Author Topic: RRSP am I contributing too much?  (Read 500 times)

Itrembac

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RRSP am I contributing too much?
« on: February 02, 2019, 09:22:44 PM »
Just realised this board might be more applicable!

My annual income is roughly $45,000 and I'm 35.

I currently have a work one which has about $22,000 in it atm. I make monthly contributions and the company matches. About $4,000 a year.

I have an individual one with about $25,000. I can contribute about $4,000 a year, and that is what I have been doing.

My big concern is that I'm going to be making more in retirement age than working age, thus paying more in taxes when I make the withdrawals!

Should I just contribute to the work one, and look to a non-registered account instead?

If you're wondering, I do max out my TFSA first!

Stasher

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Re: RRSP am I contributing too much?
« Reply #1 on: February 03, 2019, 10:48:06 AM »
Personally what I did was this
Max out first my TFSA
Max out second my employer matching company RRSP (wide range index fund with lowest MER if they have it)
Put all remaining savings each year into personal RRSP (index funds)

Are you reaching your RRSP max each year?
Don't forget as your income grows your rrsp contribution limit is growing as well.

daverobev

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Re: RRSP am I contributing too much?
« Reply #2 on: February 03, 2019, 11:50:22 AM »
If you retire early you can take the personal allowance before paying any tax - ie, before CPP and OAS.

But it's true, cap gains are taxed favourably (at the moment), as are Canadian eligible dividends. So, if you're not going to retire too early, it is worth doing some projections. There is also the case of death - at whatever age, the entire account is treated as being sold, which can lead to a nasty tax bill.

If you're 35 and want to retire at 50, you'll probably have time to draw a lot down (and possibly put it into the TFSA, if you don't need it to live on?) before CPP/OAS.

Goldielocks

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Re: RRSP am I contributing too much?
« Reply #3 on: February 08, 2019, 02:55:17 AM »
I am with Daverobev..

I had the same concern as OP - So much more tax in retirement than in my contribution years.... and then I realized I could ealry retire around 45 and start drawing it down.   There is no reason to fear the RRSP tax until you get to around 50 or so.

For OP, keep getting the match, then max out your TFSA, then add to your RRSP.
In the meantime, keep your monthly expenses down so you can afford retirement earlier.

  At age 50, figure out your RRSP spend down plan / retirement plan for the next 30 years, based on what your life looks like at that point.

The Fake Cheap

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Re: RRSP am I contributing too much?
« Reply #4 on: February 09, 2019, 07:45:35 PM »
I mean it's a good problem to have. 

How do you figure you are going to be making more when retired than now?

Please don't be one of those people who work until 65 and do a decent job at saving, and then complain because they have a 80K/year pension AND have 500K in their RRSP and complain about all the taxes they have to pay....that is just piss poor financial planning.

Itrembac

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Re: RRSP am I contributing too much?
« Reply #5 on: February 11, 2019, 03:38:57 PM »
Thanks for the responses everyone!

I do currently like my job a lot, but yes, working until 65 could be potentially piss poor planning! I was looking at how much I would roughly have at that age, thus the concern! A lot can change between now and then of course, but now having a better understanding of RRSPs, it certainly looks like I could retire well before the official retirement age without being in a bigger tax bracket.

highflyingstache

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Re: RRSP am I contributing too much?
« Reply #6 on: February 11, 2019, 05:02:51 PM »
I can't recommend taxtips.ca or the Canadian Financial Wisdom Forum enough, (FWF has a wiki and a discussion page). Both sites give great in depth explanation all about RRSP, tax rates, whatnot. Taxtips is great for their calculators as well, to see what and how you can move your tax planning around as well, especially for your future.

If I were making 45k again, I would certainly have a maxed TFSA (for the access, because tax free,) then the employer RSP, personal RSP and always last a taxable account. Deferred taxes are always better than current taxes (as mentioned above, RSPs give you tax free growth that can't be understated.

Also, I don't have a reference, but there's good consideration to the higher taxes paid at different rates. I typically look at the 45k point as possibly being close to the tipping point. Above that, the higher current tax rate is much steeper, the lower the wage however means you may not get the return you were hoping.

Prairie Stash

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Re: RRSP am I contributing too much?
« Reply #7 on: February 12, 2019, 08:04:41 AM »
I can't recommend taxtips.ca or the Canadian Financial Wisdom Forum enough, (FWF has a wiki and a discussion page). Both sites give great in depth explanation all about RRSP, tax rates, whatnot. Taxtips is great for their calculators as well, to see what and how you can move your tax planning around as well, especially for your future.

If I were making 45k again, I would certainly have a maxed TFSA (for the access, because tax free,) then the employer RSP, personal RSP and always last a taxable account. Deferred taxes are always better than current taxes (as mentioned above, RSPs give you tax free growth that can't be understated.

Also, I don't have a reference, but there's good consideration to the higher taxes paid at different rates. I typically look at the 45k point as possibly being close to the tipping point. Above that, the higher current tax rate is much steeper, the lower the wage however means you may not get the return you were hoping.
Taxables in some provinces are negative tax, OP is in one of those provinces. Only a TFSA has tax free growth, the RRSP has tax deferred growth. We should never say RRSP is tax free, its very misleading and is a fundamental flaw when comparing RRSP vs. taxable accounts.

My wife, who is 38, just sold from from her taxable account this year, gains of $10000. Expected taxes are zero, she's in retirement already. Dividends have long been tax free, as long as they're eligible (of course they are). Taxable accounts were the preferred option over RRSP for many low income people before the introduction of TFSA, what's changed? If the same amount was withdrawn from an RRSP it would boost our household income, lessening CCB currently (5.7% secret tax). Because its gains she has a further $7000 of room for more gains, or we can pull $7000 from the RRSP tax free. On that investment, we've never paid taxes and now we never will.

A taxable account is your best friend if you take off a few years for children, early retire, take a sabbatical or gap year. Its also the perfect hedge against too much in a RRSP too early. Although I call it a taxable account, we don't pay taxes on it. She started the acccount while earning $30-40k/year. In my taxable account I hold Horizons products (thanks to a forum recommendation), I don't pay tax on it. I never will, just like my TFSA.

Don't overlook taxable accounts, they're awesome. Although I also have maxed RRSP and TFSA, I'm still a fan of my taxable account, its pretty much another TFSA for me. Everyone has a different situation, everyone has nuances, loads of low income people do better by contributing to all three accounts simultaneously.

If I was following a couch potato strategy for a low income (under $45k in BC):
TFSA - US ETF and rest of world (high growth stuff)
Taxable - CDN ETF (eligible dividends negative tax in BC, reduces taxes owed each year)
RRSP - bonds and whatever is needed to achieve balance (more US/world), balance is better than tax status.

I welcome thoughts and critiques. Since I'm following this strategy myself, feel free to point out mistakes. I also do buy/hold, thats a key assumption.

bluebelle

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Re: RRSP am I contributing too much?
« Reply #8 on: February 12, 2019, 08:27:18 AM »

Please don't be one of those people who work until 65 and do a decent job at saving, and then complain because they have a 80K/year pension AND have 500K in their RRSP and complain about all the taxes they have to pay....that is just piss poor financial planning.
THANK YOU for a wonderful memory.....'piss poor' was a favourite expression of my father's.....I am not using it enough in daily converstations!

@Itrembac - first I want to say 'Awesome' that you're maxing out RRSPs and TFSA.  Give yourself a pat on the back.....I don't know what part of Canada you're in, but even in a LCOLA, that's still impressive. (haters out there - don't chime in that they could be doing better)  As others have said, you don't have to wait until you're 71 to start pulling from a RRIF (and thus probably have a higher income than during your working years).  I have every intention of drawing from my RRSP in my early retirement years, with a mix of non-registered savings.  My goal is to reduce lifetime tax paid.

Even if your tax rate is the same in retirement than currently, you're still better off.....a $1 today is worth more than a $1 30 years from now (inflation), and that money is growing tax free. 

If you think your income will be more in a few years, you could contribute to the RRSP now but not claim the deduction for a few years.

K-ice

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Re: RRSP am I contributing too much?
« Reply #9 on: February 14, 2019, 10:53:59 PM »

...
If you think your income will be more in a few years, you could contribute to the RRSP now but not claim the deduction for a few years.

I wish I had known this 15y ago. I made a few RRSP contributions when I was basically making nothing.

Today i would say if you are making under $45K and you have the potential to make more contribute but save the deductions for later.

For example if you are a resident & know you will be a full doctor soon donít take the deduction just yet.

Prairie Stash

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Re: RRSP am I contributing too much?
« Reply #10 on: February 15, 2019, 09:45:13 AM »

...
If you think your income will be more in a few years, you could contribute to the RRSP now but not claim the deduction for a few years.

I wish I had known this 15y ago. I made a few RRSP contributions when I was basically making nothing.

Today i would say if you are making under $45K and you have the potential to make more contribute but save the deductions for later.

For example if you are a resident & know you will be a full doctor soon donít take the deduction just yet.
This is an oversimplification. After 5 years, what was the value of the RRSP contibution you made cpmpared to saving the deduction?In general after 2-5 years if you save a deduction you're worse off. Invest that money, don't just leave it in the federal coffers.

If you want to be really squeeezing every dollar, invest the money in a taxable account now and contribute it to the RRSP later. This will increase your NW the most. Pre-contributing to an RRSP isn't that great; its okay but there are better ways.


K-ice

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Re: RRSP am I contributing too much?
« Reply #11 on: February 15, 2019, 11:55:16 AM »
Prairie Stash. From what I understand you can "throw" it over the RRSP wall today and invest it however you want. Not just cash.

I can then "claim" the deduction years later when your income is higher.

For example I just checked and I contributed about $12K over 8 years when my income was less than $30K.

I didn't have a crystal ball, but $8K of this was 1 & 2 years before I got my full time job. (I was almost done my training and pretty sure a good job was on the horizon.)

I was also not optimal as I saved about 1/2 from my first real summer job and claimed that as an RRSP deduction even though I was a full time student & and had lots of other deductions. (I was living at home and just excited to save.)

After I found my first full time job, and was making over $80K, that would have been a much better time to claim those earlier deductions. 

To answer the OP's question. $45K is my cut-off and you are exactly on it.
It is great you are using TFSA & getting the company match.
Do you think you will make substantially more in the near future?

(ie resident about to be a doctor.)

If you are making less than $45K, expect to make more in the future, & CLAIMING your RRSP you are probably contributing too much.

Either put it into an RRSP, but don't claim it, or find another place (TFSA or taxable) to stash it until your income is higher.

Also, it sounds like you will soon need to read up on location not just allocations since you are investing in Taxable now.

https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/

I found this a helpful article and because of it have mostly:
bonds (VAB) in my RRSP 
stocks (VXC) in my TFSA
Canadian dividend stocks in my Taxable

Wishing you the best with your Mustacian People Problems

Prairie Stash

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Re: RRSP am I contributing too much?
« Reply #12 on: February 15, 2019, 01:04:47 PM »
Prairie Stash. From what I understand you can "throw" it over the RRSP wall today and invest it however you want. Not just cash.

I can then "claim" the deduction years later when your income is higher.

For example I just checked and I contributed about $12K over 8 years when my income was less than $30K.

I didn't have a crystal ball, but $8K of this was 1 & 2 years before I got my full time job. (I was almost done my training and pretty sure a good job was on the horizon.)

I was also not optimal as I saved about 1/2 from my first real summer job and claimed that as an RRSP deduction even though I was a full time student & and had lots of other deductions. (I was living at home and just excited to save.)

After I found my first full time job, and was making over $80K, that would have been a much better time to claim those earlier deductions. 

To answer the OP's question. $45K is my cut-off and you are exactly on it.
It is great you are using TFSA & getting the company match.
Do you think you will make substantially more in the near future?

(ie resident about to be a doctor.)

If you are making less than $45K, expect to make more in the future, & CLAIMING your RRSP you are probably contributing too much.

Either put it into an RRSP, but don't claim it, or find another place (TFSA or taxable) to stash it until your income is higher.
I understand what you're saying. I'm pointing out that you claimed the deduction and got a refund in that year. That refund started growing that year, which is good! if you had delayed 5 years for the refund, no growth would occur, pull out some math and check which way ends up increasing your NW the most.

The growth of the refund was likely larger than the increased tax refund from a delay. People tend to think that a future refund is better than a current refund )plus growth). If its 1-2 years, thats true, but if you had waited 8 years, you would have been worse off.

Here's the thing, at any time you can move money from the taxable into the RRSP, its a one way street. So whatever reason you have for putting money into a RRSP today also applies in three years, but if you hold it in a taxable acount you get additional benefits.

A RRSP is tax defferred growth, on the back end you get taxed at full marginal rate! The refund you get today, is meant to offset the tax you pay in the future, if you stay in the same marginal bracket you come out exactly neutral! (Refund+growth=future tax bill) Without the refund today, you set yourself up for a tax bill in the future that comes out of your contibutions, instead of the growth on the refund.

I'm not trying to argue, I'm trying to explain the benefits of a taxable account. My second point is to show you that you the refunds claimed in the first 4 (of 8) years probably made your NW higher than if you had delayed the claims. I'm sure there's more details I'm unaware of, but I suspect you did better than you think.

I'd welcome being proven wrong, as long as its not just hypotheticals and we use actual math. My claim is that for low income individuals its typically better to invest in a taxable account than to delay claiming an RRSP refund for 5 years to move up a tax bracket. Throwing out "invest and delay claims" deserves the caveat; only for a year or two and after a while it ceases to provide a benefit.

K-ice

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Re: RRSP am I contributing too much?
« Reply #13 on: February 15, 2019, 03:47:34 PM »
Thanks Prarie Stash. I understand what you are saying too. I feel better about the $4000 early on.

As for the 2 years right before my real job I still wish I had a better understanding about RRSPs back then.

Itrembac

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Re: RRSP am I contributing too much?
« Reply #14 on: February 16, 2019, 05:57:00 PM »

Please don't be one of those people who work until 65 and do a decent job at saving, and then complain because they have a 80K/year pension AND have 500K in their RRSP and complain about all the taxes they have to pay....that is just piss poor financial planning.
THANK YOU for a wonderful memory.....'piss poor' was a favourite expression of my father's.....I am not using it enough in daily converstations!

@Itrembac - first I want to say 'Awesome' that you're maxing out RRSPs and TFSA.  Give yourself a pat on the back.....I don't know what part of Canada you're in, but even in a LCOLA, that's still impressive. (haters out there - don't chime in that they could be doing better)  As others have said, you don't have to wait until you're 71 to start pulling from a RRIF (and thus probably have a higher income than during your working years).  I have every intention of drawing from my RRSP in my early retirement years, with a mix of non-registered savings.  My goal is to reduce lifetime tax paid.

Even if your tax rate is the same in retirement than currently, you're still better off.....a $1 today is worth more than a $1 30 years from now (inflation), and that money is growing tax free. 

If you think your income will be more in a few years, you could contribute to the RRSP now but not claim the deduction for a few years.

Thank you! And I'm in BC.

Itrembac

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Re: RRSP am I contributing too much?
« Reply #15 on: February 16, 2019, 05:58:01 PM »
Prairie Stash. From what I understand you can "throw" it over the RRSP wall today and invest it however you want. Not just cash.

I can then "claim" the deduction years later when your income is higher.

For example I just checked and I contributed about $12K over 8 years when my income was less than $30K.

I didn't have a crystal ball, but $8K of this was 1 & 2 years before I got my full time job. (I was almost done my training and pretty sure a good job was on the horizon.)

I was also not optimal as I saved about 1/2 from my first real summer job and claimed that as an RRSP deduction even though I was a full time student & and had lots of other deductions. (I was living at home and just excited to save.)

After I found my first full time job, and was making over $80K, that would have been a much better time to claim those earlier deductions. 

To answer the OP's question. $45K is my cut-off and you are exactly on it.
It is great you are using TFSA & getting the company match.
Do you think you will make substantially more in the near future?

(ie resident about to be a doctor.)

If you are making less than $45K, expect to make more in the future, & CLAIMING your RRSP you are probably contributing too much.

Either put it into an RRSP, but don't claim it, or find another place (TFSA or taxable) to stash it until your income is higher.

Also, it sounds like you will soon need to read up on location not just allocations since you are investing in Taxable now.

https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/

I found this a helpful article and because of it have mostly:
bonds (VAB) in my RRSP 
stocks (VXC) in my TFSA
Canadian dividend stocks in my Taxable

Wishing you the best with your Mustacian People Problems

Thank you. I don't see a big increase in my wages in the foreseeable future!

Goldielocks

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Re: RRSP am I contributing too much?
« Reply #16 on: February 16, 2019, 07:49:04 PM »
To add on to Prairie Stash's comment.

With the Advent of the TFSA, if you have room there, there is zero reason to contribute to the RRSP now, and not take the deduction until later.  Instead, you max out the TFSA, and then in a year when your income increases, but you have a lot of expenses, you can move $$ from the TFSA to the RRSP.   You get the TFSA room back again, the next year.

Prairie Stash's comment about non-registered is spot on if you already max out your TFSA.