2015 RRSP Thread

[Sylvanfan]

So the deadline is fast approaching as March 2nd is 15 days away. The limit for 2014 tax year looks to be 24270 plus any carry over amounts from previous years.

I might guess that many of us are looking at a less lucrative 2015 as compared to last year Given the Alberta economy.

I did manage to increase my personal contributions by 17% this past year, up to about 14.7% of my meager gross earnings before deductions. Granted family wise my wife and I only are getting 8.5% roughly. So we still get a F grade there. Our overall finial health is still poor, but that's an upgrade from the catastrophic rating I would have given myself 5 years ago.

Despite looking at less personal income and a huge loss in family earnings with a 2nd kid due in May, I will try to match the gross dollars from last year. I realized that I am committing the fundamental mistake of not paying myself 10%. My company matches my 5% contribution and than put 1/3 of our bonuses towards the RRSP. So last year about 45% of my RRSP contribution came via those. So this year I plan to match my own 5% so that I give up 10 to get my 5. That will put me at 15% without any bonus which I expect will not happen.

Will need to study the new tax laws a bit though. 7 months of EI will reduce our family income a fair bit. Under the old format I would have considered converting some of my wife's RRSP stuff to TFSA. But I doubt that would have even made sense.

I still think people are not honest enough with their financial failures. I hope everyone is better than me at this stuff, but many of the people on the staff I manage claim they can't afford to lose 3 hours on a pay cheque let alone lose one. So that leads me to believe that they are not in good shape. I would struggle for sure to lose my biweekly pay, but can ride it out for at least a year.

[Calgary14]

For most people it makes sense to contribute to an RRSP as their marginal tax rate upon retirement will be lower than their current marginal tax rate. However for students or those just starting out a TFSA usually makes more sense.

If anyone is interested here's some info on the positives and negatives of an RRSP loan:
http://www.ourbigfatwallet.com/rrsp-...and-negatives/

Given the current economic situation for many people it would make sense to max their RRSP and then use the tax refund wisely to either save as an emergency fund (high interest savings account) or pay down any consumer debt

[Bill Bumface]

We make use of a spousal RRSP. By nature of the account type being a spousal RRSP and her being the name on the account, does any contribution to that account, regardless of who's funds are being contributed, count against my room?

i.e. Can I put a bunch of money in my wife's account that is with the same bank, have her dump a bunch on there, and it counts as me contributing, not her?

[Ducay]

You can contribute directly to your spouses RRSP; see CRA website or any other resource that comes up with a google. But ya, comes from your limit. You could give the cash to her but then you run the risk of it being attributed back to you. You can lend her the money have her pay interest to you which helps avoid the issue.

http://turbotax.intuit.ca/tax-resour...ousal-rrsp.jsp

[Slava]

Originally Posted by Calgary14

For most people it makes sense to contribute to an RRSP as their marginal tax rate upon retirement will be lower than their current marginal tax rate. However for students or those just starting out a TFSA usually makes more sense.

If anyone is interested here's some info on the positives and negatives of an RRSP loan:
http://www.ourbigfatwallet.com/rrsp-...and-negatives/

Given the current economic situation for many people it would make sense to max their RRSP and then use the tax refund wisely to either save as an emergency fund (high interest savings account) or pay down any consumer debt

This part I bolded is what people hope is going to happen, but from what I see it doesn't often for a couple primary reasons. Firstly, people tend to live fairly active retirements for the first decade or so meaning that their income required is basically the same as their working income, or within say 25%. That means that their marginal tax rate isn't really dropping as much as they might have thought.

Another reason is that depending on when people began contributing the tax rates were lower, or they were in a lower bracket at that point, but are simply bearing the weight of increased taxes over the decades.

I would question whether people in tenuous situations economically should be slamming every dollar into their RRSP as well. That seems like terrible advice quite frankly; they would be better off to invest in the TFSA and have the liquid cash available in the event that they need it. Sure they will be delaying that tax return until next year, (when they could contribute if they haven't needed the emergency funds), but they would still have the same amount of interest/gains and have access to the funds in that worst case scenario. I mean we're dealing with a hypothetical, but I wouldn't advise people to put everything into an RRSP if they felt they needed an emergency fund.

[JackJack]

Question:

Unsure if it is related...if not apologies and please move to correct thread.

When I was with my former company, I was able to match stock contribution up to X % into Non-Registered and Registered. I split the contribution amount (so as to not over contribute and be penalized in RRSP). When I ended up leaving my company, the Registered were transferred over from Canadian Stock Transfer to my RRSP account. The Non-Registered were transferred into an Investment account with the same bank.

Currently, the shares of that former company are sitting in kind in the investment account. If I sell those shares and withdraw the money will I be taxed?

Thanks

[Slava]

Originally Posted by JackJack

Question:

Unsure if it is related...if not apologies and please move to correct thread.

When I was with my former company, I was able to match stock contribution up to X % into Non-Registered and Registered. I split the contribution amount (so as to not over contribute and be penalized in RRSP). When I ended up leaving my company, the Registered were transferred over from Canadian Stock Transfer to my RRSP account. The Non-Registered were transferred into an Investment account with the same bank.

Currently, the shares of that former company are sitting in kind in the investment account. If I sell those shares and withdraw the money will I be taxed?

Thanks

If you withdraw the money from the RRSP you are taxed as though it's income. You will have an amount of tax withheld there that is 10% below $5000, 20% above that and below $15,000 and then 30% above that.

The non-registered could be taxed if you have gains and then you are paying capital gains tax which is on half of the gains. So if you had a $1000 gain you pay taxes on $500.

I think what you are saying is that they are held in the non-reg account, so that would mean that you might have capital gains taxes payable in your situation (which would apply when you sell the investments and realise that gain, even if you don't withdraw the funds).

[JackJack]

Originally Posted by Slava

If you withdraw the money from the RRSP you are taxed as though it's income. You will have an amount of tax withheld there that is 10% below $5000, 20% above that and below $15,000 and then 30% above that.

The non-registered could be taxed if you have gains and then you are paying capital gains tax which is on half of the gains. So if you had a $1000 gain you pay taxes on $500.

I think what you are saying is that they are held in the non-reg account, so that would mean that you might have capital gains taxes payable in your situation (which would apply when you sell the investments and realise that gain, even if you don't withdraw the funds).

Hi Slava,

Thanks for the answer. I fully understand the RRSP portion. I don't plan to touch that. I'll hold the stock for the growth potential and the enjoy the DRIP.

The stock in the non-registered investment account vested over the course of time and are a combination of my stock contribution and the employee match. At the end they were transferred into the Non-RRSP. How would they determine the capital gains on it? They were purchased over the course of many months and years...

[Slava]

Originally Posted by JackJack

Hi Slava,

Thanks for the answer. I fully understand the RRSP portion. I don't plan to touch that. I'll hold the stock for the growth potential and the enjoy the DRIP.

The stock in the non-registered investment account vested over the course of time and are a combination of my stock contribution and the employee match. At the end they were transferred into the Non-RRSP. How would they determine the capital gains on it? They were purchased over the course of many months and years...

Well you will have an ACB (Adjusted Cost Base) which they should have for you. This is what is used to determine the cost of the investment for tax purposes and is essentially an average price you have paid over time. If you were to call you could find out what that is, and then you could know what kind of tax liability you're looking at before you make the sale.

[darklord700]

Somewhat related to this. Do you recommend keeping all your RRSP with just one brokege firm? Currently, I have everything with RBC directinvesting which makes it easy to manage. Now BMO Investorline is offering a $300 to transfer to them. I've always been thinking I should not put all my eggs in RBC's basket in case they go under.

So I'm tempted to move some of my RRSP to BMO now and the $300 bonus is icing on top. Do you tell people to put everything with one broker or are two broker accounts too much to manage?

[Slava]

Originally Posted by darklord700

Somewhat related to this. Do you recommend keeping all your RRSP with just one brokege firm? Currently, I have everything with RBC directinvesting which makes it easy to manage. Now BMO Investorline is offering a $300 to transfer to them. I've always been thinking I should not put all my eggs in RBC's basket in case they go under.

So I'm tempted to move some of my RRSP to BMO now and the $300 bonus is icing on top. Do you tell people to put everything with one broker or are two broker accounts too much to manage?

Personally I think that keeping everything together makes the most sense. I do understand the not keeping all your eggs in one basket idea, but the chances that a major bank in Canada fails is extremely small. Add to that the fact that you have a few levels of protection and you are almost surely taking very little risk! One point is that you are holding shares in your account and theoretically if the broker fails (again, incredibly tiny risk!), you still own those shares, you just have no broker.

If a bank were to fail, the fact of the matter is that we are facing much more severe economic issues. I would keep them all together and look at diversity of the investments as a more pressing concern than diversity of where they are held. It makes it easier to manage, you get one set of statements and can perhaps reduce fees when you do it this way.

[Sylvanfan]

I have done what I can to consolidate all my investments to the same brokerage house, or fund company. I know this used to be a bit of a problem as I had some money invested in one place, some in another, and than my wife had a couple accounts too.

In theory having 10 different amounts of $1000 growing at their respective rates over a certain time period will end up the same as 3 consolodated amounts that have the same averaged growth rate. Especially if they're not actively managed so that the buying and selling commissions can be neglected. Something just makes me feel better about having few accounts with a higher principal, probably a condition know as "Stupid poor person's weak minded thinking".

But as a senile old man, I am sure I'd forget that I had this money somewhere, and when I have to downsize my house when I get laid off later this year....I only need to change my address with one place.

[Calgary14]

Originally Posted by Slava

This part I bolded is what people hope is going to happen, but from what I see it doesn't often for a couple primary reasons. Firstly, people tend to live fairly active retirements for the first decade or so meaning that their income required is basically the same as their working income, or within say 25%. That means that their marginal tax rate isn't really dropping as much as they might have thought.

Another reason is that depending on when people began contributing the tax rates were lower, or they were in a lower bracket at that point, but are simply bearing the weight of increased taxes over the decades.

I would question whether people in tenuous situations economically should be slamming every dollar into their RRSP as well. That seems like terrible advice quite frankly; they would be better off to invest in the TFSA and have the liquid cash available in the event that they need it. Sure they will be delaying that tax return until next year, (when they could contribute if they haven't needed the emergency funds), but they would still have the same amount of interest/gains and have access to the funds in that worst case scenario. I mean we're dealing with a hypothetical, but I wouldn't advise people to put everything into an RRSP if they felt they needed an emergency fund.

You had mentioned that retirees live active lifestyles and their required income is the same. Here’s an interesting study by the Fraser Institute. The study mentions that people do not need to replace all of their work#ing income after retirement and your replacement percentage (% of working income you need when you retire) depends on a lot of factors and varies with each person’s own circumstances.

http://www.fraserinstitute.org/uploa...eb%20final.pdf

Also, you mentioned if total income is within 75% the marginal tax rate isn’t really dropping. Using current year tax numbers if a retiree had a replacement percentage of 80% (they lived off 80% of their working income after they retired) @ $100k they would pay 26% less in taxes and over 10 years the tax savings would total almost $70k without even taking into account pension income splitting (below).

While it would be nice to be in a higher marginal rate upon retirement (because it means a higher income) I have never heard of anyone who has received more income upon retirement than during their working years. Money Sense recommends using 50-60% of your annual income while working (for couples).

http://www.moneysense.ca/retire/magi...need-to-retire

Timing of the income is important to consider as you mentioned. Someone who is in their peak earning years can save significantly by contributing to an RRSP as they would lower their marginal tax rate. This is assuming their marginal rate is lower later on in life and this wouldn’t apply to anyone who is starting out and in a lower tax bracket like students, new grads etc.

Along with the timing of the income over the span of a working career there is also the timing of the income each year while working compared to when retired. If someone is relying on RRSP withdrawals for income they are able to better time their income to minimize their tax exposure. Simply put – they can take more or less out in certain years depending on what their income has been that year. On the other hand most working people earn their income evenly throughout the year and have little/no wiggle room to save on taxes as they need the steady income due to higher expenses.

Another factor to consider is not only the timing of income but the types of income. Pension income can be split by up to 50% after age 65, while employment income cannot. The exception is of course the recent income splitting measure announced by the feds a couple months ago but the splitting is capped at $2k maximum. On the other hand eligible pension income can be split by up to 50% and the savings can be huge for some. An RRSP isn’t considered eligible but you could consider converting to a RRIF to make it eligible for income splitting.

It seems like tax rates have gone up over the years but here is an interesting article looking at historical taxes. The top personal tax rate in 1972 was almost 70% but in 2011 was 39-48% (depending on what province you live in).

http://www.camagazine.com/archives/p...zine49727.aspx

While you’re correct that it doesn’t make sense for some to max out their RRSP, I wouldn’t count on a higher tax rate upon retirement due to the income splitting options available, the likelihood of marginal tax rates increasing significantly over time, and the fact that almost everyone is able to live comfortably upon retirement with a percentage of their working income due to lower expenses, more time, etc.

[mrkajz44]

One thing that almost everyone seems to consistently miss with the concept of RRSP is the time value of money. Even if I my marginal rate is the same now (when I contribute) as it is in the future (when I pull the money out), I likely deferred that tax 30+ years. There is clearly a time value of money win there, even when your marginal tax rate stays the same.

[Locke]

Originally Posted by mrkajz44

One thing that almost everyone seems to consistently miss with the concept of RRSP is the time value of money. Even if I my marginal rate is the same now (when I contribute) as it is in the future (when I pull the money out), I likely deferred that tax 30+ years. There is clearly a time value of money win there, even when your marginal tax rate stays the same.

You're assuming that your rate-of-return exceeds inflation and cost of living increases over the same period of time.

[mrkajz44]

Originally Posted by Locke

You're assuming that your rate-of-return exceeds inflation and cost of living increases over the same period of time.

No I'm not, I'm placing a value on the tax I would have had to pay today, rather than pay it in 30 years.

Say I make $100 and my tax rate is 30%.

Option 1 - Get taxed at 30% now and invest the $70
Option 2 - Invest in RRSP and invest $100 now

Over time, the $100 will earn far more money than the $70. Let's say we triple our money by retirement.

Option 1 - I have tax of 30% on my earnings of $140, so $42, leaving me with a total of $168 ($210 less tax of $42)
Option 2 - I have tax of 30% on my entire RRSP amount of $300, so $90, leaving me with $210 ($300 less tax of $90)

I never changed my marginal rate of tax, it stayed constant at 30%. Yet, I've come out ahead in option 2 with the RRSP because I was able to earn income on the $30 that wasn't taxed up front.

[bomber317]

The scenario I like to present for maxing out your TFSA first.

You grow 10k to 100k as a random growth rate over x number of years

In your TFSA account that is 10k after tax money. You get to withdraw 100k with no taxes.

In your RSP account, that is 10k, plus your additional tax return you would have gotten for that year. Now when you withdraw from your RSP, the 100k could be liable for taxes depending how/when you withdraw that income. You also have the random variable of the what the tax rate will be at that time, what other law changes for tax benefits or tax increases, etc. You could be further ahead, you could be behind.

Add in the benefit that you can withdraw from your TFSA at any time without penalty, I personally would max out my TFSA before considering putting any money in my RSP account.

[MoneyGuy]

Put your RRSPs all with one trusted advisor. Your diversification and service will be better.

[meh]

Contribute to your RRSP. Take tax savings and put that into TFSA. Win-win!

[V]

Originally Posted by mrkajz44

No I'm not, I'm placing a value on the tax I would have had to pay today, rather than pay it in 30 years.

Say I make $100 and my tax rate is 30%.

Option 1 - Get taxed at 30% now and invest the $70
Option 2 - Invest in RRSP and invest $100 now

Over time, the $100 will earn far more money than the $70. Let's say we triple our money by retirement.

Option 1 - I have tax of 30% on my earnings of $140, so $42, leaving me with a total of $168 ($210 less tax of $42)
Option 2 - I have tax of 30% on my entire RRSP amount of $300, so $90, leaving me with $210 ($300 less tax of $90)

I never changed my marginal rate of tax, it stayed constant at 30%. Yet, I've come out ahead in option 2 with the RRSP because I was able to earn income on the $30 that wasn't taxed up front.

Where is anyone claiming that it's better to invest in non-registered plans than an RRSP? The argument is that it's better to invest in a TFSA. So taking your example:

Option 1 - Get taxed at 30% now and invest the $70 into a TFSA.
Option 2 - Invest in RRSP and invest $100 now

Over time, the $100 will earn far more money than the $70. Let's say we triple our money by retirement.

Option 1 - I have no tax on my earnings of $140, so I have $210.
Option 2 - I have tax of 30% on my entire RRSP amount of $300, so $90, leaving me with $210 ($300 less tax of $90)

However, if there's any plan for any other income during retirement, through pensions, etc, all of that income is taxed at the higher tax rate. If I used a TFSA, that income is taxed at a lower bracket, or not at all, if it's below the exemption limit.