# I'm not using my RRSP, despite having enough to contribute



## CheckingIn (Apr 4, 2009)

I think I need to be convinced to save in my RRSP.

I have no debt, I have a good job, I'm in my mid-20's, and just graduated from University a couple of years ago. I have accumulated a large savings of over $20,000 that is just sitting in a Savings Account (albeit it's in a People's Trust account, which is paying the highest interest rate in Canada), so I have enough to plop a lump sum in my RRSP account.

My RRSP only has about $3,000 in GIC's. Other than that, I do not contribute in it at all. Is this bad? My reason for not contributing is that I feel it is pointless since I do not want to use my _after-tax _dollars to contribute to my RRSP, and then when I take it out, I'll have to pay tax again on that amount. I feel like I'm getting double-taxed on it.

However, I do make full contributions to my TFSA, and I send monthly contributions to my DRIP portfolio.

Any insight as to whether or not I'm taking the right approach?


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## Four Pillars (Apr 5, 2009)

You're not using after tax dollars to contribute to an RRSP. It's pre-tax. Of course you have to contribute the tax refund to complete the transaction.


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## FrugalTrader (Oct 13, 2008)

As Mike says, you aren't considering the tax refund the RRSP offers.


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## CheckingIn (Apr 4, 2009)

But in my case, if I were to contribute, wouldn't I be using after-tax dollars to contribute? Since I'd just be writing a cheque to deposit it from my Savings Account.


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## CheckingIn (Apr 4, 2009)

FrugalTrader said:


> As Mike says, you aren't considering the tax refund the RRSP offers.


That is true.. Although I should have also mentioned that I'm not in a high tax-bracket at the moment


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## hystat (Jun 18, 2010)

CheckingIn said:


> I have a good job,


 so you're probably in a fairly high tax bracket.
Seems you are looking a serious gift horse in the mouth.


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## CheckingIn (Apr 4, 2009)

hystat said:


> so you're probably in a fairly high tax bracket.
> Seems you are looking a serious gift horse in the mouth.


Nope, not in a high tax bracket at all. By "good", I meant that I love what I'm doing, and surrounded by great people.

Never heard of the idiom you used; looked it up, still confused ..


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## Potato (Apr 3, 2009)

CheckingIn said:


> I'm in my mid-20's, [...] I have accumulated a large savings of over $20,000 that is just sitting in a Savings Account ?



Others have responded about the tax benefits of the RRSP.

I'm more concerned about the investment vehicle: why are you in cash? Do you have a planned use for this money in the near term? If you do, then that's a better reason not to stick it in an RRSP. If you don't, why isn't it invested? You should look at what your risk tolerance is, taking your age into consideration, and think about putting some of this money into equities and bonds (I'd recommend TD's e-series account, especially for this amount of money).

Either way you go (cash or bonds/equities), you should take advantage of the TFSA too.


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## CheckingIn (Apr 4, 2009)

Hi Potato, thanks for the response.

I'm actually heavily invested in the Couch Potato strategy (using the TD e-series funds), and I also DRIP 10-12 companies using Derek Foster's method.

The reason I have such a big savings is because I didn't want to dump a "lump sum" into the e-series. Rather, I make monthly contributions that are taken from this Savings Account (using Dollar-Cost-Averaging).

I've read that making lump sums can be a bit risky, so I decided to continue making monthly contributions instead.


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## balexis (Apr 4, 2009)

Hi CheckingIn,
It will be easier if you gave us a better picture of your situation. From your initial post, it seemed that all your savings were in cash (20k) + a 3k GIC in RRSP.

Now you say you are heavily invested in E-Series + 10-12 stocks? OK..

Did you max out your TFSA?

The best scenario with RRSP is contribute while in high tax bracket, take some out while in a low one. But if you run the math, especially if you're young, you WILL get ahead even if contribution and money out are done on the same tax bracket, because you delay taxes for a long time.

Also, if you think your income will significantly increase in the next few years, you might want to consider contributing right now and take the associated deduction in the future, when you hit a higher tax bracket.


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## stardancer (Apr 26, 2009)

CheckingIn said:


> But in my case, if I were to contribute, wouldn't I be using after-tax dollars to contribute? Since I'd just be writing a cheque to deposit it from my Savings Account.


Yes, you might be contributing to your RSP with after-tax $$. BUT, when you do contribute, you get a $ for $ deduction from your total income, and you pay no tax on that amount. In other words, it is just like pre-tax dollars.


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## MoneyGal (Apr 24, 2009)

...and you can even arrange to make RRSP contributions with pre-tax dollars by setting up regular contributions and filing form T1213 with CRA.


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## CheckingIn (Apr 4, 2009)

stardancer said:


> Yes, you might be contributing to your RSP with after-tax $$. BUT, when you do contribute, you get a $ for $ deduction from your total income, and you pay no tax on that amount. In other words, it is just like pre-tax dollars.


Oh, I never thought of it that way.. It sounds very intuitive, yet I haven't wrapped my head around that. Thanks!


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## CheckingIn (Apr 4, 2009)

MoneyGal said:


> ...and you can even arrange to make RRSP contributions with pre-tax dollars by setting up regular contributions and filing form T1213 with CRA.


MoneyGal, I never knew about this form! Thanks for the link!


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## CheckingIn (Apr 4, 2009)

balexis said:


> Hi CheckingIn,
> It will be easier if you gave us a better picture of your situation. From your initial post, it seemed that all your savings were in cash (20k) + a 3k GIC in RRSP.
> 
> Now you say you are heavily invested in E-Series + 10-12 stocks? OK..
> ...


Hello balexis, thanks for taking the time to respond.

Here is a breakdown of my asset allocation:

Equities (41%)
- Couch Potato (approx. 1/3 of the Equities)
- DRIP (approx. 2/3 of the Equities)

Fixed Income (18%)
- GIC's (approx. 4/5 of the Fixed Income)
- Bond Index (approx. 1/5 of the Fixed Income)

Cash (41%)
- Savings Account​
As you can see, I do have a big "Cash" allocation. That is decreasing, as I put more and more monthly contributions into my Equities. I didn't want to do a "lump sum" straight into the Equities.

And yup, I've definitely maxed out my TFSA


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## andrewf (Mar 1, 2010)

I hope by 'cash', you mean a high interest savings account?


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## CheckingIn (Apr 4, 2009)

andrewf said:


> I hope by 'cash', you mean a high interest savings account?


Yup, it's stored in a People's Trust savings account (currently the highest interest rate in Canada)


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## cardhu (May 26, 2009)

CheckingIn ... you’re off to an amazing start ... well ahead of where I was at your age. 

As others have pointed out, your view of RRSPs was incorrect because you were ignoring the distinction between before-tax dollars and after-tax dollars ... don’t feel bad, many people with far more experience than you still have trouble making that distinction ... there are some rather obscure situations in which you could actually face double-taxation on contributions to RRSP, but the ordinary day-to-day use of the RRSP within your contribution limits is not among them ... your feeling that you would be double-taxed is not caused by any actual double-taxation ... it is caused by your incorrect analysis. 

Potato makes a good point ... the RRSP works exceptionally well for most people, for its intended use, and it works somewhat less well, for most people, for “other” uses ... therefore, you have to take into account YOUR intentions for this money ... do you intend to buy a car/yacht/vacation/ski chalet/etc/etc? ... none of these intended uses really forms a good argument for the use of RRSP, although there can be exceptions ... if your intended use is to generate an income stream in retirement, then the RRSP is, for most people, an excellent vehicle. 

Having said that, that doesn’t necessarily mean that you should immediately begin contributing to RRSP ... the RRSP works most efficiently when your tax break on contribution is as high as possible (on average, over your lifetime) and your tax burden on withdrawal is as low as possible (also on average, over your lifetime) ... there are various strategies that can be employed to optimize those tax effects, depending on your personal circumstances and your expectations about the future ... sometimes, simply maxing your RRSP every year, without fail, is the optimal approach ... at other times, some deviation from that pattern may offer opportunities to optimize your average tax break ... but you should realize that optimization is not strictly necessary, in order for the RRSP to outperform the alternative ... it is often not a matter of “whether” the RRSP outperforms, but “by how much” it outperforms. 

My advice is continue to learn, but be careful WHAT you learn ... there is a lot of misleading (or worse) information floating about in cyberspace on the subject of RRSPs ... not just in cyberspace, for that matter, but also in newspaper & magazine articles, books, and even in the advice you might get from “professionals” ... read a lot, use valid logic to separate the wheat from the chaffe, and you will form your own understanding. 

To get you started, I’ll address some of the comments appearing in other responses upthread ... 



> _Of course you have to contribute the tax refund to complete the transaction. _


This is a myth ... the tax-effectiveness of an RRSP does NOT depend on the further investment of the “refund” ... it makes no difference* what you do with the tax refund, the RRSPs relative performance versus an equivalent investment in some non-RRSP scenario does not change. 

* ... it does make a difference, of course, to your overall financial picture, in that investing “more money” will usually (though not always) produce a bigger nest egg than investing “less money” ... but that is a separate discussion and has no bearing on RRSPs. 



> ._..if you run the math, especially if you're young, you WILL get ahead even if contribution and money out are done on the same tax bracket, because you delay taxes for a long time_.


This is true, but the emphasis on “brackets” can be a little misleading ... on withdrawal, it is the tax burden attributable to the withdrawal that matters, not your tax bracket ... although it is not the norm to retire with a higher income, it is quite a simple matter to demonstrate on paper how it is possible to retire into a higher tax bracket, with a higher income, yet face lower taxes on RRSP withdrawals ... it is the relative tax rates that matter, not the tax brackets, per se.


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## CheckingIn (Apr 4, 2009)

cardhu, thanks so much for taking the time to respond! I really appreciate it 



> your view of RRSPs was incorrect because you were ignoring the distinction between before-tax dollars and after-tax dollars


I think you are spot-on about my lack of understanding of using after-tax dollars. I had always thought that the only way to take advantage of the RRSP is if you make the contribution (before taxes) off your pay-cheque through your employer. Thus, I thought that when I make a contribution using funds in my Savings Account, it would be taxed again (when I take it out), thus the double taxation that I was referring to.



> if your intended use is to generate an income stream in retirement, then the RRSP is, for most people, an excellent vehicle.


I would say I fall into this category. I think after making a contribution, I would "forget" about it, and just let it accumulate.



> My advice is continue to learn, but be careful WHAT you learn


Thanks, I think I'm definitely going to do more reading..



> but you should realize that optimization is not strictly necessary, in order for the RRSP to outperform the alternative


Good point

Again, great post!  Learned a lot within this thread.


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## kcowan (Jul 1, 2010)

At about age 45, you need to look at your future contributions relative to your anticipated retirement age. For many people who anticipate earning over 32k in retirement from all sources, it is often tax efficient to draw down your RRSP in the early years (ages 55-64 i.e. early retirement) prior to taking CPP and then suspend w/d so that you maximize your Age Exemption and/or your OAS between 65 and 72.


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## cardhu (May 26, 2009)

kcowan said:


> At about age 45, you need to look at your future contributions relative to your anticipated retirement age. For many people who anticipate earning over 32k in retirement from all sources, it is often tax efficient to draw down your RRSP in the early years (ages 55-64 i.e. early retirement) prior to taking CPP and then suspend w/d so that you maximize your Age Exemption and/or your OAS between 65 and 72.


Yeah, there could be some opportunities to optimize, but ... 

•	Why would people with incomes $35k below the OAS clawback threshold need to worry about OAS clawback? And why would they need to start worrying about it 20 years in advance? 
•	Seems to me that fussing around over the relatively insignificant age amount credit reduction could be a lot of effort for little reward ... and in some cases could very well backfire ... If this approach meant drawing discretionary “extra” amounts in the period leading up to age 65, the incremental tax burden on those “extra” amounts could in many cases exceed the amount saved by avoidance of the relatively insignificant age amount reduction.


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## OhGreatGuru (May 24, 2009)

Trying to plan your retirement income needs 20 or 30 years from now based on the current Age Amount is a waste of time.

Frankly, the Age Amount ($6408 in 2009), should be eliminated anyway, and rolled into a higher Basic Personal Amount for everyone. (Why are people taxed on income that is offically below the poverty line? - but that's another discussion.) The age amount is a classic example of "ageism" and pandering to a particular interest group. Not all seniors are poor. The rationale for its existence is that many elderly people have inadequate incomes. Well, there are lots of "young" people with inadequate incomes too, who could use the same benefit. 

Eligibility for the Age Amount is also income-dependent, as it is clawed back for incomes between $32,312 and $75,032. So it's really a "Low-Income Old Persons' Age Amount".


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## 412driver (Apr 30, 2010)

Highly taxed items such as bonds or GIC's go into your RRSP's...

Open a non-registered account where you can place dividend and preferred shares...

Use your TSFA to buy equities where you save on capital gains.....


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## Bupp (Nov 13, 2009)

If you feel you will move up a tax bracket in the next 3 years then contribute to your rrsp but save the deduction for when your marginal tax rate is higher.


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## alphatrader2000 (Aug 18, 2010)

CheckingIn said:


> I think I need to be convinced to save in my RRSP.
> 
> I have no debt, I have a good job, I'm in my mid-20's, and just graduated from University a couple of years ago. I have accumulated a large savings of over $20,000 that is just sitting in a Savings Account (albeit it's in a People's Trust account, which is paying the highest interest rate in Canada), so I have enough to plop a lump sum in my RRSP account.
> 
> ...


It depends on your tax bracket. If you are on high tax bracket then you definitely better using it. Once you do the math, it becomes an easy decision. If lower bracket then one can make the argument against it, especially if you are projecting to have be in the higher bracket or not.


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## Young&Ambitious (Aug 11, 2010)

Bupp made a great point. You don't need to declare your contribution immediately, I personally have some money invested inside an RRSP account undeclared and am waiting to declare it at a time when I'm making the big bucks


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## CheckingIn (Apr 4, 2009)

Bupp, alphatrader2000, Young&Ambitious:

Thank you all for your recent comments!

I think you all made great points about contributing to my RRSP depending on which tax-bracket I'm in.

However, I think my original confusion was the concept of using "after-tax dollars", which I thought didn't make sense to use to contribute to an RRSP. However, this issue has been cleared up by some knowledgeable members on this board.


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## Eclectic12 (Oct 20, 2010)

CheckingIn said:


> Oh, I never thought of it that way.. It sounds very intuitive, yet I haven't wrapped my head around that. Thanks!


It's part of learning what the benefits and features are.

Most people quickly pick up on the idea that their investments can grow faster, with deferred taxes. However, there are some features to consider:

a) when the money is withdrawn, regardless of how it grew, it will be taxed
as income. The same growth as a capital gain or eligible dividends 
is taxed less.

b) if you are attracted to stocks/mutual funds/ETFs for grown in the RRSP,
losses don't have a benefit. A loss in a non-registered account (i.e. 
outside the RRSP) can be written off against other capital gains and 
relatively easily replaced. The point is to stick to high quality in the 
RRSP to minimize losses.

c) buying opportunities can be tricky as the only ways to pay for the 
purchase are more contributions until the max has been reached or 
from within the RRSP (ex. an income/dividend stream or selling other 
assets for capital gains.


The benefit is that if you have a good plan and a long timeframe, the benefits likely will outweigh the challenges.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> CheckingIn ... you’re off to an amazing start ... well ahead of where I was at your age.
> 
> [ ... ]
> 
> ...


Good point about checking out any information. 

In that vein, I'm trying to figure out your "tax effectiveness" comment. I agree that the use of the refund does not affect the tax effectiveness. The refund is the "tax dollars" coming back so that you have use of the full, pre-tax amount. 

However, the performance of the RRSP is a different story.
IMHO, the key is that the scenarios discussed are not comparing equivalent amounts and are ignoring taxes on the investments.

In the RRSP scenario, you have the same amount invested and then add an additional amount, the refund. So 1 unit + some additional, *in the same investment*. All other factors being equal, the larger number should gain more than the smaller number. Or if the other factors are not equal so that when the refund is added around March 2009 , the refund pays for two more units on a dip and the RRSP ends up with 3 units.

In the non-registered scenario, you have the original amount of 1 unit, plus growth or loss.

Even if you were to take the refund and invest in a non-registered account, as long as the investment is the same (which means the performance is the same), only a capital gain held for an equal amount of time is going to come out even, once the taxes are factored in.

Of course, the other extreme is to spend the refund. The tax effectiveness is the same but spending the refund is certainly going affect the overall financial picture compared to either investing the refund, inside or outside of the RRSP.

Or am I missing something?


As for the withdrawals, it may not be the norm to have income than pre-retirement, it is easier to end up with more income than expected. Most of the people I've talked to haven't considered that there can be many components to their retired income. They've focussed on their pension and missed that there are other sources such as investments, gov't (ex. CPP) and RIFs. 

Don't forget ... it's largely people in the higher incomes that are able to contribute significantly to their RRSP, so it make sense that on retirement, if they haven't planned thoroughly, all sources added together can end up being a significant income.

I am curious how to end up in a higher tax bracket, with a higher income and have an RRSP withdrawal end up being taxed less. Do you have any examples?


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## steve41 (Apr 18, 2009)

One item that needs to be remembered is that the tax burden reduces over time.... age 65 etc credits and especially, the indexing of the tax brackets can make a major impact in time. Tax on $50K is currently around $11K. In 40 years, all things being equal, tax on $50K will be approx $7K (for 2% inflation)


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