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Old 02-18-2015, 12:27 PM   #21
mrkajz44
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Oh agreed on the TFSA - its probably the best plan out there right now. Only downside is a small contribution amount is available per year ($5,500 per year now).

Just trying to point out that a RRSP has two main benefits. One is the differences in tax rates when contributing and withdrawing (and the most talked about), and two, the deferral of tax over a number of years. This second benefit almost always goes overlooked, usually when people are saying RRSPs are not great because their marginal tax rate in retirement may not be that low.
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Old 02-18-2015, 12:38 PM   #22
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One concept that some people missed when evaluating RRSP/TFSA is that almost all investment income is taxed twice in Canada. Only RRSP/TFSA investment income is taxed once.

For example, to invest $1000 and generate $50 in interest, capital gains or dividends, your start with eg $1400 pre-tax personal or business income in most circumstances. But in RRSP/TFSA, your ending investment income is taxed only once, at the end for RRSP and at the beginning for TFSA.

That's why RRSP/TFSA will always give higher after tax investment income in theory than that from a non-registered account.
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Old 02-18-2015, 12:44 PM   #23
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One concept that some people missed when evaluating RRSP/TFSA is that almost all investment income is taxed twice in Canada. Only RRSP/TFSA investment income is taxed once.

For example, to invest $1000 and generate $50 in interest, capital gains or dividends, your start with eg $1400 pre-tax personal or business income in most circumstances. But in RRSP/TFSA, your ending investment income is taxed only once, at the end for RRSP and at the beginning for TFSA.

That's why RRSP/TFSA will always give higher after tax investment income in theory than that from a non-registered account.
I can't understand what you're saying here? Its probably me because I'm working really long days at this point and I'm quite tired, but could you explain this a little more thoroughly so that I understand it better (hopefully).

Frankly, I love threads like this. It gives me a better understanding of how "average" people view RRSPs and how they understand how they operate. I just think that is invaluable for me!
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Old 02-18-2015, 12:53 PM   #24
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He's saying if you don't use an RRSP you're investing with after tax dollars, and then also getting taxed when you withdraw. That's why RRSP and TFSA money is only taxed once. Either before you invest or after, but not both.
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Old 02-18-2015, 12:58 PM   #25
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Oh agreed on the TFSA - its probably the best plan out there right now. Only downside is a small contribution amount is available per year ($5,500 per year now).

Just trying to point out that a RRSP has two main benefits. One is the differences in tax rates when contributing and withdrawing (and the most talked about), and two, the deferral of tax over a number of years. This second benefit almost always goes overlooked, usually when people are saying RRSPs are not great because their marginal tax rate in retirement may not be that low.
I think pretty much absolutely everyone and their dog knows that. My 10 year old daughter knows that. It just never gets talked about because everyone knows that RRSP is better than straight up non-registered. Not really worth bringing it up. I have only ever seen arguments against RRSP when discussing them against another comparable vehicle, in which case, all else being equal, TVM doesn't really play a role, which I illustrated on the last page.
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Old 02-18-2015, 01:07 PM   #26
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He's saying if you don't use an RRSP you're investing with after tax dollars, and then also getting taxed when you withdraw. That's why RRSP and TFSA money is only taxed once. Either before you invest or after, but not both.
OK, that's not entirely accurate. If you invest say $1000 in a non-registered account today and you earn some dividends or interest you pay tax on those as you receive them. Eventually then you receive your $1000 back (return of capital) and there is no tax on that $1000. Then you are taxed on the growth (capital gains).

For the TFSA you invest that $1000 and pay no tax at all on the growth, dividends or interest. Its far and away the most tax efficient.

For the RRSP you get a tax break on the $1000, so your taxable income is reduced by $1000 when you deposit it into the RRSP. When you withdraw you are taxed on that $1000 as well as growth, dividends and interest.

Hopefully that clarifies the differences between the three.
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Old 02-18-2015, 01:08 PM   #27
Hugh Jahrmes
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I wish I knew about RRSPs when I was 10. Financial planning was an area of massive failure for my parents, resulting in literally no good information being passed on. I was 24 before bothered to self educate.

Teach your kids, and teach them early!
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Old 02-18-2015, 01:20 PM   #28
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Everything (RRSP, TFSA, non-registered) will be taxed eventually. The only true tax avoidance is the gains in a TFSA.

Everything else, (ie RRSP), is just a deferral of tax from the year contributed to the year withdrawn. Hence why I recommend saving outside of a RRSP until you're at your highest tax bracket, or are comfortable that you will not need those savings in day to day life. (ie needing to withdraw in emergency and losing the room and paying tax on the income). Taking advantage of the first time homebuyer plan is about the only time I'd recommend young people using up their RRSP room.

edit: the only other time I'd suggest contributing to your RRSP as a young person is if you get an employer match of a portion of it, because then you're actually making money by saving.

Last edited by Ducay; 02-18-2015 at 01:25 PM.
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Old 02-18-2015, 01:38 PM   #29
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RRSP's are also a good risk mitigation tool for self employed people or Professionals who are subject to unlimited liability.

In Alberta, I believe legislation was introduced that protects RRSP's from creditor claims, judgements and bankruptcy.

Last edited by 1stLand; 02-18-2015 at 01:39 PM. Reason: note
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Old 02-18-2015, 02:13 PM   #30
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I actually like the idea of using my TFSA as my "retirement fund" and use my RRSP to help with tax avoidance.

I am fortunate enough that I am able to max out my RRSPs and TFSA, (plus add to non-registered account), but how I plan to use each:

Non-registered - used for continual growth (compounding, yay!) and will be part of retirement income

TFSA - used for retirement income (I won't take any money out of this one, just let it grow and keep adding as much as I am allowed to.)

RRSP - will use for special requirements where for instance, the wife goes on Mat leave - she can withdraw from her RRSP since her annual income will be a lot less, we can get a lot of the taxes taken off the withdrawal (under $5000 each time) back at the end of the year. We also have the RRSP there in case of extended unemployment for us. And in the good years, our contributions help lower our taxes.

I figure that's a solid plan, but I'm not a financial advisor at all.
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Old 02-18-2015, 02:35 PM   #31
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Is there ever a case where it no longer makes financial sense to continue contributing to your RRSP?
Let's say by the time you are thirty you have contributed the max for 12 years and bought some risky investments that paid off incredibly well leaving you with a million dollars in your RRSP. Does it still make sense to keep maxing out your RRSP or is there any advantage to moving your contributions to cash accounts?

*ignoring arguments like cash flow or spending instead of saving.
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Old 02-18-2015, 03:11 PM   #32
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Is there ever a case where it no longer makes financial sense to continue contributing to your RRSP?
Let's say by the time you are thirty you have contributed the max for 12 years and bought some risky investments that paid off incredibly well leaving you with a million dollars in your RRSP. Does it still make sense to keep maxing out your RRSP or is there any advantage to moving your contributions to cash accounts?

*ignoring arguments like cash flow or spending instead of saving.
Well thats a difficult question to answer. Some people contribute to their RRSP specifically for the deferred tax aspect, so that would still be a reason. Personally I'm a big advocate of the TFSA and non-registered savings for a few reasons. It all comes down to what you would like to do when you retire, or get close to retirement. If you want to spend a lump sum of money then though you are going to want to have this as non-registered or TFSA money almost for sure. Even for income you can take money from these accounts for a longer period of time than the RRSP (all things being equal in terms of the amount of income required and the value of the accounts to begin with).

There are still some arguments for the RRSP at that point, but I would lean towards other savings.
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Old 02-18-2015, 04:20 PM   #33
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I can't understand what you're saying here? Its probably me because I'm working really long days at this point and I'm quite tired, but could you explain this a little more thoroughly so that I understand it better (hopefully).
From a Cash account, assume 25% tax rate and 5% return on investment.

$1333 Pre-tax income
(333) Tax 25%
$1000 After-Tax income
Invest to earn 5% interest of $50
$50 interest income
(12.5) Tax on interest 25%
$37.5 after tax interest

From a RRSP/TFSA account, assume 25% tax rate and 5% return on investment.
$1333 Pre-tax income
Invest to earn 5% interest of $66.65
$66.65 interest income
(16.66) Tax on interest 25%
$50 after tax interest

Here I'm focusing only on investment income, interest, in this example. The difference between the two after tax interest income is 12.5 (50-37.5) which is exactly 25% tax on the $50 interest income earned from the cash account.

When someone asks me what is the value of a $1000 contribution room, I tell them it is $1000 x rate of return x tax rate. For capital gain, it's half of that and for dividend income, it is less than that usually due to dividend tax credit.
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Old 02-18-2015, 06:21 PM   #34
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From a Cash account, assume 25% tax rate and 5% return on investment.

$1333 Pre-tax income
(333) Tax 25%
$1000 After-Tax income
Invest to earn 5% interest of $50
$50 interest income
(12.5) Tax on interest 25%
$37.5 after tax interest

From a RRSP/TFSA account, assume 25% tax rate and 5% return on investment.
$1333 Pre-tax income
Invest to earn 5% interest of $66.65
$66.65 interest income
(16.66) Tax on interest 25%
$50 after tax interest

Here I'm focusing only on investment income, interest, in this example. The difference between the two after tax interest income is 12.5 (50-37.5) which is exactly 25% tax on the $50 interest income earned from the cash account.

When someone asks me what is the value of a $1000 contribution room, I tell them it is $1000 x rate of return x tax rate. For capital gain, it's half of that and for dividend income, it is less than that usually due to dividend tax credit.
TFSA should be in a 3rd category in your scenario. You don't get the tax break on a TFSA contribution and you don't pay tax on the income earned in a TFSA.
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Old 02-18-2015, 07:18 PM   #35
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TFSA should be in a 3rd category in your scenario. You don't get the tax break on a TFSA contribution and you don't pay tax on the income earned in a TFSA.
You are correct. In the same bracket TFSA and RRSP will give you the same after tax result.
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Old 02-23-2015, 11:50 AM   #36
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I've got contribution room for my RRSP for the 2014 year.

Is there a best way to top-up the remaining amount?

Should I contribute to the limit in kind (transfer stock from my Investment Account) or top up with cash?

Currently, if I were to realize any gains from the stocks in my Investment account, I would be on the hook for capital gains tax of 50% correct? Would it be better to transfer some shares into RRSP, and then later 35-40 years down the road, pull it out and only be taxed less? Does it work like that?
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Old 02-23-2015, 12:18 PM   #37
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I've got contribution room for my RRSP for the 2014 year.

Is there a best way to top-up the remaining amount?

Should I contribute to the limit in kind (transfer stock from my Investment Account) or top up with cash?

Currently, if I were to realize any gains from the stocks in my Investment account, I would be on the hook for capital gains tax of 50% correct? Would it be better to transfer some shares into RRSP, and then later 35-40 years down the road, pull it out and only be taxed less? Does it work like that?
If you transfer the shares today its a deemed disposition (in other words it is like you sold them even though you are transferring in kind). The Capital Gains amount is half of what you would pay for income, so you would pay say 19.5% at the top end as opposed to 39% in Alberta. You would save more in tax this year than what you will pay next year for the capital gains.

Contributing cash will just get you that tax break and not cost you the capital gains taxes (obviously).
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Old 02-23-2015, 12:44 PM   #38
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Currently, if I were to realize any gains from the stocks in my Investment account, I would be on the hook for capital gains tax of 50% correct? Would it be better to transfer some shares into RRSP, and then later 35-40 years down the road, pull it out and only be taxed less? Does it work like that?
It doesn't pay to transfer in kind when you have an unrealized gain. If the transfer losses value, you don't get to deduct the loss inside your RRSP.

I would just contribute cash and let the unrealized gain ride.
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Old 02-23-2015, 01:02 PM   #39
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Slava, if you had $1M in cash, how would you invest it?
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Old 02-23-2015, 01:20 PM   #40
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Slava, if you had $1M in cash, how would you invest it?
I would call me and let me work my magic!

Seriously though I would invest virtually entirely in equities at this point. I understand the risks of doing so though, and my time horizon would be long enough that I'd be totally comfortable with that. This could be through both ETFs and single securities that are mispriced.
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