Author Topic: RRSP vs TFSA  (Read 3603 times)

recklesslysober

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RRSP vs TFSA
« on: August 03, 2017, 03:25:00 PM »
Excited to have a Canadian tax board! A lot of the FI information is based on US vehicles.

I feel like I somewhat understand RRSP (pre-tax investment, taxed on withdrawal) vs TFSA (post-tax investment, grows tax free) but is there any guide out there about what to invest inside them, when to contribute to each one based on income, which to withdraw first after FIRE, etc.?

Canadian Ben

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Re: RRSP vs TFSA
« Reply #1 on: August 03, 2017, 08:17:09 PM »
Yes. So many. Google canadian perdonal finance blog tfsa vs rrsp. Off the top of my head, boomer and echo, howtosavemoney.com, financial uproar and others all list them with all the details you coild want

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Re: RRSP vs TFSA
« Reply #2 on: August 08, 2017, 01:10:45 PM »
You forget the third aspect, taxable accounts. It's RRSP vs. TFSA. vs Taxable account.

Very few people discuss the third option since very few people max out the other options. In some cases its better to have taxable accounts, like my spouse. Her order is TFSA, Taxable and then RRSP. Her mix is dividends, then gains, since dividends are taxed at 0% currently and gains will have a future tax bill. By reinvesting the dividends (DRIP) it mimics a regular capital gain ETF but makes a lot of it tax free in the future. Even better, in retirement we'll convert the gains into income all tax free. Her taxable account could have about $400,000 (unlikely we'll hit that) in it and never pay any taxes. It could be double in value of the TFSA and theoretically pay the same in taxes! I'll point out, this is a unique personal situation, your priority may differ.

Prior to the TFSA the information for RRSP vs. Taxable was regularly done (annual columns in Globe, national post etc,), since then most people assume that people will never max out the TFSA and there's no reason to discuss the taxable accounts.

recklesslysober

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Re: RRSP vs TFSA
« Reply #3 on: August 08, 2017, 03:04:53 PM »
Yes. So many. Google canadian perdonal finance blog tfsa vs rrsp. Off the top of my head, boomer and echo, howtosavemoney.com, financial uproar and others all list them with all the details you coild want

I think I need to do some more reading. I have read some of the blogs you mentioned but I guess I'm just looking for something more comprehensive and haven't found it yet!

You forget the third aspect, taxable accounts. It's RRSP vs. TFSA. vs Taxable account.

Very few people discuss the third option since very few people max out the other options. In some cases its better to have taxable accounts, like my spouse. Her order is TFSA, Taxable and then RRSP. Her mix is dividends, then gains, since dividends are taxed at 0% currently and gains will have a future tax bill. By reinvesting the dividends (DRIP) it mimics a regular capital gain ETF but makes a lot of it tax free in the future. Even better, in retirement we'll convert the gains into income all tax free. Her taxable account could have about $400,000 (unlikely we'll hit that) in it and never pay any taxes. It could be double in value of the TFSA and theoretically pay the same in taxes! I'll point out, this is a unique personal situation, your priority may differ.

Prior to the TFSA the information for RRSP vs. Taxable was regularly done (annual columns in Globe, national post etc,), since then most people assume that people will never max out the TFSA and there's no reason to discuss the taxable accounts.

True! I'm specifically looking for information about RRSP and TFSA contributions at the moment (I haven't maxed mine out and I don't think my situation would bring taxable into the mix yet), but taxable accounts and pension plans/OAS are also factors!

Here's my plan so far:

  • Contribute to EPP up to the employer match.
  • Pay off student loan debt.
  • Max TFSA.
  • Max RRSP.
  • Taxable.

Withdrawal order:
RRSP first while in a lower bracket, before EPP/CPP withdrawals start.
EPP kicks in.
CPP kicks in.
TFSA/taxable when needed.

Holdings:
RRSP (RRIF) - US stocks/ETFs
TFSA - Canadian dividends/capital gains
taxable - Canadian stocks/foreign stocks with no dividends

This may change as I come across more information. I've seen a lot of really detailed and informative plans for US tax strategies specifically for FIRE so hopefully there are some Canadian ones out there as well!

recklesslysober

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Re: RRSP vs TFSA
« Reply #4 on: August 08, 2017, 03:23:46 PM »
Reading about ETFs I came across this page.. https://youngandthrifty.ca/ultimate-5-step-guide-maximizing-index-etf-returns/. Very helpful! Some specific strategies with charts and examples.


BiochemicalDJ

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Re: RRSP vs TFSA
« Reply #5 on: August 10, 2017, 07:36:05 AM »
Canadian Couch Potato (ETF investing blog) has several write ups of what you'd want to hold in each account (TFSA, RRSP) for tax reasons, among other things. Definitely worth a look.
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frugalwitch

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Re: RRSP vs TFSA
« Reply #6 on: August 10, 2017, 08:20:24 AM »
I'm still new to investing and didn't think about that at all. I must research on this asap!

In the meantime, I want to max my TFSA and I don't think a RRSP will benefit me so much because I have a defined benefit pension plan. As I'm contributing a lot to this plan, (11%), I want the rest to be in my TFSA.

BiochemicalDJ

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Re: RRSP vs TFSA
« Reply #7 on: August 10, 2017, 09:26:33 AM »
I think the main reason people like to max RRSP eventually is the strategic application of the deduction to keep you in certain tax brackets right now- For example, if you're earning about 87K, it can be financially significant to invest chunks in RRSP to prevent the excess ~8% tax burden (These are fudgey numbers, bear with me). Also, you don't *have* to take the whole deduction all at once, you can 'save it' to keep yourself in a given bracket when years are fruitful.

I don't make enough for that to be relevant, but I still appreciate that any growth that occurs in RRSP and TFSA is tax-free, whereas taxable accounts you get hit with capital gains on sale. Which is still a lower tax rate than income, but it's higher than 0%... As for the dividend strategy, I know dividends are taxed weirdly (as in, VERY LITTLE) but haven't looked into detailed portfolios.

Honestly, I trust Dan Bortolotti enough to just slap my investments in one of his recommended portfolios through Questrade (Free ETF buys) once a month and say to hell with it.

8.8% annually so far with ~0.23% MER, so I can't complain yet.
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Prairie Stash

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Re: RRSP vs TFSA
« Reply #8 on: August 10, 2017, 11:35:04 AM »

I don't make enough for that to be relevant, but I still appreciate that any growth that occurs in RRSP and TFSA is tax-free, whereas taxable accounts you get hit with capital gains on sale. Which is still a lower tax rate than income, but it's higher than 0%... As for the dividend strategy, I know dividends are taxed weirdly (as in, VERY LITTLE) but haven't looked into detailed portfolios.

This stands out as a common myth, Growth that occurs in an RRSP is not Tax free, its very much taxed upon withdrawal. You pay all tax at marginal rates when you pull money out of an RRSP, Capital gains is currently 50% less.

RRSP is only mathematically better than a taxable account IF you get the deduction. Every year you delay claiming it makes it worth less, until eventually you come out worse.

Remember in a taxable account only the gains are taxed, in an RRSP account the gains and the initial contribution is taxed. Typically this means that an RRSP contribution has all gains taxed at higher rates than a taxable account.

If I have $20,000 I put in this year and pull out in 10 after its doubled to 40,000, what are the taxes owed (assume its the only income for simplicity)? On the Taxable account, its $0, on the RRSP its $5800, but you would have received at least $4000 in your refund.
« Last Edit: August 10, 2017, 11:45:01 AM by Prairie Stash »

BiochemicalDJ

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Re: RRSP vs TFSA
« Reply #9 on: August 10, 2017, 02:33:26 PM »
Holy smokes. PM'd to confirm my understanding before I post again- Don't want to spread any more fallacy! Thank you, Prairie Stash!
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daverobev

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Re: RRSP vs TFSA
« Reply #10 on: August 10, 2017, 02:44:51 PM »
Holy smokes. PM'd to confirm my understanding before I post again- Don't want to spread any more fallacy! Thank you, Prairie Stash!

The problem with the RRSP is that you are taking a risk that your future tax rate will be higher than your current one. RRSP is about tax *deferral*.

It does NOT play well if you will have a large income in retirement vs when you are contributing.

If you are going to FIRE, RRSPs make sense - you can draw them down before OAS/CPP starts. But you are also at risk of tax rates going up.

In a constant tax rate environment, ie your marginal rate when you put IN is the same as when you take OUT, an RRSP and a TFSA will perform almost identically (the almost is when you buy US stuff - there is no tax on US sourced dividends in an RRSP, but there is in a TFSA).

But yeah, if you're not earning at least $40k there is probably no good reason to put money into an RRSP. The only reason would be if you have young children and are never expecting to earn much more.

The TFSA is ideal for lower income people.
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Re: RRSP vs TFSA
« Reply #11 on: August 11, 2017, 11:27:42 AM »
I thought I'd post parts of the conversation between myself and Prairie Stash- It was very illuminating. I'm still going to need to work on the withdrawal strategy eventually, but right now I'm focused on the accumulation stage. Here's what I sent back:

Dang! I've been taken to school! I would delete my original thread after being so well corrected, but I figure I should leave it up so that anyone who shared my erroneous belief can also get the correction!

I suppose the reason I assumed the RRSP would be taxed less was that I assumed my declared income in my retirement (post 65) would be quite low, likely lower than even the middle tax bracket- I'm aiming for a 22K/year SWR at the moment. So the first ~10K of that is tax free, but then the next 10K is at full rates. If I change that situation to be from a taxable, still withdraw the 22K after selling, then I only pay 50% the tax and even then, only on the value of the gain, rather than the value of the initial investment (which, in a taxable account, I've already been taxed on once due to income.)

I tried to diagram this out, but my algebra has always been crap. So far I have the following written on a piece of paper, to reflect the two situations:

Let ρ= Full marginal tax rate.

RRSP situation:

Income ---> Taxed at 1ρ ---> Invested into RRSP ---> Deducted at 1ρ ---> Growth ----> Withdrawal -----> Original Investment + Growth Taxed at 1ρ.

So, kinda crappy, as it will always be taxed at 1ρ.

Taxable account situation:

Income --> Taxed at 1ρ ---> Invested into Taxable --> Growth ---> Withdrawal ---> Growth only, taxed at 0.5ρ.

So in both situations, the original investment is taxed at 1ρ once, and then in the RRSP situation, your capital gains are taxed at a full 1ρ, whereas Taxable accounts would only tax them 0.5ρ.

TFSA Situation

Income --> Taxed at 1ρ ---> Invested in TFSA ---> Growth ---> Withdrawal ---> Original Investment + Growth taxed at 0ρ.

So, if I have this right:

RRSP = 1.0ρ on gains, 1.0ρ on original
Taxable = 0.5ρ on gains only, 1.0ρ on original
TFSA = 1.0ρ on original, 0ρ on Gains.

If that's true, then I feel like a complete moron for filling my RRSP before my TFSA. I mean, they're both maxed out now, and I'm currently pouring everything in my life into my taxable, as it's all I have left to fill- but the order of operations should have been different.

Now, Prairie Stash informed me that capital gains are not just taxed at 0.5 marginal tax rate- It turns out, you take the dollar figure of the capital gains, multiply by 0.5, and *then* apply marginal tax rate. Which led a few theoretical situations they presented of literally paying no tax- For example, if you withdrew 20k of money from a taxable account, and 10k of that were gains, you'd apply your marginal tax rate to half the gains, which would be applied to 5k.

Now the part I want to confirm is this- Does that 5k that your full marginal tax rate is applied to still fall under your basic income exemption, therefore allowing you to pay no tax on that gain as long as that's your only 'income' for the year?
« Last Edit: August 11, 2017, 11:33:09 AM by BiochemicalDJ »
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daverobev

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Re: RRSP vs TFSA
« Reply #12 on: August 11, 2017, 12:08:59 PM »
RRSP = 1.0ρ on gains, 1.0ρ on original
Taxable = 0.5ρ on gains only, 1.0ρ on original
TFSA = 1.0ρ on original, 0ρ on Gains.

No. Common misconception.


If you are at marginal 50% tax (number doesn't matter, just round for simplicity) both when contributing and withdrawing from an RRSP:

RRSP contribute $10k (and get 5 back)

TFSA contribute $5k (get 0 back)

so the amount is the same from your perspective.

Grows by 100% over X years.

So RRSP $20k, TFSA $10k.

You want to spend $5k on a Honda Civic. How much do you withdraw?

TFSA: You withdraw $5k. No tax paid

RRSP: You withdraw $10k, and pay $5k in tax.

RRSP 1.0 on gains, 1.0 on original BUT THE AMOUNT OF MONEY IN THE RRSP IS HIGHER. You are being taxed on *gains* that happen inside the tax shelter, when you withdraw, because that money that is growing IS NOT YOURS; it is the government's but they are letting you hang on to it until you withdraw.

Taxable, remember you're paying tax on dividends as you go (good, if you're not earning a fortune and expecting low income in retirement), and yes of course you have already paid tax on the original amount.
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Re: RRSP vs TFSA
« Reply #13 on: August 12, 2017, 10:30:40 AM »
RRSP's are great for people who plan on retiring early, go back to school FT to retrain mid career, take sabbatical etc.   The key is to try to withdraw from the RRSP and use up before CPP,OAS kicks in and while your tax rate is low.  Keep growing the TFSA's and holding off for withdrawl later in retirement  (during OAS,CPP years)   Assuming a low cost lifestyle.

As an early retiree you can get to the point where you have too much in rrsp's in retirement. A good problem to have - but it can be a problem.
« Last Edit: August 12, 2017, 10:41:46 AM by thriftycanadian »

Goldielocks

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Re: RRSP vs TFSA
« Reply #14 on: August 13, 2017, 04:31:58 PM »
RRSP's are great for people who plan on retiring early, go back to school FT to retrain mid career, take sabbatical etc.   The key is to try to withdraw from the RRSP and use up before CPP,OAS kicks in and while your tax rate is low.  Keep growing the TFSA's and holding off for withdrawl later in retirement  (during OAS,CPP years)   Assuming a low cost lifestyle.

As an early retiree you can get to the point where you have too much in rrsp's in retirement. A good problem to have - but it can be a problem.

Yes, this.

RRSP are designed to help you balance out high and low income years, at any age.   Before MMM, I was worried about overcontributing and withdrawing at higher tax rates in retirement than the contribution tax rate...  Then realized that early withdrawls, starting by age 50 would reduce this dramatically.   As does the ability to split RRIF between spouses.

RRSPs work very well when there are two spouses with differing incomes. 

If you are holding for decades inside an RRSP, the growth on the larger capital overcomes the potential increase in marginal tax rates... ususally.

Tip - Leave some surplus room in your RRSP for future years for high income, or exceptional one time windfalls in income, or the ability to roll over other accounts into you RRSP.   
Tip 2 - you can contribute to your RRSP but not claim the tax deduction until future years, to push it off into a high income bracket year.   

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Re: RRSP vs TFSA
« Reply #15 on: August 14, 2017, 10:11:33 AM »
I like them both and understand them both. I was making extremely good money prior to FIRE this year and had no choice other than maxing my RRSP. The investment helped drop me to much lower tax brackets and my TFSA was maxed anyhow.

I may put another twist in things as my remaining RRSP room from this year (I FIRE'd so I don't have cash to invest) will be used up when I look into rolling my kids RESP money over into my RRSP. I need to figure this strategy out. My son went to trade school with his first year being paid fro my the government. He now landed an awesome job where I feel his employer will actually pay for his schooling. I have also told the kids I feel they should pay their own way. Regardless I still saved over these years and have over $31k saved for them.
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Prairie Stash

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Re: RRSP vs TFSA
« Reply #16 on: August 14, 2017, 02:50:11 PM »
RRSP's are great for people who plan on retiring early, go back to school FT to retrain mid career, take sabbatical etc.   The key is to try to withdraw from the RRSP and use up before CPP,OAS kicks in and while your tax rate is low.  Keep growing the TFSA's and holding off for withdrawl later in retirement  (during OAS,CPP years)   Assuming a low cost lifestyle.

As an early retiree you can get to the point where you have too much in rrsp's in retirement. A good problem to have - but it can be a problem.

Yes, this.

RRSP are designed to help you balance out high and low income years, at any age.   Before MMM, I was worried about overcontributing and withdrawing at higher tax rates in retirement than the contribution tax rate...  Then realized that early withdrawls, starting by age 50 would reduce this dramatically.   As does the ability to split RRIF between spouses.

RRSPs work very well when there are two spouses with differing incomes. 

If you are holding for decades inside an RRSP, the growth on the larger capital overcomes the potential increase in marginal tax rates... ususally.

Tip - Leave some surplus room in your RRSP for future years for high income, or exceptional one time windfalls in income, or the ability to roll over other accounts into you RRSP.   
Tip 2 - you can contribute to your RRSP but not claim the tax deduction until future years, to push it off into a high income bracket year.
3) put the money into a taxable account, pay 50% marginal rate on the gains and then collect 100% of the gains as an RRSP contribution in an higher income year

For example you have $10,000 in a taxable account that doubles to $20,000 and your marginal rate is 50%. You would pay $2,500 in gains when you sell, that stings a little. But your future self puts that money into the RRSP and collects a refund of $10000! That's $5000 more than originally you would have received (50% of $10k), you end up netting $2500 with that trick. Remember, you only had $10k to start with either way, you didn't have the refund to make the RRSP perform better. Performance values are identical without the refund, within an RRSP or taxable account.

Only put money into RRSP if you claim the refund the same year. A taxable account ALWAYS outperforms an RRSP account up to the date you get the refund. In a loss scenario you can carry forward on the taxable account, that makes future taxes easier and recovers the losses from this trick (if any). The entire premise of the RRSP outperforming is you receive the refund when you put the money in.

Prairie Stash

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Re: RRSP vs TFSA
« Reply #17 on: August 14, 2017, 03:12:47 PM »
I like them both and understand them both. I was making extremely good money prior to FIRE this year and had no choice other than maxing my RRSP. The investment helped drop me to much lower tax brackets and my TFSA was maxed anyhow.

I may put another twist in things as my remaining RRSP room from this year (I FIRE'd so I don't have cash to invest) will be used up when I look into rolling my kids RESP money over into my RRSP. I need to figure this strategy out. My son went to trade school with his first year being paid fro my the government. He now landed an awesome job where I feel his employer will actually pay for his schooling. I have also told the kids I feel they should pay their own way. Regardless I still saved over these years and have over $31k saved for them.
You shouldn't owe taxes on $31k. A large part is likely a Refund Of contributions (the money you put in). Its tax free on withdrawal, even if pulled out in cash.

The second part is EAP, the gains and grants. Its taxed in your kids hands, so the withdrawal amount per year is Basic Exemption ( about $11,000) - wage (pretend your kid made $4000)+$7000. SO you can pull $7k out tax free/year, not too bad.
http://www.investingforme.com/classroom/account-types/resp/withdrawals

The important part is knowing how much of the $31,000 is your contribution vs. EAP. Only the EAP is subject to tax, you already paid tax on the other part.

How much was gains/grants? Your tax bill is smaller than you think. Even better is to take the EAP out in your kids name and pay no taxes. If you port it into the RRSP you lose the grants, no exceptions. That 20% they put in, its gone if you move it into your RRSP.

Scenario is you put in $20,000, the government put in $4000 and it grew $7000. If you collapse the RESP you lose $4000, pay tax on $7000 and keep the $20k. If you have a kid go to school you claim $11,000 and pay tax on it in your sons name (lets say he pays 35%, or $3,850). You still come out ahead because you didn't lose the $4000 and you didn't pay tax on $7000 personally. Give your son $4000 for his troubles and you both come out ahead.

Even with employee paid schooling, you might want to cash out the RESP in his name.

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Re: RRSP vs TFSA
« Reply #18 on: August 14, 2017, 03:16:01 PM »
Awesome ! Thanks. I am sure CRA has all the info on what I was paid in grants for both the kids.
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Goldielocks

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Re: RRSP vs TFSA
« Reply #19 on: August 14, 2017, 06:43:57 PM »
I like them both and understand them both. I was making extremely good money prior to FIRE this year and had no choice other than maxing my RRSP. The investment helped drop me to much lower tax brackets and my TFSA was maxed anyhow.

I may put another twist in things as my remaining RRSP room from this year (I FIRE'd so I don't have cash to invest) will be used up when I look into rolling my kids RESP money over into my RRSP. I need to figure this strategy out. My son went to trade school with his first year being paid fro my the government. He now landed an awesome job where I feel his employer will actually pay for his schooling. I have also told the kids I feel they should pay their own way. Regardless I still saved over these years and have over $31k saved for them.

Oh, that should be quite easy, with a few constraints...

1)  You can withdraw your contributions as is, without rolling them into the RRSP.  No tax on the original dollar amount of contributions and this was always considered to be the plan owner's money.  The only restriction is that you can't now get future CESG matching for a couple of years after you do this.  But kids over 17 are too old for additional CESGs anyway.

2)  CESG portion gets sent back to the government if the kid is no longer in school.  The 20% match was free money anyways.. is only for costs incurred while the receipient is attending school.  Hopefully your son withdrew ONLY CESG money that first year, so only a little is left to be returned to the government.

** Because your child is registered in a full time education, you can pull out the CESG and AIP money in his name / taxed in his hands, even if the majority of costs are paid for by employer.   Your son can remove funds for ANY cost, including living, food, transportation, etc while in school.   There is a limit on the amount removed in the first term, and a limit on the maximum CESG that one child in a family plan can get.   So please take this out now, before your child graduates for the most money.

3)  AIP can be rolled into your RRSP, using your available room, tax free if the kid is no longer in school. Note, there is a restriction that the youngest child is older than 21 before this is allowed, just in case they choose education after a couple of gap years....   see below...

BUT if you have no RRSP room, you just pay the extra tax penalty on it and put it into a taxable account or TFSA.   It seems a bit like paying double taxes, but in reality is intended to approximate the taxes you have deferred until now on the income, and a penalty that represents the income on the CESG portion (that was never your money anyway).  Essentially ensuring that you return all the CESG AND the income it generated.   




-------
AIP can be removed from RESP if you are a Canadian recipient
AND any one of the following three conditions must also be met:

The plan has been in existence for at least 10 years, and all beneficiaries under the plan are at least 21 years of age and not eligible for an EAP;
The plan has existed for 36 years;
All of the beneficiaries are deceased.
« Last Edit: August 14, 2017, 06:49:29 PM by Goldielocks »

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Re: RRSP vs TFSA
« Reply #20 on: August 14, 2017, 07:08:20 PM »
Son is 18, just spent the last school year in University taking 1st year HD Mechanics and has graduated. (June)
He is now working with an employer who has signed him on as an apprentice, not sure I can now pull the funds out. My next window will be when he goes to school for his 2nd year journeyman testing and training. If I can still pull it out would be awesome to pay for the $1400 toolbox he just bought instead of him working it off.

My daughter is 17 in 1 month, not sure what she will do for school but 50% off the joint RRSP was allocated to her as I deposited the money at 50% ratio so CESG are equal.

I am fine letting the money sit for 4 more years until she is 21 and rolling the whole thing over into my RRSP if neither child requires it.

My biggest goal out of this is to educate both children on how I have been saving this money. My withdrawal strategy for the funds and how I built it up.

As for my son he is 18 and making 1200 take home every two weeks living at home for us. Now is the most important time than ever to educate him and get the habits built to lock in TFSA and RRSP plans. AND to not let him buy a new vehicle which my biggest mistake ever for wasting cash.
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Goldielocks

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Re: RRSP vs TFSA
« Reply #21 on: August 14, 2017, 08:02:39 PM »
Son is 18, just spent the last school year in University taking 1st year HD Mechanics and has graduated. (June)
He is now working with an employer who has signed him on as an apprentice, not sure I can now pull the funds out. My next window will be when he goes to school for his 2nd year journeyman testing and training. If I can still pull it out would be awesome to pay for the $1400 toolbox he just bought instead of him working it off.

My daughter is 17 in 1 month, not sure what she will do for school but 50% off the joint RRSP was allocated to her as I deposited the money at 50% ratio so CESG are equal.

I am fine letting the money sit for 4 more years until she is 21 and rolling the whole thing over into my RRSP if neither child requires it.

My biggest goal out of this is to educate both children on how I have been saving this money. My withdrawal strategy for the funds and how I built it up.

As for my son he is 18 and making 1200 take home every two weeks living at home for us. Now is the most important time than ever to educate him and get the habits built to lock in TFSA and RRSP plans. AND to not let him buy a new vehicle which my biggest mistake ever for wasting cash.

Just so you know, the CESG does not have to be assigned 50% to each child.  In a family plan, either child can take all of it, as long as it is not over an individual lifetime limit of $7.2k each of CESG money.   (and a further max of $5000 EAP in the first term) 

You can take our your original contribution at any time after you get your daughter's final CESG money (if you top it off this year) into the account.

I think you son can ask for a EAP (CESG and AIP) in the same year that he is claiming the full time or part time tuition fees / tuition tax credits, even if school has been over for a couple of months now.  Ask your institution what proof they need, likely just his registration receipt.

kayvent

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Re: RRSP vs TFSA
« Reply #22 on: August 14, 2017, 08:44:08 PM »
One aspect I have not seen mentioned is that RRSP contributions lower your Adjusted Gross Family Net Income. This number is used as the input for more formulae than just income tax calculation.

For example, the AGFNI is used to calculate CCB benefits. Imagine married doctors with small children that make 220K as a family. They'd qualify for 0$ in CCB payments if they contributed nothing to their RRSPs but they would qualify for about 2000$/year in CCB payments if they made their maximum contribution (18% of gross income). Lower down the income scale, this bizarre trend continues. A 70K family with two small children making 20k in RRSP contributions1 would see a 2K bump in CCB benefits.

1 Assume they had leftover contribution room
« Last Edit: August 14, 2017, 08:45:40 PM by kayvent »

Goldielocks

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Re: RRSP vs TFSA
« Reply #23 on: August 14, 2017, 09:04:43 PM »
Kayvent, the formulas must have changed.   We have never made close to $220k in income, and have maxed out RRSP many years, and have seen ZERO CCB  since 2003 when our eldest turned 3 (other than the $600 UCB from harper which was not income tested)....

...!....?

Your point is correct, I just can't believe a family with $220k income and maxed out RRSPs would see any CCB.


Prairie Stash

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Re: RRSP vs TFSA
« Reply #24 on: August 15, 2017, 10:04:31 AM »
Kayvent, the formulas must have changed.   We have never made close to $220k in income, and have maxed out RRSP many years, and have seen ZERO CCB  since 2003 when our eldest turned 3 (other than the $600 UCB from harper which was not income tested)....

...!....?

Your point is correct, I just can't believe a family with $220k income and maxed out RRSPs would see any CCB.
Your AGI wtih one child is greater than 157,187, your household income is over $200k. Your eldest child is now 17, age makes the difference. If you have 2 then your AGI is over $170k.

At 65,000 with one child they phase out $2450, the remainder is phased out up to $188k, for a small child.  If the child is over 6, the max is $157k. I linked the calculator to play with.
https://apps.cra-arc.gc.ca/ebci/icbc/

Kayvent is correct, with small children (under 6) they would get a payment. Or multiple children over 6, or anything more than one child really.

Canada Child Benefit Phase-out Rates and Adjusted Family Net Income Thresholds
Number of children (for phase-out rates)   Phase-Out Rates (%)
          $30,000 to $65,000             Over $65,000
1 child     7.0                               3.2
2 children   13.5                               5.7
3 children   19.0                               8.0
4 or more  23.0                               9.5

So the RRSP contribution is worth more, depending on the number of children, according to the numbers above. At incomes over $200K (ballpark), it stops being relevant.

This also bolsters the case for taxable accounts. As outlined earlier, if I keep my household expenses below $40,000, my taxable income is going to be below $30,000. I'll receive the maximum benefit while my kids are under 18. So while I would get an additional 5.7% now in CCB on my RRSP, I get 13.5% later on if I avoid pulling too much from RRSP. I need to cap my AGI (household) at $30k, claw backs start at 13.5% otherwise.

Right before FIRE, RRSP can lose compared to the taxable account! Every situation is unique, tailor this advice to your own circumstances.

Goldielocks

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Re: RRSP vs TFSA
« Reply #25 on: August 15, 2017, 10:36:07 AM »
I am glad they changed the cut of limits, then... although we definitely missed out and could have use the money back then.
   
With one kid under 6 and one in elementary, I remember we were cut off previously at around $80k-$90k of AGI...   It wasn't all bad, because they introduced the new sports and arts activities tax credits around then, which was worth up to $300 per year.

kayvent

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Re: RRSP vs TFSA
« Reply #26 on: August 15, 2017, 10:52:31 AM »
Kayvent, the formulas must have changed.   We have never made close to $220k in income, and have maxed out RRSP many years, and have seen ZERO CCB  since 2003 when our eldest turned 3 (other than the $600 UCB from harper which was not income tested)....

...!....?

Your point is correct, I just can't believe a family with $220k income and maxed out RRSPs would see any CCB.

Just to note, the CCB was introduced in July 2016 and replaced both the CCTB and UTCB. The CCTB had the same error quirk in its formula but because it was less generous to high-income family, the clawback wasn't as noticeable.

I was a bit disgusted with the 2016 budget because it had so many benefits for families making 100k-200K. The theoretical case I like to point out is that a couple making 56k each (112K in total) makes too little for the Middle Class Tax Cut but two individuals making 100K each get the maximum tax cut. Sorry for the rant.

Prairie Stash

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Re: RRSP vs TFSA
« Reply #27 on: August 15, 2017, 11:04:37 AM »
I am glad they changed the cut of limits, then... although we definitely missed out and could have use the money back then.
   
With one kid under 6 and one in elementary, I remember we were cut off previously at around $80k-$90k of AGI...   It wasn't all bad, because they introduced the new sports and arts activities tax credits around then, which was worth up to $300 per year.
Its a lot more generous now, every year it gets easier (tax wise) to be parents it seems. Now we have CCB of $5400/child, imagine how easy FIRE could be with a paid off home and 2 kids. If I save enough for FIRE, the CCB will pay the RESP and leave $2900/child, that's a big chunk of change. It takes all the risk off my children when I FIRE, they'll have fully funded educations regardless of how much I screw up.

I joked once that if we had 8 we could FIRE today, it didn't go over well...apparently having paid employment is easier.

daverobev

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Re: RRSP vs TFSA
« Reply #28 on: August 15, 2017, 02:35:25 PM »
I am glad they changed the cut of limits, then... although we definitely missed out and could have use the money back then.
   
With one kid under 6 and one in elementary, I remember we were cut off previously at around $80k-$90k of AGI...   It wasn't all bad, because they introduced the new sports and arts activities tax credits around then, which was worth up to $300 per year.
Its a lot more generous now, every year it gets easier (tax wise) to be parents it seems. Now we have CCB of $5400/child, imagine how easy FIRE could be with a paid off home and 2 kids. If I save enough for FIRE, the CCB will pay the RESP and leave $2900/child, that's a big chunk of change. It takes all the risk off my children when I FIRE, they'll have fully funded educations regardless of how much I screw up.

I joked once that if we had 8 we could FIRE today, it didn't go over well...apparently having paid employment is easier.

It's far too generous, IMHO. I dislike bribery, and particularly bribing people who should be able to afford things already/are presumably educated enough to make sensible choices (ie, if they are making enough money to be earning household > $100k).

I'm a (well... my children are, ha) beneficiary, so I would lose out if they cut it back. I hope they do.

At the moment, we're doing some money into an ITF - and not quite enough to hit the maximum $500 grant into an RESP. If things continue to go well for the next few years I may cut the RESP contribs some. Just seems overkill to max it, honestly, assuming the market performs somewhat sanely.

Though, of course, it may be that the RESP is better than the ITF, I'd kind've like to hedge against them being entrepreneurs or whatnot.

Over the long term, getting money into their names for tax purposes early is good, I think. Better than being in mine, anyway.
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