# Any point to my wife contributing to a RRSP, lowest tax rate?



## Chris Boar

So if my understanding of RRSP's is correct, you only benefit from RRSP contributions if you think your withdrawal marginal tax rate will be lower than your tax rate when you contribute to the RRSP. If they're the same there is no benefit, correct?

My wife is in the lowest marginal tax rate, at the moment she has an employer matched contribution RRSP so that's all good, it's worth it, instant 100% gain! But she's just come into some funds that will let her max out her TFSA and her RRSP. If we're investing in ETF's it seems pointless putting those in her RRSP to max it out. She might as well just buy the ETF's in a non-registered account, and pay the CG and dividend's tax when she comes to draw down on them.

Thoughts?


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## hboy43

Hi:

I think your take on things is good. Do the RRSP up to the point that the employer no longer adds to it, then TFSA until maxed out, then non-registered accounts. Are RESPs applicable to your situation?

hboy43


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## livewell

Depends on your investment timeline. If your not planning on withdrawing the money for 15-20 years or more then the value of the tax free compounding is worthwhile even if the marginal tax rate is low at investment time. I agree employee matching 1st, TFSA 2nd, but if your less than ~40-45 and are saving for retirement I would still invest in the RRSP 3rd (With the additional benefit of the short term tax rebate that you can also re-invest in non-registered accounts).


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## Guban

She could be nice to you and give you money so that you could max out your TFSA.


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## My Own Advisor

Two huge benefits of RRSP:

1. Tax-deferred growth, and
2. Tax deduction for RRSP contributions.

Regarding #2, yes, a big benefit from RRSP contributions if when your marginal tax rate (in retirement) upon withdrawal is lower than your contribution rate. 

Don't forget about #1, tax-deferred compounding time 

CGs are the lowest form of tax, next to tax-free of course.

I don't think it's ever a bad idea to max out the TFSA if/when you can.

My $0.02.


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## Chris Boar

My Own Advisor said:


> Two huge benefits of RRSP:
> 
> 1. Tax-deferred growth, and
> 2. Tax deduction for RRSP contributions.
> 
> 
> My $0.02.


I'm not so sure. I've been trying to understand everything on this site that goes into painful detail about the actual mechanics of how RRSP's work, with maths to prove it.

http://www.retailinvestor.org/RRSPmodel.html

Folks think of it as a 'tax deduction', but in reality it's effectively a loan from the CRA that must be repaid when withdrawn years down the line. That deduction plus it's profits are effectively paid back on withdrawal. You only gain from an RSP if your withdrawal tax rate is lower than when you paid in. The 'tax-defered' growth is a red-herring.


At least that's my understanding of it?


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## My Own Advisor

Chris,

It is absolutely a government loan:
http://www.myownadvisor.ca/if-you-spend-that-rrsp-refund-then-tfsa-makes-more-sense/

I wrote "At some point, the money that comes out of your RRSP will be taxed. The tax man will find you and he will ask for his refund."

Tax deduction is your government loan for your RRSP contributions.


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## Chris Boar

rikk said:


> the contributions over the years are now effectively tax free money


Having read that site some more.... the author is saying it's a common misinterpretation of how the RRSP works. The point of a RRSP is tax free growth on your *after-tax* contributions (which is sort of what you said). Referring to it 'tax-deferred' confuses the mechanics of what happens when you withdraw. If your tax rates are the same on contribution and withdrawal, the net effect is the same as a TFSA. There's a good example in a table about half way down that page. What it illustrates is that the tax you pay on withdrawal = the original tax refund+it's growth (assuming tax rates are the same on withdrawal, and regardless of whether you actually reinvested the refund).

I'm getting a headache.....


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## Chris Boar

My Own Advisor said:


> Chris,
> 
> Tax deduction is your government loan for your RRSP contributions.


That's how it's pitched to us by advisors/etc. But If my understanding is correct, the reality is that 'loan' is there to cover the tax you will end up paying on withdrawal. If you 'invest' that tax deduction, it's original capital + growth will be paid back to the Gov as 'tax' when we withdraw. We personally do not gain financially from that deduction at all, it all goes back in 'tax' when we withdraw. If we make the mistake of not reinvesting those deductions then the loan is 'repaid' in the form of tax out of our own after-tax growth.


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## cainvest

Chris Boar said:


> If your tax rates are the same on contribution and withdrawal, the net effect is the same as a TFSA. There's a good example in a table about half way down that page.


All things basically equal, RRSP = TFSA if you invest the current RRSP refund and withdraw at the same tax rates.

The gains or losses are in the details, some of which are,
- Company matching contributions (free gain)
- Future tax rate lower/higher due to income (gain/loss, this also assumes the withdrawl amount crosses all tax brackets equally)
- Future tax rate lower/higher due to goverment (who knows what the % will be later on)
- Manditory % withdrawl when older (starts at 71 right? so less control of taxable income depending on amount saved) 
- some RRSP investments have a benefit for extra return % due to withholding taxes (example: dividends on US etfs)

I'm sure there are more ....


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## My Own Advisor

The gov't loan can be at one tax rate, i.e., today's. That's doesn't mean your RRSP withdrawal will be in the same tax rate (future).

We gain financially by taking the tax-deferred loan and using it for tax-deferring investing and compounding purposes. 

Would not paying any tax on any income be ideal? Of course, but where does that exist? 

You can play around this calculator if you wish, I find it's pretty good.
https://www.retirementadvisor.ca/retadv/apps/tfsaRrsp/tfsaRrsp_inputs.jsp?toolsSubMenu=preRet


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## Davis

I did a quick calculation on a spreadsheet, but you probably want to check it yourself. If you invested $1000 in each of four accounts for 10 years, earned 5% steady annual return on each of them, and paid an unchanging 20% personal income tax rate, here's how different investments would pay out at the end of the period:
1. $1,000 in an RRSP would pay out $1,303
2. $1,000 in a TFSA would also pay out $1,303 (which is the result we expect)
3. $1,000 in an unregistered account paying interest would pay out $1,184
4. $1,000 in an unregistered account earning capital gains would pay out $1,242

This is an artificial example, of course -- 5% interest? good luck..., a consistent 5% capital gain? good luck..., but it illustrates the impact of paying tax as you go. There are other factors, which I think others have mentioned, such as seniors benefits clawbacks (GIS, OAS), the possibility that tax rates change, fees for registered accounts, and so on. There is not one right answer, unfortunately.


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## Chris Boar

My Own Advisor said:


> The gov't loan can be at one tax rate, i.e., today's. That's doesn't mean your RRSP withdrawal will be in the same tax rate (future).


Agreed, if we withdraw at a lower tax rate there is a bonus.



> We gain financially by taking the tax-deferred loan and using it for tax-deferring investing and compounding purposes.


This I'm not convinced about, or we could just be disagreeing over semantics? The maths I've seen basically demonstrates that you do not get to spend any of the tax refund or it's compound growth. It is all converted into the 'tax' when you withdraw. 

See this link for an example, and to quote 'There was no benefit from a deferral of tax because all the income earned by the tax reduction on contribution goes back to the government on withdrawal'

What does the tax on withdrawal do

What we get from the RRSP is the tax free compound growth of our 'after-tax' contribution.

So if this is in fact the case, I amend my original thoughts that there was no point to using a RSP if my wife's contribution and withdrawal tax rate are the same. There is a benefit because the RRSP effectively becomes a TFSA in that case (as long as I 'reinvest' the tax refund).


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## cainvest

Chris Boar said:


> So if this is in fact the case, I amend my original thoughts that there was no point to using a RSP if my wife's contribution and withdrawal tax rate are the same. There is a benefit because the RRSP effectively becomes a TFSA in that case (as long as I 'reinvest' the tax refund).


In the wife's specific case, TFSA .. yup, RRSP up to (at least) the matched contribution .. yup and the rest in a non reg account ... yup. The only thing I didn't see mentioned is are the "funds" she came into declared as income and will it push up through the tax brackets enough that some extra RRSP contribution is a good idea?


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## Davis

The retailinvestor.org stuff is way too detailed for me to br willing to wade through, especially when it is an anonymously published website that claims that has the truths, and the financial sector, government, investor organizations are wrong. I think that the numbers I showed above indicate that based on taxes alone, there is a benefit to putting the money in an RRSP instead of unregistered. Calculating OAS/GIS clawbacks would require much more detailed information and modeling. That isn't, as far as I can tell, retailinvestor's argument though.


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## My Own Advisor

I agree with Davis....

When I went to that site, it says:
"The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal."

Really??

Also:
"There was no benefit from a deferral of tax because all the income earned by the tax reduction on contribution goes back to the government on withdrawal."

How is that always accurate?

No benefit to tax deferral or stated this way, _there is no benefit to deferring taxes?_ How does that make any sense?

Benefits of RRSP:
1. You could (and should) withdraw money from RRSP at a lower tax rate than your contribution rate.
2. Take the "government loan" provided at your current/today's tax rate, always invest it, have that money make money deferring taxes for many years. 

Maybe the issue you're struggling with Chris is, if you maximize the account every year and reinvest all "government loans", you just might effectively be _in the same tax rate or higher tax rate in retirement_. Then you've totally lost benefit #1.


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## Echo

Doesn't the RRSP system presume that your tax rate at contribution is MORE than your rate at withdrawal? Hence the benefit of RRSPs over TFSAs or non-registered.


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## Davis

RRSPs provide a tax benefit over non-registered accounts if the tax rate at withdrawal is *equal to or greater than* the tax rate at contribution (see my post above).

RRSPs provide a tax benefit over TFSAs if the tax rate at withdrawal is *greater than *the tax rate at contribution (see my post above).


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## gibor365

A big advantage of RRSP that you can setup Spousal RRSP.... It's very beneficial if income of one spouse is significantly higher that others....


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## Woz

That retailinvestor article makes it way more complicated then it needs to be. In an RRSP your contribution grows tax free and then you pay income tax at the end on your principal and growth. In a TFSA you pay income tax at the beginning then it grows tax free.

Your total return for TFSA and RRSP can be calculated as:

RRSP: A * (1+r)^n * (1-Tf)
TFSA: A * (1+r)^n * (1-T0)

A = amount contributed before tax, r = rate of return, n = number of years, T0 = tax rate of contribution, Tf = tax rate of withdraw.

From those equations it’s pretty obvious that RRSP and TFSAs are the same if Tf = T0.


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## Guban

Chris Boar said:


> Agreed, if we withdraw at a lower tax rate there is a bonus.
> 
> 
> 
> This I'm not convinced about, or we could just be disagreeing over semantics? The maths I've seen basically demonstrates that you do not get to spend any of the tax refund or it's compound growth. It is all converted into the 'tax' when you withdraw.
> 
> See this link for an example, and to quote 'There was no benefit from a deferral of tax because all the income earned by the tax reduction on contribution goes back to the government on withdrawal'
> 
> What does the tax on withdrawal do
> 
> What we get from the RRSP is the tax free compound growth of our 'after-tax' contribution.
> 
> So if this is in fact the case, I amend my original thoughts that there was no point to using a RSP if my wife's contribution and withdrawal tax rate are the same. There is a benefit because the RRSP effectively becomes a TFSA in that case (as long as I 'reinvest' the tax refund).


I think that MOA and Davis are correct. The tax deferred compounding of the "after tax portion" inside of the RRSP has value. For example, if you put in $100 into an RRSP, and the tax rate is a constant 20%, then $20, and the growth on the $20 belongs to the government. It is the remaining $80 that MOA and Davis are referring to. Outside of the RRSP, the income/capital gain on the $80 may attract taxes every year. Inside of an RRSP, you get to defer paying taxes on that amount. So if you make $5 after the first year, you may have to pay taxes on that outside of the RRSP immediately, thereby decreasing what is growing for the future. Inside of an RRSP, the next year you have $85 of your money growing. And so on for compounding. That's likely why there is a difference in the spreadsheet for Davis' post #13.

Therefore, RRSP contributions do have a value where the tax rate doesn't change. 

Other possible benefits:
-no withholding taxes on US sourced dividends
-less paperwork tracking ACB's


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## My Own Advisor

Guban said:


> Other possible benefits:
> -no withholding taxes on US sourced dividends
> -less paperwork tracking ACB's


For sure!


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## Davis

Here is a simplified two-year version of my figures in #13 above. 

RRSP: in Year 1, earn $1000, invest it in an RRSP so the tax deduction offsets the income tax. Earn 5% return, so it grows to $1050 at the end of Year 1 and $1102.50 at the end of Year 2. Withdraw this from the RRSP, and pay 20% tax, leaving $882.

TFSA: in Year 1, earn $1000, and pay 20% tax, leaving $800 to invest in a TFSA. Earn 5% return, so it grows to $840 at the end of Year 1 and $882 at the end of Year 2. Withdraw this from the RRSP, and pay 0% tax, leaving $882.

Non-registered account: in Year 1, earn $1000, and pay 20% tax, leaving $800 to invest in a taxable account. Earn 5% return ($40) and pay 20% tax ($8), so the account grows to $832 at the end of Year 1. Earn 5% return in Year 2 ($41.60) and pay 20% tax ($8.32), so the account grows to $865.28 at the end of Year 2. Withdraw this from the non-registered account, and pay 0% tax, leaving $865.28.

As long as $882 is more than $865.28, which I think is most of the time, then under these assumptions, putting the money in an RRSP or TFSA is better than in a non-registered account.


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## Chris Boar

My Own Advisor said:


> I agree with Davis....
> 
> Also:
> "There was no benefit from a deferral of tax because all the income earned by the tax reduction on contribution goes back to the government on withdrawal."
> 
> How is that always accurate?


I'm just looking at the examples, it looks like it's always a zero sum game. 

I agree that site is slightly 'conspiracy-theorist', but I can't find a problem with the maths yet. I think the general point the site is making is that RRSP's are sold to us as 'tax-deferral' wrappers, and we get a 'bonus' in the tax refund to reinvest. When in reality the maths mechanics is that the refund+it's growth will always equal the tax you pay on withdrawal(assuming it grows at the same rate as the rest of your RSP), so the net effect is your 'after-tax' contribution grows tax free. This is assuming you contribute and withdraw at the same tax rate. If you end withdrawing at a lower tax rate then that's the actual 'bonus'. 

Unless the maths is wrong on that website


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## Chris Boar

Guban said:


> I think that MOA and Davis are correct. The tax deferred compounding of the "after tax portion" inside of the RRSP has value.


Yep agreed, but what we're disagreeing over is whether we benefit from the tax refund and it's growth. The maths appears to show that we don't (at least in terms of being able to spend any of it), it just ends up covering our tax bill when we withdraw.


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## Davis

The math on retailinvestor is too convoluted -- I am not willing to invest the time to go through it because of the conspiracy theory tone, and the fundamental flaws -- like calling the RRSP deduction a tax credit, or its statement that "The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal."

Is there a flaw in my simple math in #24 above? I have tried to present it in a way that anyone can follow without spending hours going through pages of text and calculations. As far as I can tell, my example shows a clear tax advantage to RRSP over non-registered. If I've made an error, please point it out.


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## Chris Boar

Davis said:


> Is there a flaw in my simple math in #24 above? I have tried to present it in a way that anyone can follow without spending hours going through pages of text and calculations. As far as I can tell, my example shows a clear tax advantage to RRSP over non-registered. If I've made an error, please point it out.


What about when the assets you sell in non-registered accounts are subject to capital gains/dividends tax instead of income tax? Presumably it's more advantageous to leave them outside the RSP?


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## Davis

I covered that in #13 above, but for completeness

Non-registered account earning capital gains: in Year 1, earn $1000, and pay 20% tax, leaving $800 to invest in a taxable account. Earn 5% capital gains ($40) and pay 10% (50% of 20% tax rate) tax ($4), so the account grows to $836 at the end of Year 1. Earn 5% return in Year 2 ($41.80) and pay 10% tax ($4.18), so the account grows to $873.62 at the end of Year 2. Withdraw this from the non-registered account, and pay 0% tax, leaving $873.62, which is still less than the $882 you would have from an RRSP or TFSA.

Dividends, like capital gains, are taxed at a lower rate than interest income, so will have a similar result as the capital gains example, i.e., that you're better off in an RRSP or TFSA. (There may be interactions with income-tested benefits here because of the dividend gross-up.) Feel free to complete the calculations for yourself.


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## Woz

Chris Boar said:


> What about when the assets you sell in non-registered accounts are subject to capital gains/dividends tax instead of income tax? Presumably it's more advantageous to leave them outside the RSP?


No, it’d still be better in an RSP. Tax free is still better then capital gains/dividends tax.

I don’t think there’s any problem with retailinvestor’s math. He just explains it in a convoluted way. Look at his spreadsheet http://www.retailinvestor.org/Challenge.xls. If you make the tax rate on RRSP contribution the same as tax rate on RRSP withdrawal it shows TFSA and RRSP are the same and always better than taxable as long as the tax rate on profits is >0 and the rate of return is positive. I don’t think anyone is disagreeing with that conclusion.


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## Woz

Michael James has a nice post on this on his blog (myth 1) which explains it fairly cleanly with pictures.

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


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## Charlie

I've run various scenarios and the RRSP almost always beats unregistered over 20 yrs or more.

So if your wife is 52 or less...the RRSP would usually win. (actually....since you don't collapse your RRSP at 72, but can continue deferring for another decade or two, even 52 is a low cut off date).

For example.....

Assume: 

20% marginal rate now (income under $38K)
32% marginal on withdrawal (income excluding RRSP withdrawals in excess of $75K)
12% marginal on investment income (cap gains, cdn divs etc)

7% rate of return.

$10K avail to invest.

Unregistered your $10K grows to $33K over 20 yrs at an after tax rate of 6.16%
RRSP your $12.5K (so your net investment is $10K) grows to $48K over 20 yrs at 7%. 
If you collapse your RRSP and pay tax at 32% (you've other income of $75K that you somehow didn't have during all those years of accumulation), you pay tax of $15K leaving you with the same $33K.

Other RRSP benefits:
-no US withholding tax on dividends
-creditor proofed 
-no tax bias on investing (US stocks/income assets not hit with higher tax)
-no tax bias on rebalancing portfolio (it's hard to sell unregistered winners when you know you'll get a tax hit) plus a big sale - sometimes out of your control on corp reorgs, can spike your income to a higher bracket some yrs.
-less likelihood of tax changes (div rates are changed almost every year, cap gains have been taxed at 0%, 66%,75%, and 50% while RRSPs have been unchanged for almost 50 yrs).

Disadvantages:
Less flexible if you need the funds sooner
Currently may impact OAS clawback -- though tough to plan for that if your timeframe is 20 yrs or more!

It's really tough to plan with certainty for 20, or 30 or 40+ yrs out. Too many changes in circumstances, tax policy, markets, etc. You get to a point where your assumptions will drive your results. The assumptions I've used above are really unlikely -- esp the one about high other income when you withdraw at the same time you're paying very low rates on invest income. Yet even with these the RRSP can win.

RRSPs have existed since the late 50's (when cap gains were not taxed at all). They were a pretty good idea then, and they usually continue to work as planned. You can come up with scenarios where they don't work. But those tend to be rare.

You did well by maxing the TFSAs. She should top up your as well. My bias is to RRSPs next. Not everyone agrees.

EDIT -- you guys are much more succinct than I am....


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## Chris Boar

Woz said:


> Michael James has a nice post on this on his blog (myth 1) which explains it fairly cleanly with pictures.
> 
> http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html


That's basically saying the same as the site I linked to, but a lot easier to understand! Thanks


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## livewell

A couple of other benefits other than the big one, is registered accounts make it practical to hold certain asset types that are not practical/sensible in non-registered eg. REIT's which typically pay their dividends as a mix of capital and dividend. For that reason REIT's in a non-registered are a bad idea. Also ETF's in non-registered are problematic IMO as you can be caught with annual capital gains that you have no control over. Based on this http://howtoinvestonline.blogspot.ca/2014/12/last-chance-in-2014-to-avoid-large.html?m=1 holding CHB (High yield corporate bond EFF) in your account last year you would be looking at over 7% capital distribution.


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## 0xCC

Davis said:


> Is there a flaw in my simple math in #24 above? I have tried to present it in a way that anyone can follow without spending hours going through pages of text and calculations. As far as I can tell, my example shows a clear tax advantage to RRSP over non-registered. If I've made an error, please point it out.


There is a very, very minor flaw with the math (that won't change the final conclusion). The assumption that at the end of year one in the non-registered account there will be a capital gains tax bill due and that the tax bill will reduce the amount left to grow in year two. That tax bill will only be due if the investment is sold at the end of year one. In that example that would leave an extra $8 available for compounding in year two which would generate an extra $0.40, generating an extra $0.36 of after tax money which as I said does not change the final conclusion.


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## Davis

OxCC: quite right. It would make more sense to assume that the capital gain is only realized once at the end of Year Two instead of each year, although it could work either way, but if I meant to realize gains each year, I should have made my assumption clear. Regards,


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## Eclectic12

livewell said:


> A couple of other benefits other than the big one, is registered accounts make it practical to hold certain asset types that are not practical/sensible in non-registered eg. REIT's which typically pay their dividends as a mix of capital and dividend.
> For that reason REIT's in a non-registered are a bad idea...


YMMV as the mix of income can be simple such as RoC + income or be more complicated such as income, other income, eligible dividends, non-eligible dividends, RoC & Capital Gains.

Where there is a high percentage of RoC ... it's preferred tax treatment (delayed or a small tax bill compared to income) as well as it's reduced impact for things like OAS may make it attractive in a taxable account.


Cheers


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## jambo411

DW is in lowest bracket and will be in retirement. TFSA maxed but not enough so use RRSP. If no other income first $11,000 is basically tax free. We also have non-registered account with dividend payers. In BC the dividend tax credit puts you in a negative tax position. Therefore DW will be able to make $20,000 + and pay no tax, with the TFSA for backup. So for us the RRSP makes sense.


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## janus10

Hint: marginal tax rate is not the same as average tax rate. In many cases your withdrawal tax rate will be less than your contribution rate because your contribution rate will be at or close to your marginal tax rate (large contributions may knock you down a bracket) while your withdrawal tax rate starts at 0% and goes up from there. People without significant sources of incomes, eg pensions, will likely fall under that category.

Example: you make $60k a year and for 10 years you contribute $5k a year receiving about $1,500 in refunds each year at a marginal tax rate of 31%. Your RRSP after those 10 years let's say is $60k and you take it all out. Your average tax rate is only about 21%.


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## RBull

^good point. Also those folks with a spouse that have registered pension income may also benefit from income splitting, reducing tax rate.


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## Chris Boar

So this article that was linked to debunks the myth about asset allocation, e.g. don't put Canadian dividend paying assets in a registered account as you lose the reduced dividend tax. That's false apparently. So I might as well throw everything in my RRSP and TFSA's and don't worry about asset allocation?

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


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## Guban

Arranging investments is still a valid idea. Each investment has a preferred location. I think that what is being said is that registered is better than nonregistered. If you have a Canadian dividend paying stock and a bond, the former is better outside a RRSP and the latter inside, rather than the reverse.


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## My Own Advisor

I second that: 

arranging investments is still a valid idea since certain investments have their tax-preferred home.


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## Chris Boar

Guban said:


> If you have a Canadian dividend paying stock and a bond, the former is better outside a RRSP and the latter inside, rather than the reverse.


But why? Where's the maths to support that? 

That article I linked to implies it doesn't make any difference, because the tax you pay on withdrawal is essentially based on the growth of the CRA loan (refund) you got. Your own growth, be it interest, capital gains or dividends, is mathematically tax free. 

The only tax efficiency issue I can see that isn't really discussed is withholding tax on US assets. 

Ugghhhh...


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## Guban

If you have $100 in dividends and $100 in interest. If the interest is held outside of a registered account and the dividend is held in a registered account, then the interest is taxed fully and the dividend tax credit is lost. If the dividend is held outside, then there is a tax advantage. In a long term plan, an even better situation would be to hold everything in a registered plan, and all of the taxes would be deferred until withdrawn. This deferral allows the compounding effect to happen, and the money to grow faster.


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## 0xCC

I think that in order to make Guban's (very solid) reasoning fit into the retailinvestor.org article you have to think things in terms of opportunities to invest the same amount of money both inside and outside a registered plan. To find the math to support that all you need to do is look at the marginal tax rates for interest income vs. dividend income. The same amount of money condition is important because you should think of contributions to RSPs as how much can be invested before tax vs. after tax if you are investing in a non-registered account. See my thread on Early Retirement Strategy Crisis of Confidence for some reasoning behind that (and to see how dumb I am  ).

For the withholding tax on US income (as far as I know assets (I'm thinking of capital gains) don't have a withholding tax, just income does) there isn't any US withholding tax in RSPs, there is in non-registered accounts but US income is treated like interest income so that is better to hold inside an RSP anyway. And to be clear when dealing with US income RSP and TFSA are not interchangeable, there is withholding tax in TFSAs *and* you don't get a tax credit for that withholding tax like you do in a non-registered account.


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## Chris Boar

Guban said:


> If the dividend is held outside, then there is a tax advantage.


Well I seem to be repeating myself here. The maths appears to show otherwise....

Those articles with examples show that when you take into account your CRA tax refund at the front end, then your own growth be it capital gain, interest, or dividends are entirely tax free when withdrawn from an RRSP. 

E.g. lifting the example from that article regarding dividends.


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## 0xCC

That is only when considering the before tax and after tax investment amounts. As I said in my post, given that you have the same amount of money to invest both inside and outside the RSP it makes more sense to invest in Canadian dividend payers outside the RSP and interest payers inside the RSP.

If you are trying to figure out whether it makes more sense to invest some funds outside an RSP vs. contributing the same fund _plus_ the tax refund the contribution generates then it makes sense to invest inside the RSP in almost all cases (there might be some cross-over case at very low earned income levels where the tax refund is less than the difference in tax rate between the dividend income and earned or interest income tax rates).


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## Woz

Chris Boar said:


> Well I seem to be repeating myself here. The maths appears to show otherwise....
> 
> Those articles with examples show that when you take into account your CRA tax refund at the front end, then your own growth be it capital gain, interest, or dividends are entirely tax free when withdrawn from an RRSP.
> 
> E.g. lifting the example from that article regarding dividends.
> 
> View attachment 3193


I think you're glossing over part of what Guban's saying:



> In a long term plan, an even better situation would be to hold everything in a registered plan





> I think that what is being said is that registered is better than nonregistered.


Asset allocation matters if you've maxed your registered accounts. Then obviously you'd want to shelter as much of your higher taxed investments in registered accounts and put the rest in an unregistered account.

If you don't have enough room in your RRSP then it's best to structure your investments so that canadian dividend paying stocks are the in an unregistered account. You still want to shelter as much of your investments as possible (assuming your tax rate will be the same or lower in retirement).


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## RBull

My head is starting to hurt after reading this thread!


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## Chris Boar

Woz said:


> I think you're glossing over part of what Guban's saying:


 I agree if everything is maxed out then you want Canadian dividend paying stocks outside, over say bonds. But the standard industry advice appears to be you hold Canadian dividend stocks outside of an RSP even if it's not maxed out.

E.g. http://www.theglobeandmail.com/glob...-paying-stocks-out-of-my-rrsp/article8471970/

Having done all this reading I now think of the tax I pay on withdrawal as not actually tax. It's just me repaying the original tax refund I got plus it's growth. (Isn't that nice of me to invest money on behalf of the CRA!).


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## 0xCC

Chris Boar said:


> Having done all this reading I now think of the tax I pay on withdrawal as not actually tax. It's just me repaying the original tax refund I got plus it's growth. (Isn't that nice of me to invest money on behalf of the CRA!).


If you put the funds into the RSP as shown in the diagram from Michael James on Money you posted above there isn't any "tax refund" to get, you would have invested the full before-tax amount you had set aside for investing vs. the after-tax amount if you put the funds into a non-registered account. The CRA just lets you invest the tax portion of those funds on their behalf and pay them back later (hopefully at a lower tax rate, especially if when you withdraw that is your only income).


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## Davis

Chris, I think you are misinterpreting what the article says. It concludes: "Therefore, it makes sense to hold your equity-based investments outside your RRSP to enjoy the preferential tax treatment and hold your interest-bearing investments (GICs and bonds) inside your RRSP."

It does not conclude: "Therefore, it makes sense to hold your equity-based investments outside your RRSP to enjoy the preferential tax treatment." which is what it would say if your statement ("But the standard industry advice appears to be you hold Canadian dividend stocks outside of an RSP even if it's not maxed out.") were correct.

I demostrated using a very simple example earlier on that even with investments taxed at a lower rate (I showed capital gains, but dividends will produce the same result), holding the RRSP results in higher return than in a non-registered account. Others here have confirmed that my conclusion is valid. 

I don't trust the convoluted math of retailinvestor, especially since (a) he is claiming that he is right and everyone else is wrong, (b) it is an anonymous blog - we don't know who he is, and (c) he makes fundamental errors in his explanations of the tax vehicles.


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## Spudd

In the lowest tax brackets, dividends actually attract negative income tax, so if you are not making much it might be a savings to keep them outside the RRSP. You can see the taxation of different types of income here: http://www.taxtips.ca/taxrates/bc.htm

In BC if you make less than 44.7k per year, your dividends are actually saving you money. (however, you'll still need to worry about your capital gains if/when you sell the stocks later)


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## leslie

Chris Boar has the correct understanding of where the benefits of an RRSP come from. Many comments here showed a reluctance to read the development of a math proof. Maybe the 2nd video of this series is more palatable. https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg

I would presume you already know/understand the basic rules covered in the 1st video of the series about the RRSP Mechanics, although a few posters here object to the sentence ..."The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal." The 1st video is necessary watching for those people. They fail to understand that that the RRSP's if not 'all about' the Bonus from a lower withdrawal tax rate. Some get that, other get a Penalty. That factor is secondary. The RRSP is 'all about' the permanent sheltering of profits from tax' 

The 3rd video show where the Bonus/Penalty from a lower/higher tax rate on withdrawal comes from, as well as the remaining two costs of an RRSP.

But the 2nd video https://www.youtube.com/watch?v=Gf04BbqzJVc is the really important one that shows WHY what you think you understand is wrong, and presents a model of understanding the reflects the actual math measurements. If you want to play with different inputs and see the deconstruction of benefits use the spreadsheet at http://www.retailinvestor.org/Challenge.xls


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## leslie

The issue of Asset Location can only be discussed once there is agreement on where the benefits of RRSPs come from. The AL objective is to maximize benefits. You must agree on what those benefits are, and where they come from. It is pointless until then because you will have disagreed before you start. 

The benefits of an RRSP equal the $$ difference between the RRSP outcome and a Taxable account. This $benefit can be deconstructed into (a) the value of profits not being taxed, plus (b) the Bonus/Penalty from a lower/higher withdrawal tax rate. You AL in order to maximize those two factors. You can use the spreadsheet http://www.retailinvestor.org/Challenge.xls to see the results assuming both (i) no rebalancing and (ii) yearly rebalancing, at the YrByYr tab.

The understanding of why those math outcomes are the way they are, is explained at http://www.retailinvestor.org/rrsp.html#taxfree 
If Davis would like to specify ('I don't trust the convoluted math of retailinvestor"), I am sure I can explain any of the calculations he does not understand. They are just simple FV of a Dollar calculations, and adds/subtracts/multiplies, etc.


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## Eclectic12

leslie said:


> ... the basic rules covered in the 1st video of the series about the RRSP Mechanics, although a few posters here object to the sentence ..."The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal." The 1st video is necessary watching for those people.


I'm looking forward to watching the first video. My guess is that there's something missing or not described properly.

If the RRSP system defines that one's contribution tax rate = one's withdrawal tax rate, by definition the tax rates are the same. In this situation, a "bonus/penalty" based on different tax rates is not possible.

Where one accepts a different tax rate as the source of a bonus/penalty ... then the withdrawal tax rates must be variable when compared with the contribution rates.


[ In other words, unless there's something missing ... these two ideas can't both be true. ] 


I'll post what I find from the video.


Cheers


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## Guban

Chris Boar said:


> I agree if everything is maxed out then you want Canadian dividend paying stocks outside, over say bonds. But the standard industry advice appears to be you hold Canadian dividend stocks outside of an RSP even if it's not maxed out.
> 
> E.g. http://www.theglobeandmail.com/glob...-paying-stocks-out-of-my-rrsp/article8471970/
> 
> Having done all this reading I now think of the tax I pay on withdrawal as not actually tax. It's just me repaying the original tax refund I got plus it's growth. (Isn't that nice of me to invest money on behalf of the CRA!).


The article says you lose the dividend tax credit and favourable capital gains/loss treatment outside an RRSP, so interest paying investments are better held inside an RRSP. But it doesn't say to keep Canadian dividend paying stocks outside even if the RRSP is not maxed out.

The tax paid upon withdraw really is a tax. It only happens to have the same dollar value as the original refund (plus growth taxes) if the tax rate is still the same.


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## Guban

leslie said:


> Chris Boar has the correct understanding of where the benefits of an RRSP come from. Many comments here showed a reluctance to read the development of a math proof. Maybe the 2nd video of this series is more palatable. https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg
> 
> I would presume you already know/understand the basic rules covered in the 1st video of the series about the RRSP Mechanics, although a few posters here object to the sentence ..."The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal." The 1st video is necessary watching for those people. They fail to understand that that the RRSP's if not 'all about' the Bonus from a lower withdrawal tax rate. Some get that, other get a Penalty. That factor is secondary. The RRSP is 'all about' the permanent sheltering of profits from tax'
> 
> The 3rd video show where the Bonus/Penalty from a lower/higher tax rate on withdrawal comes from, as well as the remaining two costs of an RRSP.
> 
> But the 2nd video https://www.youtube.com/watch?v=Gf04BbqzJVc is the really important one that shows WHY what you think you understand is wrong, and presents a model of understanding the reflects the actual math measurements. If you want to play with different inputs and see the deconstruction of benefits use the spreadsheet at http://www.retailinvestor.org/Challenge.xls
> View attachment 3721


I watched the second video in the series, and it comes to the conclusion that a TFSA and RRSP yield the same result if the tax rate does not change. This was never in question.

It makes some distinctions about "misunderstandings" of an RRSP, that seemed to be subtle distinctions where those tax rates have not changed.

It shows a tax free section of the RRSP, and then proceeds to subtract taxes off when it is withdrawn. Odd.

I am not convinced that I am misunderstanding RRSPs.


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## canucked_up

What I'm finally getting from retailinvestor.org is an analogy where I see an RRSP as a box with a golden coin inside, but I should see it as a golden coin wrapped in a box. Semantics. Pretty sure I was ok before. I was able to glean some useful information nevertheless. I will continue to work on the assumption that I will draw at a lower rate than I contributed FTW.
As to the topic of the post, it seems as if you will be in pretty good shape. At some point, non registered investments can be a good idea, crunching your numbers will show you where/when that is.
Good Luck

I did find this spreadsheet interesting http://www.retailinvestor.org/Taxburden.xls


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## leslie

@Guban
It is always disappointing when readers completely miss the points you are trying to make. Everyone already agrees with the statement ... "When tax rates don't change then the outcomes of RRSP and TFSA are equal". That was shown in the first video with which there is no disagreement. The second video's purpose was not to calculate a $outcome. It was to explain a model of understanding what the RRSP's main benefit is. 

The points of the 2nd video are:
1) The main benefit, the only benefit that everyone receives, is the benefit from *permanent* sheltering of profits from tax. 
2) This benefit will always exactly equal the same benefit from TFSAs and comes from exactly the same source.
3) Profits earned in an RRSP are not taxed on withdrawal.
4) The tax refund is not a benefit.
5) There is no benefit from deferrals (of paying the original tax on employment income, or of tax on profits earned). 

Those statements completely contradict the lists of benefit posted by all the experts and officials ( http://members.shaw.ca/PublicAccess/ScreenShots/published.html) These all falsely claim that ..
1) Profits in an RRSP are taxed on withdrawal.
2) The tax refund is a benefit.
3) There is a benefit from deferring tax. 

Did you miss all those points?

You have stated on this thread ..
post 21) " The tax deferred compounding of the "after tax portion" inside of the RRSP has value." You should now have realized that your words 'tax deferred' are wrong - that there is no tax on the profits while in the plan or on withdrawal. 

post 21) "I think that MOA and Davis are correct." MOA claims that "Two huge benefits of RRSP: 1. Tax-deferred growth, and 2. Tax deduction for RRSP contributions." Davis claims that "RRSPs provide a tax benefit over non-registered accounts if the tax rate at withdrawal is equal to or greater than the tax rate at contribution". You should now realize that a) there is not benefit from deferrals, b) the contribution's tax refund is not a benefit, c) the main benefit of RRSPs is the permanent sheltering of profits. 

post 44) "an even better situation would be to hold everything in a registered plan, and all of the taxes would be deferred until withdrawn." You should now realize that taxes on profits are not deferred, they are permanent. 

post 57) "The tax paid upon withdraw really is a tax. It only happens to have the same dollar value as the original refund (plus growth taxes) if the tax rate is still the same." You should realize now that the equality between the tax paid on withdrawal and the government's principal share of the account *always* holds true. It is not a case of 'it only happens to be". The Bonus/Penalty from a change in tax rates is a completely independent variable that overlays, without changing the basic benefit. (But maybe, since you decided the 3rd video had nothing to say, you missed that).

post 44) "If you have $100 in dividends and $100 in interest. If the interest is held outside of a registered account and the dividend is held in a registered account, then the interest is taxed fully and the dividend tax credit is lost. If the dividend is held outside, then there is a tax advantage". You should now realize that the main RRSP benefit is from permanent sheltering of taxes. When you try to maximize that benefit with Asset Location, you see that the effective tax rate does not determine the issue. 

The math for the benefit = *The difference between the Future Value of the after-tax savings when compounded at the nominal rate of return vs. when compounded at the after-tax rate of return.* The image I posted above shows that this benefit is much more strongly impacted by the asset's rate of return, than by its tax rate.


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## janus10

I have many problems with the series of videos and it leaves me with the impression of a one sided viewpoint. 

Off the top of my head here are some ways I would have put it:

the last two items in the 4 item list should be minuses not plusses
a balanced view would have shown the benefit from a lower MTR in withdrawal rather than only highlighting a higher MTR. For most of my working life I have contributed the maximum allowed to my RRSP and at the highest MTR. I fully expect to withdraw at an MTR far below that and have the flexibility to do that.
using only a low income earner example disregards the benefits of RRSPs to shelter more annually than the TFSA limit can. 
no consideration is given to the idea that one might be investing in interest bearing securities and thus the tax rate would be much higher for non reg vs. TFSA and RRSP
no considerstion is given that there may be certain administrative costs reduced or waived or additional tools and resources given to an investor with a substantial RRSP balance that can not be given to a much lower TFSA balance. Even access to certain low fee MF sometimes require a more significant initial investment than one might be able to access with smaller funds in a TFSA. Lower costs, better decision making tools, additional investment options.
its possible that a delayed deduction may allow someone to make an investment into a down market, so it wont always be a negative factor. And no example is shown if a person benefits from deducting in a higher tax bracket than when they contributed.
no doubt many people do not invest the "contribution credit" and rather wastefully spend it. More emphasis should have been made on what must be done to keep RRSP benefit from being frittered away
some people may accelerate their retirement savings as they see their portfolio grow significantly. Some may give up because it's grown large enough or after a market collapse. Asset allocation should not have been glossed over as there is a real difference in what is generally held in these various accounts and has an impact on growth. There are so many complexities, including investor psychology, that to boil these videos down to a specific example with a slanted bias is unfortunate.
if the goal was to help explain these various investment accounts to the layperson, then it is too complicated while also not providing a balanced view. I got the impression it was to attack the messengers in the industry and media rather than the message.

Based on the videos I think, in summary, TFSAS are good, RRSPs are ok and non registered are bad. 

For everyone. 

For ever.

Really?!

What about this idea? Dangling the carrot in front of people who almost universally think they pay too much tax to use RRSPs to get some of that tax back? Is it so bad that this likely has led thousands and thousands of Canadians to take some control over their financial well being? For some people, I do believe TFSAS are better for them than RRSPs. But, something that gets Canadians saving and investing for their future is a good thing. One doesn't need to make RRSPs look bad in order to make TFSAS look good.

And what about those employers who have RRSP matching programs but never TFSA matching programs? Could the type of reasoning put forth here discourage people from taking free money from their employer? I know people just like that! What a shame more employers don't spend time telling their employees what a fantastic benefit this is.


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## none

If you invest Canadian equities in a non-registered account and the gains are taxed at 10% if you're in the lowest tax bracket right?

So lets run some numbers - age 60; invest 10K and get 5% until 65 when you withdraw it all. Assume marginal tax rate (lowest is 20%)

Growth after 5 years: $12763.

TFSA: you get it all! 12763
Non-registered (assuming lowest tax bracket). 12763 - (2763 * 0.1) = 12,487 (A difference of $276).

Compare to an RRSP (This of course ignores the tax deferment which is important - gain are fully taxable)
12,763 - (12763*.2) = 10,210

Add in the tax deferred part (assuming you didn't just blow it on beer and popcorn)
10,210 + $2000 = 12,210

Could someone check my math? Does that make sense?


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## Eclectic12

^^^^

If this is a Canadian equity, paying eligible dividends for someone in Ontario in 2015 - where's the 6.86% refund that the eligible dividends generate?
http://www.taxtips.ca/taxrates/on.htm

Some companies are paying 5% eligible dividends ... so are you assuming almost nothing for the share price growth?


As for the tax deferred part, that's fine if one put the tax refund under a mattress for four or five year. Those looking to get the maximum benefit form the RRSP are more likely to put the refund into the RRSP. Where this has been done, there should be 5% growth attached to it.


Cheers


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## leslie

janus10 said:


> Based on the videos I think, in summary, TFSAS are good, RRSPs are ok and non registered are bad. For everyone. For ever..


The videos certainly come to no such conclusion. I would never agree with that statement. Many of your points presume the videos are an argument for 'which is better - RRSPs, TFSAs or Taxable accounts'. But the videos only argue for the correct understanding of where the RRSP's benefits come from. They use the TFSA comparison because everyone agrees where its benefits come from. They use the Taxable account comparison because the $benefits equals the difference in outcome from the Taxable. 

Read my post above this one for the summary points made in the 2nd video. You have missed their points completely. 

You excuse the false claims regarding RRSP benefits because they are used in a good cause - to promote savings. I think people should be given the truth so they can make up their own minds. As it stands now people are regularly making wrong decisions because they have accepted your wrong claims as the truth. Even the regular contributors on this site are making wrong decisions - look at my list above of Guban's errors. You have all drunk the cool-aid.


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## Eclectic12

I've had a chance to go through video #1 ... and I find it mixed.

The main area I was looking to understand was the "The RRSP system presumes that your tax rate at contribution is the same as your rate at withdrawal." bit and was disappointed that there was no discussion or statement of this. 

I can see where it might be useful for some to think in terms of "benefits from profits are not being taxed" and "a bonus/penalty from a difference in tax rates" but since this is describing what one puts on the tax return ... this does not seem accurate. 

IMO, changing tax brackets is not a bonus or penalty but the profits being taxed less or more. On the tax return, one adds the RRSP withdrawal into one's total taxable income to end up with the final tax number. There is no special variable to adjust what is owing.


While I can agree that the refund or contribution credit is not a benefit in the sense increased RRSP growth. I can also see that it is important to understanding the complete situation.

At the same time, it is critical to the "Joe Blow" scenario. If like most people I know, the question is "where do I put $3.9K in after-tax dollars" - rolling the refund into the RRSP is crucial to the calculation of the net RRSP benefit.

Say the $1.1K is spent on a vacation ... Joe is ahead by a vacation but has scarified the RRSP Growth so that it is now the same as the TFSA. After paying the 22% withdrawal tax, the TFSA wins at $11.7K, then the taxable account at $10K and finally the RRSP at $9126.

I would have preferred some sort of emphasis that keeping the refund working in the RRSP is key.


As for asset allocation ... maybe it's the timing of when the video was produced but the taxable account after-tax growth rate can vary a lot more than indicated by choosing different asset classes in different provinces.

Consider if Joe is in Ontario and chooses to buy a bank stock paying an eligible dividend of 4% as single purchase for the 11.5 years. The video says there will be a drag due to taxes owed at 15%. 

There are two portions that are taxable, the capital and the dividends paid. For the capital portion (which is usually the largest gain) - there is no tax until the sale, 11.5 years later. At that point, it will be 11%.

Now for the interesting part ... the eligible dividends. Joe is going to receive a 6.86% refund. 
http://www.taxtips.ca/taxrates/on.htm

In this case, there is almost nothing being eaten away by taxes, until the same point as the RRSP so there is almost no slowdown in the growth.

I expect this to narrow the gap considerably ... or where the RRSP contributor spent the refund, I expect that it's TFSA > Taxable > RRSP.

The way video one rolls everything into one big tax number is making it difficult for me to confirm what I am doing is comparable so I think I'll work out my own version of "Joe" for the asset part.


Cheers


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## janus10

leslie said:


> The videos certainly come to no such conclusion. I would never agree with that statement. Many of your points presume the videos are an argument for 'which is better - RRSPs, TFSAs or Taxable accounts'. But the videos only argue for the correct understanding of where the RRSP's benefits come from. They use the TFSA comparison because everyone agrees where its benefits come from. They use the Taxable account comparison because the $benefits equals the difference in outcome from the Taxable.
> 
> Read my post above this one for the summary points made in the 2nd video. You have missed their points completely.
> 
> You excuse the false claims regarding RRSP benefits because they are used in a good cause - to promote savings. I think people should be given the truth so they can make up their own minds. As it stands now people are regularly making wrong decisions because they have accepted your wrong claims as the truth. Even the regular contributors on this site are making wrong decisions - look at my list above of Guban's errors. You have all drunk the cool-aid.


There was a gentleman, about 40 years ago, who had a passion and progressive, or even radical views, against what were commonly held beliefs of the time. He was able to find some supporters over the years and those who didn't were often criticized. Instead of trying to modify his message so that it could be easier to understand (not all people learn the same way), he became more aggressive. Eventually, he took most of his supporters away. Later, they "drank the Kool-Aid". The metaphor you used comes from the Jonestown tragedy.

If your goal is to help educate people, then broadly grouping them, judging them, and insulting them is an interesting strategy. If you choose to ignore their objections to the way the message was delivered, and I would gather that these are people with above average finance/investment knowledge, that is an interesting strategy. If you imply that their minds are closed to a new perspective, yet you do not exhibit an attempt to understand why they are uncomfortable with the way it is presented, then that, too, is an interesting strategy.

When I heard the concept that one should think of the contribution credit as the government's money, I immediately thought that there will be people who would wonder how it is segregated, how is it managed, what instructions is the government giving to how that money is being invested. I have no doubt that this concept will only confuse certain people. They literally will believe that this is separate from the money inside their RRSP.

When I heard the concept that the profits are not taxed, I can just imagine someone saying, well, I need a new car so since my RRSP is up by $35,000, let's take that out right now. And thank goodness, I don't have to pay tax on it because there is an anonymous poster who said it is never taxed. Ever. And he showed me the mathematical proof.

When I heard that an RRSP has an additional benefit that there could be a reduction, or even elimination, of government benefit programs, I thought that this must have been a mistake. Surely, that's a disadvantage. Time and time again, I've seen the experts warn that, especially when an RRSP has been converted to a RRIF and the mandatory withdrawals escalate, there is a danger in effectively being taxed higher than the contribution rate, and even the highest MTR (because of clawbacks). Yet, the video calls this a benefit.

Would it have been possible to present the points that were made using the following example:

Joe Blow makes average/median income for a Canadian, or about $50k. His MTR is about 31% when he makes his deduction, but only 20% when he withdraws from his RRSP. Joe also contributed to his RRSP while he was a 4th year student but he took his deduction when he got his first full time job, so he decided to defer taking the deduction for a year because he moved from the 20% MTR to the 31% MTR. And, with Joe's combined OAS and CPP he was never going to collect GIS anyway, but with his income from his RRSP it isn't so much as to be subject to OAS clawback. He, like more and more Canadians, never worked where there was an employer sponsored DBP. If a scenario that shows a greater after tax benefit of an RRSP vs. a TFSA can still make your point, then that would be more powerful.

I do completely understand the videos and the way they have been portrayed. In my particular case, it doesn't change my investment strategy. And, frankly, I don't really care whether other people are making the wrong decisions. I know that there is far more that I do not know than I know, so I come here for additional insight, not to diagnose people's financial well being and offer unsolicited advice. 

But, you said that I made wrong claims in my post - please detail where I am wrong because that is very valuable information to me and I would sincerely thank you for that. I have created several financial tools, the most recent one to calculate CPP benefits (it's not to the level of what dogger1953 has, as it is only for my personal use) and I use that to feed into my own, simpler version of steve41's RRIFmetric tool (it is the most complicated one I've ever done and it took me weeks and weeks and weeks - once I completed all of the tax calculations for Ontario, BC and Alberta I stopped. Those were the only provinces to which I thought we would retire, so that was enough and it is never meant for commercialization.) So, if you've identified flaws in what I posted, and that could affect my strategy for retirement, then I'm keenly interested.

In the videos, there are definite benefits to RRSPs that aren't mentioned, and there are definite drawbacks that could be emphasized. I can see people becoming very confused by the manner in which it is explained. I find it is hard to unlearn what you already know, so I can imagine it would be hard to create these videos and then try to see it from a layperson's point of view and be honestly self-critical. 

When I have had a hard time explaining something to someone, occasionally my ego kicks in and think that it is THEIR problem. Then, I (usually) catch myself and come up with a different way, and a different way, until they finally understand. That is a good learning experience for both parties. I don't imply they are incapable of critical thought and are easily misled - especially people I don't even know.

In my opinion, the defense of the videos could have benefited from a softer tone, such as acknowledging that it takes time for people to change their habits. RRSPs have been around for a long time, TFSAs are newer, and it will be a gradual process before people start increasing their use of a TFSA not just as a complement, but sometimes, instead of an RRSP. I have a built in "sales alert" sensor that goes off whenever someone tries to present a financial benefit to me, but it doesn't use my personal situation, and only takes the most favourable starting position.

But, you've done the work, you are happy with it, so please don't think I am in any way posting this to change your mind in any of the conclusions you have made about any one here.


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## leslie

The points made by the videos are : 
1) The main benefit, the only benefit that everyone receives, is the benefit from permanent sheltering of profits from tax. This benefit will always exactly equal the same benefit from TFSAs and comes from exactly the same source.
2) There is a bonus (or penalty) from a difference in tax rates between contribution and withdrawal.	
3) There is a growing cost from any delay in claiming the contribution as a tax deduction.
4) There is a loss of benefits from government support programs in retirement from the RRSP withdrawals being taxable. 
These factors are independent and add up to the RRSP's net benefit.

The statements 1-5 above completely contradict the claims by all the experts and officials ( http://members.shaw.ca/PublicAccess/...published.html). The videos show why .....
1) Profits in an RRSP are NOT taxed on withdrawal.
2) The tax refund is NOT a benefit.
3) There is NO benefit from deferring tax (the original tax on employment income, or of tax on profits earned).

None of the comments above make reference to any of these points, much less find fault with the math proofs. The closest comment was the complaint that negative factors should be indicated as being 'subtracted' instead of 'added'. In my books when you subtract a negative you end up with a positive... but who cares? Especially since there is no acknowledgment of the factors being added/subtracted. The other comments on these points were made without having watched the videos in which they are presented, or even understanding the calculation of benefit (= the difference in outcomes from a taxable account).


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## OnlyMyOpinion

janus10 - very good points. 
Anyway, it seems like the repeat button is stuck on this thread, time to throw it out.


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## cainvest

leslie said:


> 3) There is a growing cost from any delay in claiming the contribution as a tax deduction.


I skimmed through the videos, hope I didn't miss something, but there seems to be a problem with the delay calculation. You mention one delaying because they'll be in a higher tax bracket the following year but don't show the benefit from the higher taxes (on investment) to lower taxes (on withdrawl) in the example (bonus #2 in the example). Is that right or did I miss something?


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## Eclectic12

leslie said:


> ... The videos show why .....
> 2) The tax refund is NOT a benefit ...


As I indicated in post #65, based on video #1 - where Joe Blow spends the contribution credit received as a refund on a vacation, the RRSP then becomes last of the three and loses it's net benefit. 

From an RRSP perspective ... if there is no benefit from the contribution credit, the RRSP should have remained in first, should it not?


Cheers

*PS*

Or to put it another way, if there's no benefit to the contribution credit ... how come Joe using the RRSP means a vacation now and relatively close to the same money to spend in 11.5 years time?


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