2008 as part of the 2008 budget. The TFSA start date set in the budget was Jan 1st, 2009, making the limit part of the initial design.

Perhaps you are confusing the rush in Oct 2009 to bring in the option of a 100% of benefit penalty for things like intentional over contributions to inflate TFSA contribution room or questionable swaps. That change was made effective as of the announcement despite the legislation enacting it being passed in Dec 2010.


Cheers


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## Covariance (Oct 20, 2020)

Eclectic12 said:


> The Feds rushed to put in a $5K per year cap?
> 
> Seems far fetched and a revision of history as the TFSA program including the $5K cap was announced in Feb 2008 as part of the 2008 budget. The TFSA start date set in the budget was Jan 1st, 2009, making the limit part of the initial design.
> 
> ...


Never said anyone rushed. They just quickly did what they said they planned to do. In the April 2015 Federal Budget the Conservatives raised the annual contribution to $10,000 for 2015 and subsequent years. The Liberals won the election in October 2015, defeating the Conservatives. One of the first things they did was to kill the $10k contribution amount as they said they would during their campaign. Effective Jan 1 2016 is was back to $5500 (indexed to inflation). So for one year we had $10k.


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## Eclectic12 (Oct 20, 2010)

I disagree as writing the cap was a quick result of the tax free part implies to me that it wasn't part of the design that had to be "fixed".

The bump up for TFSA contribution room to $10K I don't believe was part of the design where IIRC, it also took away the inflation indexing. Essentially making the TFSA contribution room like the days of the RRSP contribution room when it was a set amount with no changes, year over year. It seemed to be a perk to hopefully sway the election fortunes versus the years the TFSA had run without any changes, except adding to the range of penalties.


Cheers


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## Beaver101 (Nov 14, 2011)

bgc_fan said:


> Just out of curiosity, what are you expecting from the bank? Would you prefer that they called on an annual basis to do a check up? I think CIBC and TD do, but at some point it becomes a nuisance.* At $6k, I suspect the bank probably didn't think it was worth the effort to check up on it.*
> ...


 ... that's most likely the case.

If that amount was $60K, you can bet that they'll be hooking you up with one of their "financial" advisor for a "free (or a grand or 2's worth) consultation" *asap *... plus bonus recommendations on "their (house)" mutual funds, of course.

Seriously, when the depositor turns 70/71, isn't by regulation(s) that the bank(s) are to notify their clients on the need to collapse their RRSP? The OP's brother was 72 when he was contacted ... talk about his (maybe all) bank was hiding under a rock.


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## My Own Advisor (Sep 24, 2012)

I'm with Ian above. RRSPs, TFSAs, are outstanding investment vehicles. I wouldn't be where I am today financially without them. 

Reinvesting the RRSP-generated refund is key though in any RRSP vs. TFSA debate. 




__





Managing the refund well is the linchpin in the RRSP vs. TFSA debate


The RRSP is great. The TFSA is great. However, managing the RRSP refund well is the linchpin in the RRSP vs. TFSA debate.




www.myownadvisor.ca





Like Ian "They serve a dual purpose for the Govenment...to hopefully reduce income supplements to seniors by encouraging people to save for retirement."

You bet. 

Please don't rely on the government to fund your financial future!


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## MrMatt (Dec 21, 2011)

My Own Advisor said:


> I'm with Ian above. RRSPs, TFSAs, are outstanding investment vehicles. I wouldn't be where I am today financially without them.
> 
> Reinvesting the RRSP-generated refund is key though in any RRSP vs. TFSA debate.


RRSP vs TFSA is effectively a marginal tax rate variation over time debate.

I don't consider tax refunds as a core concept of RRSPs, they're simply a result of your fiscal management strategy.
If you plan on RRSPs file your T1213, then you can minimize your refund.


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## cainvest (May 1, 2013)

My Own Advisor said:


> Please don't rely on the government to fund your financial future!


I think many will need to rely on Government related products like rrsp, tfsa, ccp, and oas. Of course those that overly save will have a non-reg component and/or have good company pensions.


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## MrMatt (Dec 21, 2011)

cainvest said:


> I think many will need to rely on Government related products like rrsp, tfsa, ccp, and oas. Of course those that overly save will have a non-reg component and/or have good company pensions.


Well RRSP and TFSA aren't "government related products".
RRSP is a tool to allow investment growth with less government interference.
TFSAs are pretty much a anti government thing, they don't even count that growth for clawbacks.

If the government didn't take half our paycheck in taxes, to pay for things we don't need or want, they wouldn't have to give us tiny handouts back.


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## cainvest (May 1, 2013)

MrMatt said:


> Well RRSP and TFSA aren't "government related products".


Since the government created them and can change them (or the rules) at any time I'd say they are "government related products".


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## Covariance (Oct 20, 2020)

Eclectic12 said:


> I disagree as writing the cap was a quick result of the tax free part implies to me that it wasn't part of the design that had to be "fixed".
> 
> The bump up for TFSA contribution room to $10K I don't believe was part of the design where IIRC, it also took away the inflation indexing. Essentially making the TFSA contribution room like the days of the RRSP contribution room when it was a set amount with no changes, year over year. It seemed to be a perk to hopefully sway the election fortunes versus the years the TFSA had run without any changes, except adding to the range of penalties.
> 
> ...


Yup. The Conservatives put it out there in April 2015 with a hope that it would help them win the election. The they lost in October. The Liberals had campaigned through the election on rolling it back, ironically as part of their plan to balance the budget. So yes, the original program was and is a good one to encourage savings.

Not splitting hairs here but my point was not that there is any problem with TFSA. Rather the Liberals wanted to "fix" and remove a large expansion of the funds that would be flowing into TFSA and shielded from tax (as opposed to deferred had they gone into an RRSP).


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## ian (Jun 18, 2016)

The unfortunate aspect to all this is the relative low take rate for programs like TFSA and RESP , not to mention the surprising number of people who neglect to participate in employer DC pension plans thus leaving matching dollars on the table. It does not encourage the Government to expand the programs...especially RESP whose numbers are not even inflation adjusted.


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## MrMatt (Dec 21, 2011)

ian said:


> The unfortunate aspect to all this is the relative low take rate for programs like TFSA and RESP , not to mention the surprising number of people who neglect to participate in employer DC pension plans thus leaving matching dollars on the table. It does not encourage the Government to expand the programs...especially RESP whose numbers are not even inflation adjusted.


I think it's a literacy problem, in this case financial literacy.
Also planning and money. If you have 2 kids, it's pretty tough to max out RESP.


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## balexis (Apr 4, 2009)

MrMatt said:


> Put money in the RRSP, let it grow, but don't claim the deduction.
> When you take the money out, instead of being taxed, claim the deduction on that.


Have a look at Retail Investor .org : RRSP tax benefits : a new understanding : tax calculators - Investor Education

First conclusion: *An RRSP with a delayed-deduction is NEVER the best choice.*


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## MrMatt (Dec 21, 2011)

balexis said:


> Have a look at Retail Investor .org : RRSP tax benefits : a new understanding : tax calculators - Investor Education
> 
> First conclusion: *An RRSP with a delayed-deduction is NEVER the best choice.*


Wrong.
An RRSP with a delayed deduction is not normally the best choice.

Example case.
Lets say I make 45k/yr for most of my career. 
I want to withdraw my RRSP for some reason, my income would be really high, I use at least some of my unclaimed deduction at this time, keeping me in the lower tax bracket.

Even simpler, lets say I have a lot of cash from an inheritance, but I have a low income, I can contribute and claim later.


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## cainvest (May 1, 2013)

MrMatt said:


> An RRSP with a delayed deduction is not normally the best choice.


There will always be situations that RRSP isn't a good choice but I think for most that should use RRSP delaying the deduction generally isn't a good idea.


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## MrMatt (Dec 21, 2011)

cainvest said:


> There will always be situations that RRSP isn't a good choice but I think for most that should use RRSP delaying the deduction generally isn't a good idea.


I agree, that's why I said it's rarely the best choice. I was simply disagreeing that it was never the best choice.


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## Karlhungus (Oct 4, 2013)

Ive been aggressive with the RRSP that last couple years as I have 3 kids under 6. So the contributions have cranked up my CCB to the tune of $1000 per month.


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## peterk (May 16, 2010)

off.by.10 said:


> Another thing people forget is that their true marginal tax rate can be significantly higher when they have kids. I think most child related benefits are clawed back based on net income. And there are several of those around here. I remember we had a voluntary low income year several years back and I was surprised at all the extra money that came pouring in the following year from adjusted benefits.
> *
> Had I known that a long time ago, I might have considered keeping my RRSP deductions until I had children*.


Yes, I've been playing this game the last 2 years, but really, it's not as beneficial as you think in the end. It's hard for the math to work out because of the delay in the benefit being paid, plus the build up of 2+ years of deductions probably puts you into a lower tax bracket faster than you think. Certainly it can good to think about for 1-2 years in advance if you know you are pregnant or will be soon. But for any more than 2 years of delaying it is likely a wash, and you should just deduct now.

I'd point out - that if you have child benefits, especially for 2 or more kids, then the RRSP tilts heavily in favour over the TFSA... though one needs to be careful about withdrawls and OAS clawback, so it's a doubled edge sword.


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## Eclectic12 (Oct 20, 2010)

ian said:


> The unfortunate aspect to all this is the relative low take rate for programs like TFSA ...


Hmmm ... IIRC the TFSA has a much better take up rate than when the RRSP was introduced with the lessor of $2.5K or 10% of income.
That doesn't change that many I talk to could make more use of it or use it better. 



ian said:


> ... not to mention the surprising number of people who neglect to participate in employer DC pension plans thus leaving matching dollars on the table ...


To me this is the bigger issue ... though I believe it is driven by financial ignorance with inertia mixed in.

Cheers


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## balexis (Apr 4, 2009)

MrMatt said:


> Wrong.
> An RRSP with a delayed deduction is not normally the best choice.
> 
> Example case.
> ...


The page I linked to has detailed calculations supporting the conclusions. I understand how your two scenario intuitively make sense, but I'm genuinely curious - have you run the numbers?
The inheritance scenario is interesting: how would investing 100% in an unreg account compare to an RRSP with delayed deduction for say 5 years? 15 years? 25 years? It is clearly demonstrated that the longer the delay, the higher the penalty.


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## MrMatt (Dec 21, 2011)

balexis said:


> The page I linked to has detailed calculations supporting the conclusions. I understand how your two scenario intuitively make sense, but I'm genuinely curious - have you run the numbers?
> The inheritance scenario is interesting: how would investing 100% in an unreg account compare to an RRSP with delayed deduction for say 5 years? 15 years? 25 years? It is clearly demonstrated that the longer the delay, the higher the penalty.


"Run the numbers"?
No numbers to run, the amount saved will depend on the marginal tax rate at the time claimed, if you claim when your marginal tax rate is higher, you save money income tax.
So if you decide to claim when your marginal tax rate would be higher, you save more in taxes.

The tax free compounding inside an RRSP or TFSA gives an advantage. 
You can model it yourself, go ahead.

What penalty? I'm not aware of any penalty for not claiming your RRSP deductions at any particular time.

The only gotcha with RRSPs is changes in marginal tax rate, if you contribute at a low rate and withdraw at a high rate you could be behind.


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## cainvest (May 1, 2013)

MrMatt said:


> The tax free compounding inside an RRSP or TFSA gives an advantage.
> You can model it yourself, go ahead.
> 
> What penalty? I'm not aware of any penalty for not claiming your RRSP deductions at any particular time.


Isn't not being able to invest your refund a penalty?


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## MrMatt (Dec 21, 2011)

cainvest said:


> Isn't not being able to invest your refund a penalty?


Well no, it's the cost (opportunity cost), of delaying the claim. I don't think that's a penalty, it's simply one of the tradeoffs.

I think in most cases TFSA is wonderful, and RRSPs are good, and you likely don't want to delay claiming the contribution. I think filing of T1213 is a great idea if you make regular contributions.

However if you do want to delay your claiming your contribution, that's fine, and you can still come out ahead vs non registered. There might be cases where delaying the claim can make sense, ie low return portfolio and significant jumps in marginal tax rate.
I think playing such games are kind of silly, but some people love getting into the weeds on all that. I'll admit, sometimes I find it interesting to investigate those types of games.


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## cainvest (May 1, 2013)

MrMatt said:


> Well no, it's the cost (opportunity cost), of delaying the claim. I don't think that's a penalty, it's simply one of the tradeoffs.
> 
> I think in most cases TFSA is wonderful, and RRSPs are good, and you likely don't want to delay claiming the contribution. I think filing of T1213 is a great idea if you make regular contributions.


As I believe someone already mentioned TFSA and RRSP are equal given these two factors


RRSP tax rate is the same going in/out
RRSP tax refund is invested each year

So if you have no refund claim you are losing out on investing that portion of the money.


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## MrMatt (Dec 21, 2011)

cainvest said:


> As I believe someone already mentioned TFSA and RRSP are equal given these two factors
> 
> 
> RRSP tax rate is the same going in/out
> ...


Yes, I've run those calculations and basically agree. 
That's why for young people at the low income phase, and when they might need access to the money, I lean towards recommending TFSAs. 

Also conceptually I reject that there is an RRSP tax refund. That's an artifact of your tax planning strategy.
I'd actually go further, assuming 20% marginal tax rate.
If you contribute $80/period to TFSA or $100 to RRSP, for a constant marginal tax rate, they'd be the same.

If however you only contribute $80 to RRSP, then get a refund in March/April of the following year of $20/period, you'd end up with less, as that money hasn't been invested for several months.

so to be pedantic, I'd say if you wait to get an "RRSP refund" you're missing out, you should have never lent that money to the government in the first place. 
But again I think this is splitting hairs and really only a minor effect.


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## cainvest (May 1, 2013)

MrMatt said:


> That's why for young people at the low income phase, and when they might need access to the money, I lean towards recommending TFSAs.


Of course low income favors TFSA and RRSP can really be truely excellent (far better than TFSA) for higher level earners but it always depends on the situation.


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## MrMatt (Dec 21, 2011)

cainvest said:


> Of course low income favors TFSA and RRSP can really be truely excellent (far better than TFSA) for higher level earners but it always depends on the situation.


Agreed, but I initially started this thread because I didn't understand how anyone could have anything against an RRSP. 
I can't think of any case where it's "bad"


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## My Own Advisor (Sep 24, 2012)

+1

Ditto.

Always amazes me MrMatt about people disregarding the merits of the RRSP, TFSA even worse


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## afulldeck (Mar 28, 2012)

MrMatt said:


> Agreed, but I initially started this thread because I didn't understand how anyone could have anything against an RRSP.
> I can't think of any case where it's "bad"


Only one reason---> the marginal tax rate is higher at exit than entry. Under this condition the user doesn't get the benefit of the tax break and loses the ability of tax loss recovery.


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## MrMatt (Dec 21, 2011)

afulldeck said:


> Only one reason---> the marginal tax rate is higher at exit than entry. Under this condition the user doesn't get the benefit of the tax break and loses the ability of tax loss recovery.


If you expect that is the case, don't claim your deduction until withdrawal.

So you put in $1k, don't claim the deduction, let it grow the compounding is tax free, so it will be higher than if you did this unregistered.
At withdrawwal of your $1k, you use your deduction then, Then you only have to pay on the total accrued gains.

I think in the specific case of increasing tax rates, it might not be best, but I think you can still use the RRSP to come up with a solution that is close to equivalent.

I agree that there are very specific situations that the RRSP comes out behind.
If you invest in a single stock, over the entire time period, and it is all a single capital gain, unregistered would win out. 

But I think for most real cases the RRSP wins.

Which is my point, you have to put together some pretty contrived examples for RRSPs to be a bad diea.


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