# Marginal tax brackets and RRIFs - a few RRSP questions



## peterk

There's a few things I need cleared up about RRSPs. I'm about to start contributing, but I want to make sure it's the right thing for me. RRIFs, you have to convert all of you RRSP accounts by 71, but can as early as 55. Do you have to convert all your RRSP accounts over to a RRIF if I want to start drawing on _some_ of my money at 55? How does the mandatory withdrawal percentage work. Is it just based on the total in the account at the beginning of each year? Do you have complete control over how the money is liquidated out of the account? (forced to sell assets) And what happens if you don't take out enough? Is the government going to go into your RRSP and start selling your investments to cash out? Is there any disadvantage of just withdrawing from your RRSP instead of converting to the RRIF for people 55-71? (other than the withholding tax)

I'm a bit confused about the marginal rate. Say I'm $5000 into the 36% bracket. If I make a $10000 contribution will I get back 36% of 10000 or 36% of 5000 and 32% of 5000?


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## steve41

> If I make a $10000 contribution will I get back 36% of 10000 or 36% of 5000 and 32% of 5000?


 It depends on your salary. The refund is essentially whatever tax on your full salary would be minus tax on (your salary less your contribution)


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## peterk

Right. So if I were going to "optimize" my return I may be best to only contribute enough to get me out of the tax bracket I'm in.


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## steve41

Forget about what tax bracket you are in.... an optimum (long term) solution is to generally maximize your rrsp contribution.


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## Jon202

steve41 said:


> Forget about what tax bracket you are in.... an optimum (long term) solution is to generally maximize your rrsp contribution.


You can maximize your contributions yes, but if you want you can delay claiming them on your tax return until the next year if you think your income will be higher and/or won't be contributing as much.


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## cardhu

> Do you have to convert all your RRSP accounts over to a RRIF if I want to start drawing on some of my money at 55?


NO ... prior to age 71, you can convert just a portion of your RRSP to RRIF, while leaving the balance unconverted, if you wish. 



> How does the mandatory withdrawal percentage work. Is it just based on the total in the account at the beginning of each year?


YES ... or more precisely, it is based on the closing balance in the account at the end of the prior year. 



> Do you have complete control over how the money is liquidated out of the account? (forced to sell assets) And what happens if you don't take out enough? Is the government going to go into your RRSP and start selling your investments to cash out?


The RRIF rules do not cause money to be “liquidated” out of the account, nor do they force the sale of assets ... the rules merely require withdrawal ... YES you have complete control over how that money is withdrawn ... or rather, you have the opportunity for complete control, if you choose to exercise it. If you choose not to, or are unable to, exercise that control then of course there are mechanisms in place to ensure that the withdrawal takes place, but NO, the gov’t will not go into your RRIF and start selling your investments. Your trustee (your broker or financial institution) will ask you for instructions, and if you fail to provide them, they will fall back to some default procedure for implementing the necessary withdrawal. Different trustees may have different default procedures. 



> Is there any disadvantage of just withdrawing from your RRSP instead of converting to the RRIF for people 55-71? (other than the withholding tax)


Well, the withholding tax can be a big disadvantage, particularly since the rate of withholding can exceed the actual tax burden on withdrawals by quite a wide margin, but yes there are other disadvantages as well ... RRSP withdrawals are not eligible for the Pension Amount tax credit, or for pension splitting, while RRIF withdrawals are, starting at age 65. 



> So if I were going to "optimize" my return I may be best to only contribute enough to get me out of the tax bracket I'm in.


Maybe ... or maybe not ... optimizing of RRSP contributions is something that occurs over the course of one’s lifetime ... it isn’t an annual event ... therefore, sometimes the optimal approach will be as you suggest, and other times it won’t be ... in some cases, the optimal approach would be to contribute and deduct a larger amount, regardless of whether your deduction crosses bracket boundaries. Note that there can be various other non-income-tax items that could be impacted by your RRSP contribution, and are not reflected in your marginal rate. 

Delaying taking the deduction until you are earning in a higher bracket can sometimes work to your benefit, but it can also sometimes lead into a trap whereby you end up reducing your aggregate lifetime tax break instead of increasing it. 

Focus on the big picture.


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## peterk

Thank you very much everyone, that was very informative Cardhu. I'm just trying to get a clearer picture of the rules and tax treatments of various account types like RRSPs, TFSAs, holding companies, and trusts.
I understand that in a lot of cases it may be best to just max out your RRSP every year. So it seems like main risks of the RRSP route are income tax rate risk - what if the income tax rate in 50 years is 50%? Unlikely but it could happen. And market risk - what if I'm 85 and required to withdraw 10% and the market tanks? I'm also starting into a career as an engineer in which I have a (hopefully small) chance of getting sued, and perhaps a holding company or family trust would help protect a certain portion of my assets from that risk. 

The more I think about it the more complicated it seems to get... the more I learn about money management the more I don't know. You either have to go all in or pay someone big money to do it for you and hopefully not screw it up!


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## cardhu

peterk said:


> So it seems like main risks of the RRSP route are income tax rate risk - what if the income tax rate in 50 years is 50%?


Well, you have to put this in perspective … the nature of RRSPs is such that if the tax rate is the same at contribution and withdrawal, then the returns earned inside the RRSP are effectively taxed at ZERO percent … the same end result as a TFSA … but the reality is the vast majority of the population faces a lower tax rate on RRSP withdrawals than on contributions, if they are using the RRSP as it was intended to be used, and therefore, they enjoy a NEGATIVE tax rate on those investment returns earned inside the RRSP. 

Tax rates may very well rise in the future ... but you have to ask yourself, how high are they likely to go? ... and how soon? ... the RRSP can withstand some degree of tax rate increases, without losing its inherent growth advantage ... it can overcome a small rise in rates over the short term and the longer the holding time, the greater the tax hike it can overcome ... There are uncertainties, of course, there always are ... but if the magnitude of the change required to derail any particular approach is so great that it is difficult to imagine it happening in our lifetime, then the probabilities are pretty solidly in favour of that approach. 



> And market risk - what if I'm 85 and required to withdraw 10% and the market tanks?


Market risk is not unique to RRSPs ... all of your equity investments face market risk, regardless of whether they are held in a registered account or not ... the RRIF withdrawal schedule simply represents a tax-efficient mechanism to deregister the assets ... there is no requirement that you spend the money, only that you move it outside of the shelter of the RRSP ... and if you move it outside during a period when valuations are low, the withdrawal will be even more tax efficient than it otherwise would have been.


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## Guest

Hello cardu ... you say … "the nature of RRSPs is such that if the tax rate is the same at contribution and withdrawal, then the returns earned inside the RRSP are effectively taxed at ZERO percent" … if I deposit say a total of $20K and over 10 years get that up to say $100K, the return of $80K (as well as the $20K) is taxed on withdrawal.


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## steve41

This might explain what Cardhu means by zero percent.

Our guy is 35, he earns $50K per year, retires at 65. He starts out with an RRSP of $50K.

Two scenarios.... in the first, he continues to invest in his RRSP, in the second, he invests in a tax-free vehicle.

The RRSP strategy returns him a constant after tax (constant) income of $33,040.

In the second scenario, he avoids further contributions to his RRSP, and all savings are directed to a TFSA. This time his constant ATI (dying broke at 95) returns him a $32,843 inflation adjusted lifestyle.

Therefore you could say that the RRSP was effectively (just better than) tax-free.

RRSP scenario
Taxfree scenario


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## cardhu

steves said:


> This might explain what Cardhu means by zero percent.


Not really … tax rates are not the same at contribution and withdrawal in your model. 



rikk said:


> if I deposit say a total of $20K and over 10 years get that up to say $100K, the return of $80K (as well as the $20K) is taxed on withdrawal.


Yes, of course RRSP withdrawals are taxed … and RRSP contributions are deductible … and if the applicable tax rate at withdrawal is the same as the tax rate on contribution, then the result is an effective tax rate of ZERO on the returns … the RRSP produces exactly the same after-tax result, that would have been achieved by investing the money instead in a non-reg account, if that non-reg account had been taxed at ZERO percent. 

Here's a simple example ... lets say your tax rate is 50% throughout your life … so when you collapse your $100K RRSP, you end up with $50k after tax … and if you invested that same $10K outside of RRSP over those same 10 years, it’d grow to $50K, of which $40k is growth … if that growth were taxed at 0% percent then you’d end up with $50k in your pocket, after tax … just like the RRSP … unfortunately, non-reg investments aren’t taxed at 0%.


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## steve41

> Not really … tax rates are not the same at contribution and withdrawal in your model.


 I find it very hard to manufacture a plan in which the tax rate in retirement is the same as pre-retirement. Certainly, not for a working/saving, retiring/withdrawing, dying broke sequence.


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## cardhu

I know ... and that’s why your models don’t explain what I meant.


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## steve41

The model makes the assumption that the current tax rules (T1) will continue into the future. Everything else.... rates, inflation are what they are. This is not a theoretical model, it is the actual mathematical description of the financial and taxation system we live in. 

My example was to compare investing for that individual in RRSPs in one case and investing in a taxfree entity in the other case. The fact that the RRSP case returned a higher after tax income than the taxfree case says to me that the RRSP is a (close to) zero tax investment.

As I said.... it is hugely difficult to find a situation where the tax rate after retirement is the same as before retirement, unless you make assumptions about a major arbitrary tax armageddon down the road.


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## CanadianCapitalist

rikk said:


> Hello cardu ... you say … "the nature of RRSPs is such that if the tax rate is the same at contribution and withdrawal, then the returns earned inside the RRSP are effectively taxed at ZERO percent" … if I deposit say a total of $20K and over 10 years get that up to say $100K, the return of $80K (as well as the $20K) is taxed on withdrawal.


Assume your average contribution tax rate and the average withdrawal tax rate is 50%.

Inside a RRSP:
Deposit: $20K
Withdrawal $100K after 10 years.
After-tax: $50K

Outside a RRSP:
Deposit: $10K (because RRSP contributions are pre-tax)
Withdraw: $50K after 10 years. (your investments grow the same 5x in 10 years).
At a 50% capital gains inclusion rate, you'll have $40K after taxes

So, you can see that in theory a RRSP is better. In fact, the taxable account almost certainly lags even more for most tax brackets because you'll regularly pay taxes on dividends and portfolio turnover. Whereas all your investment growth is sheltered within a RRSP.

In the top tax brackets, you are almost certainly better off contributing to a RSP.


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## steve41

It is easy to say something like 'average tax rate in retirement of 50%'.... it is much more difficult showing how such a tax rate could be encountered in the course of a normal working-retired lifetime profile. Unless your name was Donald Trump or Bill Gates.


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## HaroldCrump

steve41 said:


> It is easy to say something like 'average tax rate in retirement of 50%'.... it is much more difficult showing how such a tax rate could be encountered in the course of a normal working-retired lifetime profile. Unless your name was Donald Trump or Bill Gates.


Is it really _that_ uncommon to not have the same income tax rate in retirement as prior to?
Consider most of our poor, hard-working, pensioned public sector workers, who receive 90% of their highest drawn salary (or average of 5 best years) after retirement as pension.
I believe teachers and health care workers get similar pension deals.
So that 90% plus the interest/returns from their non pension savings might easily get them to 100% of their pre-retirement income or even above.


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## steve41

Give me an example scenario, and I will bash it out. Who knows, you may be right, but I doubt it.


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## Maltese

HaroldCrump said:


> Is it really _that_ uncommon to not have the same income tax rate in retirement as prior to?
> Consider most of our poor, hard-working, pensioned public sector workers, who receive 90% of their highest drawn salary (or average of 5 best years) after retirement as pension.
> I believe teachers and health care workers get similar pension deals.
> So that 90% plus the interest/returns from their non pension savings might easily get them to 100% of their pre-retirement income or even above.


I'd sure like to know which plans pay out 90% of one's salary. Mine pays a maximum of 70% and that's after 40 years of service. Not many people make it to this amount or even close to it.


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## George

HaroldCrump said:


> Is it really _that_ uncommon to not have the same income tax rate in retirement as prior to?
> Consider most of our poor, hard-working, pensioned public sector workers, who receive 90% of their highest drawn salary (or average of 5 best years) after retirement as pension.
> I believe teachers and health care workers get similar pension deals.
> So that 90% plus the interest/returns from their non pension savings might easily get them to 100% of their pre-retirement income or even above.


There's no such thing as a pension plan in Canada that offers a 90% replacement ratio after retirement. The most that any defined-benefit plan offers is 2% for each year worked, up to a maximum of 35 years - that totals 70%.

The assumption, of course, is that the nurse/teacher/public servant will stay employed with the same employer for 35 years - this is hardly the norm nowadays, even amongst public sector workers. 

Also, bear in mind that pensions aren't free. The employees and employer pay for them via deductions off of each and every paycheque - around 5.5% for earnings below the YMPE (because CPP also covers that amount) and 8.4% for earnings above the YMPE.


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## CanadianCapitalist

steve41 said:


> It is easy to say something like 'average tax rate in retirement of 50%'.... it is much more difficult showing how such a tax rate could be encountered in the course of a normal working-retired lifetime profile. Unless your name was Donald Trump or Bill Gates.


I didn't say this is a typical case. Even if you make aggressive assumptions against a RRSP, those in the top and middle brackets come out ahead. And I subscribe to the view that the typical experience is a drop of couple of tax brackets in retirement as well.


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## andrewf

I'm expecting taxes to be higher when I retire than presently. The boomers are going to rob the country blind before they die, and their kids will have to pay for it. It's hilarious that just as the boomers are starting to retire that they suddenly feel like OAS, GIS and CPP payouts should be increased. How charitable of them.


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## steve41

Let's think about this.... we are talking about the RRSP, which is a vehicle for ensuring that we have a source of income after our salary disappears (retirement) In a situation where our retirement income (pension/cpp/oas, etc) is the same as or similar to our income during our working years, then the entire argument becomes moot.

Remember, this started out as a discussion of the tax implications of the RRSP/RRIF.


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## Larry6417

andrewf said:


> I'm expecting taxes to be higher when I retire than presently. The boomers are going to rob the country blind before they die, and their kids will have to pay for it. It's hilarious that just as the boomers are starting to retire that they suddenly feel like OAS, GIS and CPP payouts should be increased. How charitable of them.


Wow! Did someone spike your coffee today? Your statement is unfair, especially in regard to CPP. Contributions were boosted in 1997 to create a surplus that could be invested. People retiring now have not only paid for their CPP, they've helped to pay for your CPP as well. Also, changes have been made to CPP to reduce the benefit of early retirement. See http://www.fin.gc.ca/n08/data/09-051_1-eng.asp

I don't mind paying for GIS as it's meant for low-income Canadians. I do dislike OAS; it's welfare for middle-class seniors.


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## andrewf

So, the deal with CPP is that the contribution rate was increased to 9.9% in 1997 to make the program sustainable. Because it had already racked up substantial liabilities, this rate is quite a bit higher than would be necessary had the CPP been funded sustainably from the start. Ie, people contrbuting after 1997 are paying extra to cover the unfunded liability created by the underfunded/PAYGO scheme we had pre-1997. Boomers may work up to half their career after 1997, but it's really their kids that will have to overcontribute for their entire careers because the boomers undercontributed pre-1997.

To be clear, Larry, I'm commenting on the news reports about the sudden concern about pensions and living standards of seniors. I fully expect government benefits to seniors to be increased in some ways over the next decade, and that will amount to boomers picking the pockets of their children. When people say they want CPP coverage doubled, many mean immediately, not phased-in in accordance with contributions. Otherwise, this solution will do nothing to help the boomers who didn't save enough. The only way to help these people is to lower their expectations, or steal from their kids.


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## Larry6417

Actually, CPP was underfunded from the start. To receive a lifetime worth of benefits, one needed to contribute for only 10 years prior to joining (at inception). The people who received the most benefit while paying the least are the generation *before* the boomers. 

The only large group I hear of calling for doubling CPP is CARP. I wouldn't be so sure that young people will be stuck with the bill. The federal gov't was noticeably cool to the proposal. Also, the structure of CPP is such that the provinces have to agree as well.

P.S. I would be far more worried about healthcare costs than pension costs in the future.


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## andrewf

The generation before the boomers did benefit the most, but they had lots of kids in order to support them in their old age. 

The boomer's kids are going to shoulder a significantly heavier load than their parents did.

Agreed about health care. We should be prefunding it. At the very least, we shouldn't be running deficits provincial+federal on the order of $100 biliion/year.


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## peterk

Wow this got a bit beyond the topic I had started  But thanks everyone.

Can someone clear up what is wrong with my math here? I don't understand the calculation that shows how an RRSP is "tax neutral" if the deposit and withrawal marginal rate are the same.

Eg. 1000 deposited.
Marginal rate 36%
results in a $360 refund and 1360 total.
say it is invested at 5% for 5 years
= 1735.74
after taxed at 36% that equals 1110.87

TFSA
$1000 invested at 5% for 5 years
= 1276.28

I understand that if instead of adding a 36% refund I take 1000/(1-.36) as the refund I get the RRSP to equal the TFSA. But from all I understand of how we get taxed that doesn't seem to be the right thing to do. 
Can someone explain what I've got messed up here?


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## Larry6417

peterk said:


> Wow this got a bit beyond the topic I had started  But thanks everyone.
> 
> Can someone clear up what is wrong with my math here? I don't understand the calculation that shows how an RRSP is "tax neutral" if the deposit and withrawal marginal rate are the same.
> 
> Eg. 1000 deposited.
> Marginal rate 36%
> results in a $360 refund and 1360 total.
> say it is invested at 5% for 5 years
> = 1735.74
> after taxed at 36% that equals 1110.87
> 
> TFSA
> $1000 invested at 5% for 5 years
> = 1276.28
> 
> I understand that if instead of adding a 36% refund I take 1000/(1-.36) as the refund I get the RRSP to equal the TFSA. But from all I understand of how we get taxed that doesn't seem to be the right thing to do.
> Can someone explain what I've got messed up here?


The term "tax neutral" is meaningless because the people who use the term have never defined it. I won't say "tax neutral." What I will say is that equivalent amounts invested in a TFSA and RRSP will yield the same after tax income. I'll use CC's numbers: 50% marginal tax rate, $10,000 after tax savings.

TFSA: The $10,000 is invested and multiplies 5 times in 10 years to $50,000. Since no tax is payable, that is equal to $50,000 after tax.

RRSP: Assume that the $10,000 in after tax savings is leveraged by using a RRSP loan. By borrowing $10,000, one can contribute $20,000 ($10,000 savings + $10,000 loan) to trigger (at a 50% marginal tax rate) a $10,000 refund, which is then used to repay the RRSP loan. Therefore, the full pre-tax RRSP investment of $20,000 grows 5 times in 10 years to $100,000. After (50%) tax the RRSP amount is $50,000 - the same as the TFSA.

I believe this is a theoretical number - very few Canadians invest the full pre-tax amount in their RRSPs.


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## Larry6417

CanadianCapitalist said:


> Assume your average contribution tax rate and the average withdrawal tax rate is 50%.
> 
> Inside a RRSP:
> Deposit: $20K
> Withdrawal $100K after 10 years.
> After-tax: $50K
> 
> Outside a RRSP:
> Deposit: $10K (because RRSP contributions are pre-tax)
> Withdraw: $50K after 10 years. (your investments grow the same 5x in 10 years).
> At a 50% capital gains inclusion rate, you'll have $40K after taxes
> 
> So, you can see that in theory a RRSP is better. In fact, the taxable account almost certainly lags even more for most tax brackets because you'll regularly pay taxes on dividends and portfolio turnover. Whereas all your investment growth is sheltered within a RRSP.
> 
> In the top tax brackets, you are almost certainly better off contributing to a RSP.


*In theory there is no difference between theory and practice. In practice there is.* - Yogi Berra

The equations and conclusions you've presented are correct in theory, but how often does theory match practice? To invest the full pre-tax amount in a RRSP, one must leverage the after-tax amount by borrowing and contributing the expected refund. For example, using the numbers you provide, one can borrow $10,000 (the expected refund from a $20,000 contribution) to contribute along with the after-tax savings of $10,000. The tax refund of $10,000 can then be used to repay the loan. If there's a way to contribute the full pre-tax amount without borrowing, I would like to know.

The problem: most Canadians don't invest in their RRSPs this way. Most contribute the after-tax savings, $10,000 +/- the tax savings ($5,000). Let's say that the investor contributes $15,000 that grows 5 times to $75,000 pre-tax or $37,500 after tax – less than the $40,000 in a non-registered account. Please note that I'm giving the benefit of the doubt to the RRSP. I'm assuming that the $10,000 is contributed at the start of the year and the resulting tax saving is invested in the same year. Now the question is: what about next year's refund? The re-invested $5,000 will trigger tax savings of $2,500 next year. If that amount is re-invested in a RRSP (at the same 17.46% that would give a 5 bagger over 10 years) next year for 9 years, it grows to $10,640 pre-tax or $5,320 after tax. $37,500 + $5,320 = $42,820 – more than the non-registered account but just barely. The $2,500 would yield, the year afterwards, a tax saving of $1,250 and so on. If those amounts are all re-invested I expect that the final sum would approximate, but never equal, the theoretical value of $50,000 after tax because of the time value of money. Also, how likely is it that Canadians will keep track of and contribute the “refund on the refund”?

So how likely is it that Canadians would re-invest the tax savings within a RRSP? Every few months, one of the recurring questions is RRSP vs. paying down the mortgage. In the last go-round posts favoured using the tax refund to pay down the mortgage. I'm not saying that's the wrong thing to do. What I am saying is that any use of the refund besides investing in the RRSP will result in lower returns than predicted by pristine models.

I think RRSPs are very valuable for most Canadians, but I'm leery of mathematical models that disregard how Canadians actually invest.


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## ghostryder

peterk said:


> Wow this got a bit beyond the topic I had started  But thanks everyone.
> 
> Can someone clear up what is wrong with my math here? I don't understand the calculation that shows how an RRSP is "tax neutral" if the deposit and withrawal marginal rate are the same.
> 
> Eg. 1000 deposited.
> Marginal rate 36%
> results in a $360 refund and 1360 total.
> say it is invested at 5% for 5 years
> = 1735.74
> after taxed at 36% that equals 1110.87
> 
> TFSA
> $1000 invested at 5% for 5 years
> = 1276.28
> 
> Can someone explain what I've got messed up here?



Umm, you are not comparing apples to apples?

You put $1360 in pre-tax income into your RRSP. $1360 x 36% tax = 489

Which leaves you with $870 after tax.


So to be fair you need to compare your $1360 of pre-tax dollars contribution to your RRSP to your $870 after tax contribution to your TFSA.

Your above calculation for RRSP is correct. After you withdraw and pay tax at the same rate you are left with $1110.


Your TFSA you put in $870 in after tax dollars:

$870 @ 5% for 5 years = $1110 withdrawn tax free.


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## peterk

Ah, I finally got it. Was not accounting for the fact the refund, if deposited back in the RRSP, will generate it's own refund in the following year - and so on. 
thanks ghostryder


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## ghostryder

peterk said:


> Ah, I finally got it. Was not accounting for the fact the refund, if deposited back in the RRSP, will generate it's own refund in the following year - and so on.
> thanks ghostryder


You appear to have not been comparing equivalent contributions. As you noticed, if you don't put the refund you get from making the RRSP contribution into the RRSP as well then things are equal. This assumes of course that you actually get a refund.

A $1000 RRSP contribution plus contributing the refund would be a total contribution of $1360. The equivalent TFSA contribution would be $870.


Or you could compare a $1000 TFSA contribution to a $1563 RRSP contribution. Either way you end up with the same $$ in the end.

Also, theoretically the RRSP could lag the TFSA a bit since if you make regular contributions to the RRSP and you put the refund in too, you can't put the refund until you receive it. So that money has slightly less time to grow. Over a long time period, this is probably negligible.

So which one is better comes down to other factors. If you are going to retire to a lower bracket, you might be better with RRSP. If you know you are going to receive OAS, GIS or other income tested benefits in retirement, a TFSA might be better, since TFSA withdrawals are not considered income.

Etc, etc.


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## Eclectic12

George said:


> There's no such thing as a pension plan in Canada that offers a 90% replacement ratio after retirement. The most that any defined-benefit plan offers is 2% for each year worked, up to a maximum of 35 years - that totals 70%.
> 
> The assumption, of course, is that the nurse/teacher/public servant will stay employed with the same employer for 35 years - this is hardly the norm nowadays, even amongst public sector workers.
> 
> Also, bear in mind that pensions aren't free. The employees and employer pay for them via deductions off of each and every paycheque - around 5.5% for earnings below the YMPE (because CPP also covers that amount) and 8.4% for earnings above the YMPE.


Hmmm ... I agree there isn't a pension plan that offers 90% replacement *as part of a single plan*. Note as well that several pension presentations I've been at have indicated that the legislated max a Defined Benefit plan can legally pay used to be something like $97K - regardless of what was contributed/investment growth. I'm not sure if this has been adjusted.

At the same time though - I've read lots of annual reports that indicate the CEO and top executives have "supplemental pension plans" to get around this. So when combined, the percentage goes much higher - ignoring stock options etc.

The few remaining people in a DB plan don't have access to the supplemental plans so generally, you are in the ballpark. The years and totals look right but I'm not so sure the 2% is though.

I'm also surprised that for the teacher at least, the % is so low as my sister when working as a supply teacher, wasn't working a full year, her pay was being deducted by 10% for the DB plan. She had to apply once she had proof she didn't work full time to get it refunded.

But then again, that's the fun part of DB plans (or mortgages or index linked GICs). There is a lot of room for variation.


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## MoneyGal

2% is correct. 

From CRA's "Registered Pension Plans Glossary:" 

*Benefit accrual rate*

The annual benefit accrual rate in a defined benefit plan or provision is the rate at which the member's lifetime retirement benefits for the year are accumulated. This may be a percentage of the member's remuneration, a percentage of the member's contributions, or a flat dollar amount. *The effective benefit accrual rate may not exceed 2% of a member's remuneration for the year*. For more information, see paragraph 8503(3)(g) of the Income Tax Regulations.

(My bolding added)


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## Eclectic12

HaroldCrump said:


> Is it really _that_ uncommon to not have the same income tax rate in retirement as prior to?
> Consider most of our poor, hard-working, pensioned public sector workers, who receive 90% of their highest drawn salary (or average of 5 best years) after retirement as pension.
> I believe teachers and health care workers get similar pension deals.
> So that 90% plus the interest/returns from their non pension savings might easily get them to 100% of their pre-retirement income or even above.


I'd expect so. I think of my co-worker who commented "this pension stuff is too complicated - if I don't have enough when I retire, I'll be a bag lady". Or the one who in the pension benefits presentation who gasped "You mean I won't get my full salary from the pension plan when I retire?".

There a lot of people out there who don't know about financial planning - never mind retirement planning.

Then too - even if 90% is offered (which I don't think is legally allowed), how many stayed in the same plan long enough to actually receive the 90%?

How many DB plans are left? 

My impression is fewer and fewer. When the options were presented to me as part of the mandated DB to Defined Contribution pension plan conversion, I wasn't impressed that the DB option had a six percent contribution rate (me plus employer) while the DC plan that was supposed to replace it had a 2 percent contribution rate. 

With savings on the contribution rate and no risk as there is not guarantee, it is easy to see why companies would choose to convert.


As for 90%, I'll have to dig out the presentation. I believe the legislated limits at the time were much lower than this. I was surprised to find out that the legislation limits what can be paid.

While I can't comment on public sector - most teachers who are willing to talk about their retirement to me, said that if they'd started directly out of university and don't switch school boards, their max was 65% average five of the their top seven. But this also varies plan to plan, as does benefits and contribution rates.

Finally when I asked about contribution rates, I was paying into a DB plan 2.6% while they were paying 9%. So I'm not surprised that contributing three times as much results in more and/or better benefits.


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## Four Pillars

Eclectic12 said:


> I'd expect so. I think of my co-worker who commented "this pension stuff is too complicated - if I don't have enough when I retire, I'll be a bag lady". Or the one who in the pension benefits presentation who gasped "You mean I won't get my full salary from the pension plan when I retire?".
> 
> There a lot of people out there who don't know about financial planning - never mind retirement planning.
> 
> Then too - even if 90% is offered (which I don't think is legally allowed), how many stayed in the same plan long enough to actually receive the 90%?
> 
> How many DB plans are left?
> 
> My impression is fewer and fewer. When the options were presented to me as part of the mandated DB to Defined Contribution pension plan conversion, I wasn't impressed that the DB option had a six percent contribution rate (me plus employer) while the DC plan that was supposed to replace it had a 2 percent contribution rate.
> 
> With savings on the contribution rate and no risk as there is not guarantee, it is easy to see why companies would choose to convert.
> 
> 
> As for 90%, I'll have to dig out the presentation. I believe the legislated limits at the time were much lower than this. I was surprised to find out that the legislation limits what can be paid.
> 
> While I can't comment on public sector - most teachers who are willing to talk about their retirement to me, said that if they'd started directly out of university and don't switch school boards, their max was 65% average five of the their top seven. But this also varies plan to plan, as does benefits and contribution rates.
> 
> Finally when I asked about contribution rates, I was paying into a DB plan 2.6% while they were paying 9%. So I'm not surprised that contributing three times as much results in more and/or better benefits.


My Dad got 70% of his best five years - Ontario public teacher. He retired a few years ago however, so maybe the max has decreased.


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## NorthernRaven

Eclectic12 said:


> While I can't comment on public sector - most teachers who are willing to talk about their retirement to me, said that if they'd started directly out of university and don't switch school boards, their max was 65% average five of the their top seven. But this also varies plan to plan, as does benefits and contribution rates.





Four Pillars said:


> My Dad got 70% of his best five years - Ontario public teacher. He retired a few years ago however, so maybe the max has decreased.


The federal public service pension (which also covers a few non-feds) is 70% of best five _consecutive_ years. It appears if you leave and return the five years can bridge the non-employed gap, but the indexing is cancelled and restarts from the last date you leave the plan, so you have to be careful about returning after a long absence and/or at a lower salary.


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## George

NorthernRaven said:


> The federal public service pension (which also covers a few non-feds) is 70% of best five _consecutive_ years. It appears if you leave and return the five years can bridge the non-employed gap, but the indexing is cancelled and restarts from the last date you leave the plan, so you have to be careful about returning after a long absence and/or at a lower salary.


Just to clarify - it's 70% of the best five consecutive years salary only if the pensioner has accumulated a full 35 years of pensionable service. 

This often isn't the case - the average age for a newly-hired permanent employee in the federal public service is 34 (source: http://www.psc-cfp.gc.ca/adt-vrf/rprt/2007/ind-ind/index-eng.htm). That means that the 50% who are older than 34 when they're hired must remain working for the public service until _at least _ age 69 to receive a full 70% pension - depending, of course, on whether the individual had pensionable service from a previous employer or was in a pensioned position before becoming a permanent employee.


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## NorthernRaven

George said:


> Just to clarify - it's 70% of the best five consecutive years salary only if the pensioner has accumulated a full 35 years of pensionable service.
> 
> This often isn't the case - the average age for a newly-hired permanent employee in the federal public service is 34 (source: http://www.psc-cfp.gc.ca/adt-vrf/rprt/2007/ind-ind/index-eng.htm). That means that the 50% who are older than 34 when they're hired must remain working for the public service until _at least _ age 69 to receive a full 70% pension - depending, of course, on whether the individual had pensionable service from a previous employer or was in a pensioned position before becoming a permanent employee.


Sorry, I should have made that 35 years explicit - it is 2% for each year of service to a maximum of 35 years (35*2%=70%). I was responding to the 5 year bit. I had 17 years in the federal plan ending in 2008, and recently added an additional year, so the "consecutive" phrasing and the reset on the indexing have been of interest to me.

I've seen variants on "five best years" in Googling some of the provincial plans - I'm wondering how many of them are actually "consecutive" like the feds in the fine print and just have sloppy phrasing in the public overviews. For most people it would come out the same anyway, but there are probably a few oddball cases where it would make a difference.


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## Eclectic12

NorthernRaven said:


> Sorry, I should have made that 35 years explicit - it is 2% for each year of service to a maximum of 35 years (35*2%=70%). I was responding to the 5 year bit. [ ... ]
> 
> I've seen variants on "five best years" in Googling some of the provincial plans - I'm wondering how many of them are actually "consecutive" like the feds in the fine print and just have sloppy phrasing in the public overviews. For most people it would come out the same anyway, but there are probably a few oddball cases where it would make a difference.


Part of my point was that there variation based on the details of the DB plan. People like to talk about, say the pension that "teachers get", in reality the DB plans vary from school board to school board.

It's the same in private companies - every DB plan I had ever heard of required a full time employee to join the DB plan within two years or less of becoming full time.
I was rather shocked when for one company only, I received the DB info package where I was given up to 15 years to decide to join.

Then too - even of the few that have the 35+ years in to get the 70%, how many have a spouse and choose a lower rate in exchange for paying the spouse after a pension after the worker has died? So even of the few who are eligible for 70%, it is likely not 100% who collect.


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## OhGreatGuru

Eclectic12 said:


> Hmmm ... I agree there isn't a pension plan that offers 90% replacement *as part of a single plan*. ...
> 
> At the same time though - I've read lots of annual reports that indicate the CEO and top executives have "supplemental pension plans" to get around this. So when combined, the percentage goes much higher - ignoring stock options etc.
> 
> ...


Please don't dignify these with the name "Pension Plans". There is nothing actuarially sound about them. They are golden parachutes or golden handshakes paid out by the employer (and shareholders).


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## NorthernRaven

Eclectic12 said:


> Part of my point was that there variation based on the details of the DB plan. People like to talk about, say the pension that "teachers get", in reality the DB plans vary from school board to school board.
> 
> It's the same in private companies - every DB plan I had ever heard of required a full time employee to join the DB plan within two years or less of becoming full time.
> I was rather shocked when for one company only, I received the DB info package where I was given up to 15 years to decide to join.


You mean a return of contributions was possible for up to 15 years? That does sound pretty open. The feds have the standard ROC after two years also. Or do you mean the plan was optional and you didn't have to join and contribute for 2 (or 15) years?



Eclectic12 said:


> Then too - even of the few that have the 35+ years in to get the 70%, how many have a spouse and choose a lower rate in exchange for paying the spouse after a pension after the worker has died? So even of the few who are eligible for 70%, it is likely not 100% who collect.


The federal plan includes a 50% survivor benefit. Is your example one where you have to explicitly choose whether or not to have a survivor benefit for an existing spouse, and receive different pension amounts for each case? I don't believe the federal system works this way, although now I'm curious and will have to see if I can find out if my pension value would have been calculated lower if I was single. However, "_if you marry after retirement, your survivor would not normally be entitled to a pension. However, your may elect, with one year of marrying or ... becoming entitled to payment of a deferred annuity...to provide your survivor with a benefit by taking a reduction in your own pension._"

BTW, anyone wanting to wander through the federal plan info can find all their information online.


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## George

NorthernRaven said:


> The federal plan includes a 50% survivor benefit. Is your example one where you have to explicitly choose whether or not to have a survivor benefit for an existing spouse, and receive different pension amounts for each case? I don't believe the federal system works this way, although now I'm curious and will have to see if I can find out if my pension value would have been calculated lower if I was single.


The federal public service plan has benefits for the plan member's spouse and children if the member dies, but there are no options to choose from - the benefits are a fixed part of the plan.

In contrast, many other plans allow the plan member, upon retirement, to choose a survivor's benefit and minimum payout options. The options might include:


No survivor's benefit, in exchange for a higher payout (useful if you don't have a spouse)
Joint-life option with a reduced payout to the surviving spouse, as long as the survivor is alive
Guaranteed term options, where the plan will pay a minimum amount to the survivor for a specified period of years after retirement, in case the plan member dies.
Various combinations of the above.

Every plan is a little bit different, and it's important to be able to choose the best option based on your specific life circumstances.

For example, if you retire and your spouse is critically ill, it may not make any sense to have a pension that'll pay your spouse if you die - the chances are likely that your spouse will die before you. In the opposite situation, where your spouse is very healthy and you're in very poor health, it would make sense to maximize the survivor's benefit.


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## Eclectic12

OhGreatGuru said:


> Please don't dignify these with the name "Pension Plans". There is nothing actuarially sound about them. They are golden parachutes or golden handshakes paid out by the employer (and shareholders).


*grin* - I see your point.

However, while it didn't specify what contributions came or from whom (you didn't think an annual report would get *that* detailed, did you?), it did spell out that it was to provide supplemental income should the executive retire with the company. It was to address the gap between the executive's salary and the legislated maximum that DB plan could pay.

For all I know, it might or might not be actuarially sound.

Maybe someone who knows the details of such plans could chip in?


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## Eclectic12

NorthernRaven said:


> You mean a return of contributions was possible for up to 15 years? That does sound pretty open. The feds have the standard ROC after two years also. Or do you mean the plan was optional and you didn't have to join and contribute for 2 (or 15) years?
> 
> The federal plan includes a 50% survivor benefit. Is your example one where you have to explicitly choose whether or not to have a survivor benefit for an existing spouse, and receive different pension amounts for each case? I don't believe the federal system works this way, although now I'm curious and will have to see if I can find out if my pension value would have been calculated lower if I was single. However, "_if you marry after retirement, your survivor would not normally be entitled to a pension. However, your may elect, with one year of marrying or ... becoming entitled to payment of a deferred annuity...to provide your survivor with a benefit by taking a reduction in your own pension._"
> 
> BTW, anyone wanting to wander through the federal plan info can find all their information online.


I mean that in the 2 year case (the most common I've experienced), I can defer joining the DB plan for maximum 2 years. If I'm not in the plan, I don't contribute and the company does not contribute. When the magic two year anniversary hits, I am automatically enrolled - no other choice.

As I say, I was surprised one and only one company gave me 15 years to decide.


I can't recall the terminology at the moment. At retirement, the choice is made and if chosen, the payments to the plan member are reduced. This is to provide funds for the non-plan member spouse - who is not contributing to the plan. Without this in place, on death of the plan member, the remains in the plan I believe are lump sum paid out to the estate or surviving spouse.

If the survivor benefit you are referring to is an on-going payment for a set number of years for the non-plan member spouse instead of a lump sum payment, then we are probably talking the same thing.


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## Eclectic12

George said:


> [...]
> 
> In contrast, many other plans allow the plan member, upon retirement, to choose a survivor's benefit and minimum payout options. The options might include:
> 
> 
> [*]No survivor's benefit, in exchange for a higher payout (useful if you don't have a spouse)
> [*]Joint-life option with a reduced payout to the surviving spouse, as long as the survivor is alive
> 
> [...]
> 
> Every plan is a little bit different, and it's important to be able to choose the best option based on your specific life circumstances.[...]


Or another case where taking "no survivor's benefit" that makes sense is if the spouse has a comparable pension benefit from their work.

This also plays into your excellent point about understanding the plan and choosing the best option.

If the plan member is going to be paid 70% but a survivor benefit would cut it to 55% while the spouse's plan pays close to the equivalent of 60%, the reduction may not make sense. I'm assuming equally good health, equally long living relatives etc.


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## NorthernRaven

Eclectic12 said:


> I can't recall the terminology at the moment. At retirement, the choice is made and if chosen, the payments to the plan member are reduced. This is to provide funds for the non-plan member spouse - who is not contributing to the plan. Without this in place, on death of the plan member, the remains in the plan I believe are lump sum paid out to the estate or surviving spouse.
> 
> If the survivor benefit you are referring to is an on-going payment for a set number of years for the non-plan member spouse instead of a lump sum payment, then we are probably talking the same thing.


For the federal public service plan, there is that case of choosing a reduced pension to provide a survivor benefit, but only if you marry _after_ leaving or retiring from the public service. If you were already married while still employed, the survivor benefit is established, and I can't find anything that indicates that a singleton and a married person with the exact same contribution history would have a different pension amount. I'm assuming they've rolled everything into their actuarial calculations.

The survivor benefit is 50% of the pension amount. There is also a provision for minor children.


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## Eclectic12

NorthernRaven said:


> For the federal public service plan, there is that case of choosing a reduced pension to provide a survivor benefit, but only if you marry _after_ leaving or retiring from the public service. If you were already married while still employed, the survivor benefit is established, and I can't find anything that indicates that a singleton and a married person with the exact same contribution history would have a different pension amount. I'm assuming they've rolled everything into their actuarial calculations.
> 
> The survivor benefit is 50% of the pension amount. There is also a provision for minor children.


That is a significant difference. My dad was married before he started work for the company he retired from. At retirement, he chose to reduce his pension so that Mom would have one after he passed on.

I'll have to find the details of mine but I recall this being part of the presentation - where the date of the marriage made no difference. It was a decision to be made, on retirement.


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## MoneyGal

Re: individual pension plans (aka "supplemental pension plans"): these are federally-regulated individual defined benefit pension plans suitable for high income-earners who want to shelter income from tax. 

An "actuarially sound" retirement system is usually understood simply to mean "a retirement plan that pays [or can pay] for future obligations from its fund." 

IPPs, in order to retain their registration as pension plans in Canada, must ensure that the fund is able to meet promised future benefits - i.e., _these are actuarially sound pension plans by definition_. 

In order to retain registration status, all filings must be up to date. 

IPPs are a complex topic and they are not well-understood. There are many stories about "offside" IPPs deregulated by CRA if the conditions for registration were not met or maintained. The classic reference work on IPPs is by Peter Merrick and published by LexisNexis (although I think it is out of print now).


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## Eclectic12

MoneyGal said:


> Re: individual pension plans (aka "supplemental pension plans"): these are federally-regulated individual defined benefit pension plans suitable for high income-earners who want to shelter income from tax.
> 
> An "actuarially sound" retirement system is usually understood simply to mean "a retirement plan that pays [or can pay] for future obligations from its fund."
> 
> IPPs, in order to retain their registration as pension plans in Canada, must ensure that the fund is able to meet promised future benefits - i.e., _these are actuarially sound pension plans by definition_.
> 
> In order to retain registration status, all filings must be up to date. [...]



Hmmm ... at some point in the future, I might investigate further.

While it is good to know that to stay an IPP, they have to be funded, it does raise a couple of questions:

a) were the Nortal IPPs fully funded or did they go down the tubes with the 
regular, self-funded pension plan?

b) if IPPs are allowed, why place a restriction on the plain-jane DB plan
so that for executes, one or more IPPs are required?


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## cannon_fodder

What would the pros and cons be for converting RRSPs to RRIFs during early (eg at age 50 assuming your province allows it) retirement?


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## Four Pillars

For someone under age 65, the only benefit of a RRIF (that I can think of) is the ability to set up regular withdrawals with your financial institutions, which is something you can't do with an RRSP.

The drawback is that there will be an ongoing minimum withdrawal requirement, but that shouldn't be a problem since someone who converts part or all of their RRSP to a RRIF is presumeably doing that to get money out of the account.

I've haven't researched it yet, but I think there is some provision to convert a RRIF back to an RRSP if things don't work out.


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## Eclectic12

Four Pillars said:


> My Dad got 70% of his best five years - Ontario public teacher. He retired a few years ago however, so maybe the max has decreased.


I'm not sure ... but I believe it also depends on what the board has setup as well. Similar to the % for the three private defined benefit pensions I've belonged to have had different percentages.

BTW, the ranges have also varied - "best three of five" and "best five of seven" are the two that come to mind.


Cheers


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## Eclectic12

OhGreatGuru said:


> Please don't dignify these with the name "Pension Plans". There is nothing actuarially sound about them. They are golden parachutes or golden handshakes paid out by the employer (and shareholders).


*grin* - I've quoting the annual report. I'll let others debate the terminology and how accurate it is.


Cheers


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## Eclectic12

NorthernRaven said:


> You mean a return of contributions was possible for up to 15 years? That does sound pretty open. The feds have the standard ROC after two years also. Or do you mean the plan was optional and you didn't have to join and contribute for 2 (or 15) years?
> 
> The federal plan includes a 50% survivor benefit. Is your example one where you have to explicitly choose whether or not to have a survivor benefit for an existing spouse, and receive different pension amounts for each case?
> 
> I don't believe the federal system works this way, although now I'm curious
> 
> [...]
> 
> BTW, anyone wanting to wander through the federal plan info can find all their information online.


Hmmm ... not sure what you mean by "return of contributions". 

In all cases where I've seen the db pension details - quiting prompts the choice of staying in or leaving the db pension. If the choice is made to leave the pension, at minimum, your contributions plus earnings are returned via a Locked In Retirement Account (LIRA) and at maximum if vested, the employers contributions plus earnings are also returned. 

Only once where my contributions exceeded what was required was a "remove and report as income" option offered for a portion of my contributions.


As posted, it was to join the plan - though it's more of a "time limited optional" instead of "optional". Once passed probation, the choice to join was yours - up until the time limit. The only way to avoid joining would be to quit just before the time limit. Since most DB plans want to have contributions for as long as possible to grow so having a 15 year optional period was weird. 


Yes. Existing spouse or you get married prior to retirement. 
Most plans I've been in pay one amount for your pension and if you select the spousal benefit, yours is reduced but if you die before your spouse - the spouse continues receiving a pension.


BTW - for all the talk about a teacher's db plan being "gold plated" - my father explicitly stated he'd taken a reduced benefit as he had elected for a survivor benefit for my mom. So not all teachers pensions are the same.
It just underlines that there is a lot of variation.


Cheers


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## cannew

I think for some there is an advantage to setup an early RRIF. Especially if your spouse is younger. The RRIF withdrawal will be determined by the lower spouse's age, thereby reducing the initial withdrawal percentage.

For people who don't have a lot of income they can begin to withdraw cash or transfer RRIF shares (to a non-registered account, without selling the shares). Their taxable income will increase by the withdrawal (or share transfer) but it may not increase their tax rate too bad or hopefully cause a claw back to the OAS.


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## kensala

*RRSP withdrawals before 65*

Briefly, this is our present situation. Both my wife and I are 63, I am still working ($100,000+) while my wife is retired (CPP of $6000). Her retirement income will eventually be drawn from her RRSP holdings (she was self-employed).

It is a 'no-brainer' to know that she will withdraw at least an amount from her RRSP that will allow her to avoid tax completely (approximately but only $4000 for 2011). However, it has been suggested to us that she should be withdrawing RRSP funds to give her a total income of $40,970. About $30,000 of that will be subjected to tax, of course, but only at the lowest marginal tax rate (20% in Ontario). The same funds withdrawn after I retire will be taxed at the second marginal tax rate of approx. 31% - this because we will pension spilt and my wife's "base" income (CPP + 50% of pension) will take her above the $40,970 mark.

So, on the surface of it, this withdrawal would, in the long term, save about 11% in tax. However, the counter argument is that by paying fairly substantial tax amounts NOW we remove that tax amount from the holdings where it would otherwise continue to generate interest income (tax free until withdrawn). We see the validity of that argument but, in reality, her investments have not seen healthy gains in the past two or three years (in fact, the gain in the past 12 months is negative!). 

The decision then would seem to center on whether or not we would better off (again, in the long term) to take the smaller tax hit but take it now and so avoid the higher tax rate later OR leave as much of her RRSP funds sheltered so that they continue to grow until she opts for a RRIF.

She has this option in this year (2011) and for two more before turning 65 so such withdrawals could amount to her taking out $90,000 or so before I retire (and her income jumps). 

Is this a simple case of pay me now or pay me (considerably more) later?

I would welcome input. PM me if you wish.


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## kcowan

kensala said:


> Is this a simple case of pay me now or pay me (considerably more) later?
> 
> I would welcome input. PM me if you wish.


I would take it now. If I could save 11%, I would do it in a heartbeat. Use part of the money for her TFSA. With inflation, the next opportunity will be in 10 years, and will likely be higher tax. (And then there might be an inheritance to consider?)


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## Square Root

OhGreatGuru said:


> Please don't dignify these with the name "Pension Plans". There is nothing actuarially sound about them. They are golden parachutes or golden handshakes paid out by the employer (and shareholders).


Agree. These supplementary plans(of which I have one) are almost never funded. The payouts are tax deductible when paid but any funding prior to payment would not be. This seems fair from a tax point of view. My arrangements were negociated as part if my retirement and are very generous, reflecting my committment to stay on for several years to train my replacement.


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## fraser

I have, or will have a supplementary pension to my DB plan. I was in management however this supplementary plan came in effect because of CRA limitations to the standard DB pension plan.


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## Square Root

fraser said:


> I have, or will have a supplementary pension to my DB plan. I was in management however this supplementary plan came in effect because of CRA limitations to the standard DB pension plan.


Are you referring to what CRA calls a Pension Enhancement Account? This is an account you can contribute to (with limits)that enables you to "buy" pension enhancements like early start with no penalty, inflation protection,better survivor benefits,etc. i think it was designed to give people with private sector DB plans a chance to get closer to what civil servants get with their pensions. Anyway I had one of these and it worked out pretty well.


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## fraser

I have a pension enhancement account. It is tied to my DB plan. I can/could contribute up to $3133 per year, the company would match half of that. The monies are used towards enhancements such as form of pension, early retirement benefits, etc. Failure to use means that the funds are forfeit. It has worked out well.

I also have what the plan refers to as a Restoration Pension. This pension component essensially makes up the difference between CRA pension maximums and what I would be entitled to under the normal DB formula (or so I understand it in reading the plan document). In my case it will amount to about 14 percent of my total company pension. It is paid by the company from earnings, ie not in a DB trust, and at this point it is unclear to me if it can be paid in other forms such as joint/survivor.

So really, there are three components to the plan. A DB component funded solely by the employer, an Enhancment account (capped) funded by the members and matched by employer, and finally the Restoration Pension which is funded by the company and allows the company to apply the db pension formula consistently-notwithstanding CRA maxmimums.


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## Square Root

Fraser-Sounds like a pretty good arrangement for you. You must work for a good company. Bank?


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## fraser

No, not a bank - a IT company. DB pension was closed a number of years ago. I chose, fortunately, not to accept a buyout and move to DC. 

It was a very good company to work for. Sadly, my impression is that this is the case any more.


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## cardhu

kensala said:


> It is a 'no-brainer' that she will withdraw at least an amount from her RRSP that will allow her to avoid tax completely (approximately but only $4000 for 2011).


You can’t avoid tax completely, on any amount of RRSP withdrawal ... even if she keeps her income under $10,000, every dollar of RRSP withdrawn will be taxed at ~20% ... just as most of her CPP income currently is ... but lucky for her, most of that tax would appear on your tax bill, not hers ... if she draws $6000 of CPP income, then you lose $6000* of spousal amount tax credit ... if she draws an additional $4000 of RRSP income, then you lose an additional $4000 of spousal amount tax credit ... and so on, until the spousal credit is entirely used up ... the end result of which is that her $10,000 of income will increase your tax bill by something very close to $2,000. 

*the above is a simplification – the ON spousal amount, and the impact that her income has on it, are accounted for a little differently. 

In light of your generous DB pension, it may still make sense to do this, and more ... however, the tax savings wouldn’t be as much as you may think ... a withdrawal of $35k to bring her income up to $41k (including $6k CPP) would be taxed at 22%, not 20% ... there are 3 reasons for this; (1) the tax-free withdrawal on the first ~$4k is a mirage, as shown above, (2) the second ON tax bracket starts a little lower than the second federal bracket, and (3) the ON Health Premium ... so your apparent differential is now only 9% vs the 11% you suggested ... factor in the tax-drag on any reinvested amounts, and the effect of short-circuiting the deferral**, and the real differential is even narrower. 

**re: short-circuiting the deferral ... tax deferral is a very effective tool ... we’ve seen all sorts of strategies bandied about that involve voluntarily terminating the deferral early (ie. early RRSP withdrawals or intentionally crystallizing cap gains in a non-reg account) ... unfortunately, most of these strategies are built on a simple comparison of current vs. future marginal tax rates, and they neglect the fact that over a long deferral period, the future tax rate can be higher than the current tax rate, while still leaving more dollars in your pocket ... in other words, a 30% tax rate on a single lump sum withdrawal in 20 years, could be preferable to a 22% tax rate today.


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