# RRSP and TFSA maxed out - where should I put extra cash



## mike74722 (May 15, 2011)

I'm a newbie investor and was wondering where you could place money if your RSP and TFSA contributions were maxed out and you wanted to minimize taxation? Could you still add to your TFSA and just pay the taxes for going over your limt? Would this be the best thing to do?


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## Cal (Jun 17, 2009)

That would not be the best thing to do.

Just buy the investments that you would like to hold/compliment your other holdings. The will be considered non registered investments. Some people like to hold dividend paying equities in non registered accounts to take advantage of the dividend tax credit. However you don't have to.

You are able to overcontribute up to $2000 in your RRSP, although you can't claim the amount, you are able to have it just in case some numbers are off or in the event of an adjustment. I would want to make sure that you don't get an adjustment and go over though, as you will have to pay taxes on that amount.


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## andrewf (Mar 1, 2010)

If you have a mortgage (or almost any other kind of debt), repay that first. If you are comfortable with that level of debt, you might consider using an investment loan to finance non-registered investments. That interest is deductible from income, which partially shields the income from your investments.


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## Larry6417 (Jan 27, 2010)

There are different things you can do - from simple to fancy. Generally, the simple things are better. As Andrew stated, paying debt - if you have any - provides a tax-free return. You could buy common stocks. No capital gains are payable until sold. You may have to pay tax on dividends, but if you purchase eligible Canadian stocks, the dividend tax credit lowers tax payable by a fair bit. If you have a spouse, then you could consider income-splitting by contributing to that person's TFSA. 

Fancier methods include using investments like flow-through shares (here's a quick description www.milliondollarjourney.com/how-flow-through-shares-work.htm ) or whole life insurance. However, these aren't short term-investments, and there are high costs involved, especially with whole life. You need to carefully evaluate your finances to see if these may sense for the long term.


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## OhGreatGuru (May 24, 2009)

mike74722 said:


> I...Could you still add to your TFSA and just pay the taxes for going over your limt? Would this be the best thing to do?


Other than the $2K overcontribution allowance permitted for RRSPs, there are substantial penalties, not just "taxes", for overcontributing to TFSA or RRSP. So don't deliberately overcontribute.


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## OhGreatGuru (May 24, 2009)

mike74722 said:


> I'm a newbie investor and was wondering where you could place money if your RSP and TFSA contributions were maxed out and you wanted to minimize taxation? ...


That's very hard to say without knowing more about your investor profile. But in principle:
1. Retire debt;
2. Dividend funds or dividend-paying stocks because of the Dividend Tax Credit; or,
3. Equity funds or growth stocks, because capital agains are taxed at an inclusion rate of only 50%.


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## Jungle (Feb 17, 2010)

Great suggestions here. Also look at spousal rrsp contributions, if you have a spouse.


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## PMREdmonton (Apr 6, 2009)

One other thing to consider is that you could move all Canadian equities out of TFSA and RRSP since they are given favourable tax treatment and then buy other things for the RRSP (REITs, bonds, US dividend paying equities). You can do the same for the TFSA but US dividend paying equities should never be put in a TFSA.


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## OhGreatGuru (May 24, 2009)

Also see this article http://www.milliondollarjourney.com/tax-optimizing-the-couch-potato-portfolio.htm
referenced in this thread
http://www.canadianmoneyforum.com/showthread.php?t=7494


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## larry81 (Nov 22, 2010)

add this to your reading list:

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement


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## mike74722 (May 15, 2011)

Great thanks!


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## nick24 (Apr 3, 2009)

If you have kids, you could put money into an RESP up to a max of $2500 per year. The Govt will contribute an additional 20%. You can contribute more, but the Govt will only add to the first $2500 per annum.


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## marnia (Jun 3, 2011)

*are dividends better than a DRIP for reducing taxes?*

I'm confused as to whether I should be setting up DRIPs so I'm not constantly buying the discount broker fee for buying new units or just receiving dividends. Is there a difference re taxation? Also, for the people who eventually live off their dividends, obviously they are not using DRIPs or there would not be any money cast off. Doesn't this mean that their nest egg amount never grows bigger or am I missing something? Thanks.


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## My Own Advisor (Sep 24, 2012)

Old thread...but trying to help a fortunate friend....

If all TFSAs (2 accounts) and RRSPs (2 accounts) are lucky enough to be maxed out...

Then would you agree:

1) Retire debt/repay debt (their only debt is mortgage) as much as possible

Then, 

2) When debt is retired or close to being retired, then focus on building up non-registered assets with dividend-paying stocks because of the DTC?


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## none (Jan 15, 2013)

I'm thinking of underweighting my potato initially and adding canadian equities via e-series in a registered account.

Practically though, will this make tax time really annoying? I.e dividends and monthly buy ins or does TD just give me a statement in March with all the info?


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## birdman (Feb 12, 2013)

My Own Advisor: I agree and that is what we did. Then, the only issue to consider is asset allocation within the various accounts.


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## My Own Advisor (Sep 24, 2012)

TD should be sending you a tax statement, I would think for RRSP and non-reg. accounts.


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## My Own Advisor (Sep 24, 2012)

frase said:


> My Own Advisor: I agree and that is what we did. Then, the only issue to consider is asset allocation within the various accounts.


Good to know frase. I hope I get into the same position eventually. 

What I mean is, it seems they have a tax issue while still working, which I suspect if RRSPs and TFSAs are maxed out, and the house is close to being paid off, this is a good problem (although annoying problem tax-wise) to have.


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## RBull (Jan 20, 2013)

My Own Advisor said:


> Old thread...but trying to help a fortunate friend....
> 
> If all TFSAs (2 accounts) and RRSPs (2 accounts) are lucky enough to be maxed out...
> 
> ...


Yes.

If/when the market offers a very good buying opportunity in the coming years they may choose to do a blend of debt repayment and non reg. investing.


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## uptoolate (Oct 9, 2011)

I thought that it was interesting that no-one took exception to the suggest by Larry6417 of buying Whole Life insurance as an option - although perhaps it's because he did say that it is an expensive option.


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## dime (Jun 20, 2013)

How about the inverse of the original question? 

Does it make sense to have 100% of stock and ETF investments in nonregistered account and max out the TFSA with bond income? 
It makes sense to me to take advantage of the dividend tax credit as well as the captial gain and loss rules. I also like how the the tax is paid annually, so the balance is effectively an accurate reflection (compared to an RRSP where a whopping amount of tax must be paid at age 71). 

Is it crazy to not have any RRSP for fixed income? Right now yields are just so damn low it seems almost pointless!


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## My Own Advisor (Sep 24, 2012)

_Is it crazy to not have any RRSP for fixed income? 
_
Maybe, but I don't!


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## Eclectic12 (Oct 20, 2010)

marnia said:


> I'm confused as to whether I should be setting up DRIPs so I'm not constantly buying the discount broker fee for buying new units or just receiving dividends. Is there a difference re taxation?


No ... when dividend income is paid - it is taxed in the year the dividend is received ... regardless of whether the dividend is spent, is collected then spend to buy a different stock or is used immediately by a DRIP to buy the same stock.

Where the dividend is spent, there's no future tax implication. Where the dividend buys more stock (DRIP or no DRIP), the dividend money will be a part of the adjusted cost base (ACB) of what is purchased and will eventually be a part of the capital gain (or loss) calculation when the stock is sold.




marnia said:


> Also, for the people who eventually live off their dividends, obviously they are not using DRIPs or there would not be any money cast off ...


YMMV ... some will have part or all of their portfolio paying dividends for income to spend. If they don't need all of the dividend income, they may have some of it used for a DRIP. Others will have everything going into the DRIP and will sell stock to generate the income.




marnia said:


> ... Doesn't this mean that their nest egg amount never grows bigger or am I missing something? ...


You are overlooking the growth of the share price. 

Now likely something bought for dividend income won't grow as much from a share price perspective ... but there can be growth. Then too, there's stock that pays a small dividend but the share price has been growing substantially.


Finally ... if this is an active investor who saw the market slumping in 2008 ... there can be substantial growth from selling a portion near the top and then re-buying or redeploying the proceeds. As an example, having seen Agrium climb from a purchase price of $28 to $114 - I sold a portion for $105. I missed out on two or three dividends but was able to re-buy less than a year later for about $40. 

One wants to be careful with this type of action ... my main focus to was preserve what was earned but the side bonus was a nice multiplier to growth.


Cheers


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## Eclectic12 (Oct 20, 2010)

dime said:


> How about the inverse of the original question?
> 
> Does it make sense to have 100% of stock and ETF investments in nonregistered account and max out the TFSA with bond income?
> It makes sense to me to take advantage of the dividend tax credit as well as the captial gain and loss rules.


Depends on one's income level and the comparison ... bond income versus dividends at a high Ontario tax rate, say $90K before considering investment income ... that's something like paying 25.38% on taxable eligible dividends versus 43.41% on the bond. However, if the comparison is a non-dividend paying stock versus an eligible dividend paying stock ... then it's 21.70% on the capital gain (CG) versus 21.70% *plus* 25.38% on the dividend income each year. Or worse, a non-dividend paying stock versus a non-eligible dividend paying stock means paying 21.70% on the CG *plus* 32.91% yearly on the dividend income.

http://www.taxtips.ca/taxrates/on.htm




dime said:


> ... I also like how the the tax is paid annually, so the balance is effectively an accurate reflection (compared to an RRSP where a whopping amount of tax must be paid at age 71).


What do you mean the "balance is effectively accurate"? 

The annual tax is only covering the income paid in that tax year (i.e. dividends, cash distributions). The capital gains tax is deferred and is due on sale or death.


Secondly ... who is choosing a whopping tax bill by withdrawing everything at age 71 from their RRSP?

As I understand it - age 71 is when one has to windup the RRSP, where choosing to convert to a RRIF or annuity will spread out the withdrawal income over many years, resulting in a reduced tax bill versus a lump sum withdrawal.

http://www.epr.ca/what-to-do-with-your-rrsp-investment-when-you-turn-71-or-you-retire/


Never mind that if one anticipates that one's retirement income is high ... one can choose to retire early and use RRSP withdrawals as the main source of income before the other retirement income sources are started. This would reduce the tax bill as an RRSP withdrawal is included as income, dollar for dollar so that in a time of low or no income - the income tax bill will be reduced.


The key here is that one has choices that will affect the tax bill significantly.




dime said:


> Is it crazy to not have any RRSP for fixed income? Right now yields are just so damn low it seems almost pointless!


Depends on what one is comfortable with risking and how this fits with the other assets one has.


Cheers


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## dime (Jun 20, 2013)

@ Eclectic12 Thanks, there's some really great points you've made. You've managed to make sense out of my poorly written post!I'll read over carefully. Complicated stuff. 

Yes, on the capital gains due upon sale of the stock. I had in mind how I pay tax annually on the yield and cap gain, but you're right in that often I hold onto stocks for 6 or 7 years before finally selling.

Yes, my mistake, now that I think about it, the RRSP conversion to RRIF is what my mother is working on now so it doesn't have to be a single tax bill upon age 71! 

When you say "one has choices that will affect the tax bill significantly," Other than hiring an advisor, any good resources you might suggest for looking closer at this topic? 

Regarding what you say about risk, do you have any suggestions as to what are the better options for fixed income at the moment when considering the current low rate environment with potential for rising rates in a few years?


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## Eclectic12 (Oct 20, 2010)

Complicated it is ... but I've found that once the mechanics are understood, the choices that make sense become clearer. Take your time to absorb and understand as moving too quickly tends to be far more costly than delaying a short while.

As for "one has choices" ... other than hiring an advisor, I find it helpful to try to learn a bit more when I can. Then too, paying attention to the comments/info from those who are currently going through the process helps ... as it running some quick scenarios to check some the claims. 

Don't forget, most articles will build in assumptions to illustrate their point ... if the assumptions don't look like they will hold true - then it might be a different situation. 


Cheers


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