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Originally Posted by Language
My wife and I are definitely behind the eight ball when it comes to retiring. My wife is stay at home with our two young kids, while I work full time and earn decently well. I’m 38 and my wife is in her mid-30’s.
We recently moved to Toronto from the U.S., and most of the money we had saved up, went towards a down payment (if it was up to me, we would be living in Alberta right now, but alas…). Due to the significant real estate prices here, we still have mortgage that’s close to $1m. I can comfortably cover our mortgage and household expenses, but it’s stressful thinking about needing to pay off a huge mortgage, save for our own retirement, and also save to help our kids in the future.
We’ve never contributed to an RRSP, so definitely need to get going on that asap. With a target retirement date of 60-65, it leaves me a 22-27 investment horizon window.
Would something like this be a solid plan:
1) open RRSP for myself and spouse (Wealthsimple?)
2) start to immediately contribute each month, so annual contribution is equal to max limit
3) invest in index funds?
For 3, do people typically diversify their index funds, or would dumping everything into something like VEQT be a simple and effective strategy? I know everyone always says diversification is key, but does that hold true for ETF’s?
Thanks all.
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1) Yes, open up both an RRSP and a TFSA. Wealthsimple and Questrade are both solid online brokerage options.
The RRSP is a tax-deferred account (e.g. if you deposit $10000 in 2024, and you have a tax rate of 32.5% for instance, you will get $3250 back next year when you file your taxes, which you could then reinvest.) However when you retire, if that 10000 has grown to 20000, and you want to withdraw it, you will have to pay income tax on it, although your tax rate might be lower (for instance 30.5%).
The TFSA is a (mostly) tax-free account in that if you deposit $7000 in 2024, and that $7000 grows to $14000, you can withdraw it anytime you want without worrying about being taxed. But since that original 7K came from your net income, you did already pay taxes on the initial contribution before it became income.
The benefit of the TFSA is that if something unforeseen were to happen in 2035, you could withdraw from it, and that withdrawal would be added to your 2036 contribution limit. So even though it's not primarily a retirement account, it's by far the best account to max out before you max out another. The annual contribution limit per person is 7000 right now, and if you didn't contribute in previous years of living in Canada as an adult, those years would have carried over. Your wife and yourself thus might have over 14000 in purely tfsa contribution room this year - even if she isn't working. The RRSP limit on the other hand is entirely dependent on your income. Both do also carry over from previous years. Last year the TFSA limit was $6500 so you might both have another $13k in TFSA contribution room to max out if that carried over. On that note though, I don't recall if wealthsimple or questrade have joint TFSAs, so you might need to make separate accounts for your wife and yourself if you want to go that route as your TFSA probably caps out at your contribution limit (but I'm not an expert on stuff like this, I'm just some dude)
If you're in a higher tax bracket, maxing out the rrsp makes more sense (but in that case maxing out both isn't much of an issue anyways - you have the income for it regardless) but if you're in a more typical tax bracket, you probably have more to gain from maxing out both your TFSAs first.
Your employer might also offer RRSP contribution matching so that is worth looking into (e.g. if you deposit 3% of your pretax paycheck they will deposit 3%, and you don't have to wait until tax return time for these). In that case at least contribute to your RRSP what your employer is willing to match
Final note - RRSP contribution deadline is 60 days into the next year, TFSA deadline is end of year. So If you want a tax break for last year, you can contribute before end of month and have that in your 2023 return. Year end bonuses are thus a good fit for rrsps. Your TFSA contribution needs to be declared in your 2024 return, make sure not to go over your limit in the calendar year essentially.
2 - contribute what makes sense in your budget. That's the other nice thing about the TFSA - it can effectively double as your emergency fund as long as you realize all contributions and withdrawals need to be declared, and selling stocks/equities/bonds might take a little longer than having liquid cash in an account. But even purely as a retirement vehicle it will probably give you more money when you're old - because money withdrawn from your tfsa isn't taxable income.
3 - Typically index tracking ETFs are popular these days. I can't tell you where to put your money but I will answer your other question. If all your money is in VEQT - it is already diversified between equity in the Canadian, US, and Intl markets. It is market cap weighted and readjusted quarterly. But diversification is essentially the whole point of these kinds of ETFs. The easiest one to explain would be VFV which is the requivalent of owning stocks in the top 500 publically traded corporations in USA, weighted towards the top of the list. If you own VFV you essentially own MSFT, NVDA, GOOG, META, AMZN, TSLA, AAPL, plus 493 other companies that might peak if and when the other seven falter. And if you own VEQT, part of that is VFV essentially.