Author Topic: RRSP's and mortgages  (Read 692 times)

frugalcanuck

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RRSP's and mortgages
« on: September 10, 2017, 10:55:12 AM »
I'm still kind of new to this idea if FIRE, but I have been frugal since I was a little boy.  I started making decent money just over a year ago and my net worth graph can attest to that.  I am thinking of buying a rental house that is a bit bigger than the one I own so If we decide to have another baby we can move into the one with an extra bedroom and washroom and rent out my current house.  The money that I have saved this year is just siting in cash at the moment because I am hesitant at putting it in my RRSPs.  If I have a plan of buying another house in one to three years, what should I be doing with my cash in the mean time so I pay less taxes?

This would be my second house so I would not qualify for the first time home buyers plan even though I did not use it on my first house.  Are there any other tricks or "loopholes" to get my money out of RRSP's to pay for a house?

kayvent

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Re: RRSP's and mortgages
« Reply #1 on: September 10, 2017, 11:34:41 AM »
The rules for a TFSA may be more appealing. You can deposit money into it, put it in a relatively safe vehicle (CDs, actual bonds, bond indexes), and any money you withdraw from it can be put back in the subsequent tax years.

If I have a plan of buying another house in one to three years, what should I be doing with my cash in the mean time so I pay less taxes?

You don't save taxes by putting money in an RRSP. You delay paying taxes1. If you plan on having another child within the next few years, you could save money in your TFSA. When you're expecting to have a baby, switch to putting money in your RRSP to catch you up. RRSP contributions reduce your adjusted family net income which will increase your monthly CCB and quarterly GST/HST rebates. Compared to using the space now, it would be a 3-10% increases depending on your current income and number of children.

Quote
I am thinking of buying a rental house that is a bit bigger than the one I own so If we decide to have another baby we can move into the one with an extra bedroom and washroom and rent out my current house.

The rental real estate in Canada is a different beast than our American neighbours. Internally it varies a lot too. I was watching 'Til Debt Do Us Part and one of the little facts they spewed out was that in Canada the average landlord makes 3$ per week per tenant after factoring in costs. Some make a lot more, some make less. Before diving in, make sure you know your local area to see if it is worth it. My mother and stepfather owned eight different rental properties and their own home. The entire operation was a wash. The properties didn't even appreciate; some depreciated. We live in one of the fastest growing areas in Canada and had a 500% rise in immigration during the Harper Era. Didn't help property values or rent much.

1 You save money if you drop a bracket/tax rate between deposit and withdrawal but this doesn't sound like your case unless Trudeau actually plans on giving us a true middle class tax cut.

Goldielocks

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Re: RRSP's and mortgages
« Reply #2 on: September 13, 2017, 12:30:42 AM »
If you put money into RRSP today, and take it out next year, it could be no problem.  There are no penalties.

Assume the same tax bracket this year and near future...
This year, you get a tax deduction worth reduced taxes of X dollars, and in 2 years you pay X dollars in tax when you withdraw the original contributions.  Just reinvest (don't spend) your tax credit when you get your refund that first year.

If you will make more money and be in a higher tax bracket in 2 years, then you can save a bit on the taxes, net.

The problem with RRSP is that you will permanently decrease your contribution room when you withdraw... not so with the TFSA.

Also TFSA was a great suggestion.   The only issue with a TFSA is that there is usually less room available, although it has been established for 8 years now, so that may not be a problem any more if you have not maxed it out previously.

The bigger question (after you have found a good landlord investment, which is a challenge in most urban markets right now), is where to invest it after you put it in?   If it will just sit as cash in your RRSP or TFSA, there really is no point to moving it there.   If it doesn't grow, there is no tax on it anyway.   If you invest it to grow, it may lose value right when you want it in two years...

One more way to save taxes...with short term money in the RRSP...   Life long learning plan.
If you are registered full time in a program, you can withdraw from your RRSP very much like the Home Buyers plan, with a 10 year payback instead of 15 years, capped to $20k total and $10k per year.  So if you or your spouse plans to go back to school around then, you could pull money from the RRSP and not pay tax on it immediately.. but your future repayments do not earn the credit a second time.   This works if you are in a very high tax bracket now (to make the tax savings worth the effort) and can fund the school without other loans.
« Last Edit: September 13, 2017, 08:27:48 AM by Goldielocks »

Goldielocks

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Re: RRSP's and mortgages
« Reply #3 on: September 13, 2017, 09:06:36 AM »

You don't save taxes by putting money in an RRSP. You delay paying taxes1. If you plan on having another child within the next few years, you could save money in your TFSA. When you're expecting to have a baby, switch to putting money in your RRSP to catch you up. RRSP contributions reduce your adjusted family net income which will increase your monthly CCB and quarterly GST/HST rebates. Compared to using the space now, it would be a 3-10% increases depending on your current income and number of children.

1 You save money if you drop a bracket/tax rate between deposit and withdrawal but this doesn't sound like your case unless Trudeau actually plans on giving us a true middle class tax cut.

Hey Kvent,  this is a great tip -- low income to save in TFSA, then switch it out to RRSP when you have a high income those first couple of years.  Doubly so because of the child benefit tip.

There are three very common times when one would drop a bracket/tax rate substantially on the RRSP:

1.  When a person early FIREs, and starts drawing down their RRSP.., they can be in a much lower bracket because of the long, long time to draw it down... maybe they have a high TFSA to use, or other investments.   This is especially true for high income earners now (e.g. lawyer / financial banker), and plan to FIRE, and you only live on $40k per year...   although maybe this supports your comment about the middle income tax cut... because this high income lawyer is not in the group that your point is about...

2.  Here is the important one.   When you retire, after age 65, you can split RRIF and pension income with a spouse.  This immediately drops your income per person in half.   So someone contributing at $75k per year would drop down to $37.5k per tax rates year when withdrawing, for the same income.   With a paid off house and no kids, a lower income in retirement is a real possibility.

3.   A  realistic example of value to all middle income is the ability to tap into your RRSP during low income years, such as maternity leave, and in-between jobs, raising kids while working very part time.   Let's say a person contributed at the 60k income level for a handful of years, then lose a job / mat leave, goes back to school, and only makes $23k per year through EI or casual work.  Topping that off with $10k from the RRSP shifts your marginal tax bracket from 30% to 20% (Ontario, no dependents).

Your point is valid about the wide margin from $47k to $90k having very narrow marginal tax differences (only 5% difference, really), which is where the majority are working.   I guess the key is to calculate how much tax is paid out versus any benefits a family is getting back over a 5 year period, between EI, disability, child benefits, and cost of school per child to determine if they are net gainers or losers about their tax situation, to see if the complaint about no tax cut is valid.   

Honestly, although recently the child tax benefits cut offs have increased a lot, previously, with $100k - $125k in family income, I only had Harper's $600 per year per child, and while paying 40% marginal taxes, so I understand why the pressure for cuts are now coming at the $100k to $150k brackets, and over, instead of at the under $90k crowd (which is at 33% marginal tax and child benefits).  Especially as the ($2k max) income splitting credit (Family Tax Cut) for high/low income earner families was removed in 2016, which impacted the over $100k income group the most...   

My guess is that it is the child-free middle income earners that are getting the least tax relief right now.

 





Prairie Stash

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Re: RRSP's and mortgages
« Reply #4 on: October 02, 2017, 12:07:59 PM »
I'm still kind of new to this idea if FIRE, but I have been frugal since I was a little boy.  I started making decent money just over a year ago and my net worth graph can attest to that.  I am thinking of buying a rental house that is a bit bigger than the one I own so If we decide to have another baby we can move into the one with an extra bedroom and washroom and rent out my current house.  The money that I have saved this year is just siting in cash at the moment because I am hesitant at putting it in my RRSPs.  If I have a plan of buying another house in one to three years, what should I be doing with my cash in the mean time so I pay less taxes?

This would be my second house so I would not qualify for the first time home buyers plan even though I did not use it on my first house.  Are there any other tricks or "loopholes" to get my money out of RRSP's to pay for a house?
TFSA - you have $52,000 in lifetime room, so does your partner (it usually takes 2 to have children). That's $104,000 in room. Even having the money in a high interest account inside a TFSA will reduce taxes.