Author Topic: Brand new and learning. Dealing with student loan debt and investing in RRSP..  (Read 4246 times)

ptgearguy

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Hi guys, I am a working professional as a physiotherapist in Canada. I currently am at 54000 in student loan debt and am working hard to pay that down ASAP. Now I was wondering is if I should put money into RRSP at the same time. It will delay the speed of the loan but I could get some tax breaks. I gross approximately 80k and am single.

Second, I really do not understand how RRSP really work and the best types to invest in. Im looking for a good source of information to help me with that when the time comes.

I really appreciate any help I can get.

nobodyspecial

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You can put 18% of your salary in an RRSP each year and you get that amount knocked off your income as far as tax is concerned.
You pay tax when you take it out - although you can take it out at any time.

If you didn't contribute the maximum then any extra accumulates for future years. So there is a strategy of wait until you are a higher earner  where the tax saving is bigger, but you will have lost out on any gains your investments would have made.

It can be invested in stocks/bonds/anything - take a look at Tangerine's investments, probably simpler than doing it yourself and is only 1% fee compared to most bank's 2.5%. You can transfer it to another holder later.  See canadiancouchpotato for more details.
« Last Edit: November 25, 2015, 06:52:41 AM by nobodyspecial »

lostamonkey

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What's the interest rate on your student loan debt?
What province do you live in?

Once you answer these two questions we will be able to provide recomendations as to if you should contribute to an RRSP first or pay off your student loans.

Heckler

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Start here while you pay off your loans.   Read every article he's written, and try to find his book "Guide to the perfect portfolio".

http://canadiancouchpotato.com/category/indexing-basics/



http://canadiancouchpotato.com/resources/

ptgearguy

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What's the interest rate on your student loan debt?
What province do you live in?

Once you answer these two questions we will be able to provide recomendations as to if you should contribute to an RRSP first or pay off your student loans.

I live in BC and interest is 5.5% currently. Thank you for all the response guys

nobodyspecial

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I live in BC and interest is 5.5% currently.
Wow 5.5% on a government loan - I must start a government !

ptgearguy

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I live in BC and interest is 5.5% currently.
Wow 5.5% on a government loan - I must start a government !

Likewise...too bad I decided to be a physiotherapist eh? :)

Goldielocks

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If you are making less than $60,000 per year, consider investing in TFSA to the maximum before adding to RRSPs.

RRSPs only defer paying tax until retirement, so work best at higher income levels now, and lower rates in retirement.

For loans, keep paying on time then refinance to lower rate when possible.  Until then you have a few deferment options if Canada Student Loan if you run into problems and every once in a while the government forgives a part of those loans, too.

ptgearguy

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If you are making less than $60,000 per year, consider investing in TFSA to the maximum before adding to RRSPs.

RRSPs only defer paying tax until retirement, so work best at higher income levels now, and lower rates in retirement.

For loans, keep paying on time then refinance to lower rate when possible.  Until then you have a few deferment options if Canada Student Loan if you run into problems and every once in a while the government forgives a part of those loans, too.

Dont many rrsp's have higher growth than TFSA though? Second, I could also use the return from my income tax to further invest or pay debt..

Mmm_Donuts

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RRSPs and TFSAs do not have "growth" in and of themselves. They are investment vehicles. You can invest in anything you want, in either vehicle. You can have cash or GICs in them if you wanted. They are just types of registered accounts that you can open with your bank.

The first step is to open the accounts. Open a self directed TFSA and RRSP account, if you haven't done so already. Don't let the bank sell you anything! Self directed means you can choose your own things to invest in. The bank will try to sell you their expensive mutual funds if you tell them you don't know what you're doing.

But it's very easy to learn. Check out the couch potato link above for starters. You basically want to start out with ETFs and index funds -- these are the simplest way to get into investing, where you're buying funds that track the stock market, and have very low fees.

If investing small amounts at a time, another option instead of a bank is questrade, because you can buy ETFs for free. (Most other cdn banks charge 10$ per buy or sell.)

Couch potato has articles on asset allocation, where you can learn about what types of funds go best in what account. Typically bonds are best in RRSPs, and higher growth funds are best in TFSA, because you won't pay tax on the growth. There are more details but that is a good start.

You're making 80k so I would start with the rrsp. If you get a tax refund, you can put that into your TFSA. Or pay off debt.
« Last Edit: November 26, 2015, 04:56:47 AM by Mmm_Donuts »

ptgearguy

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RRSPs and TFSAs do not have "growth" in and of themselves. They are investment vehicles. You can invest in anything you want, in either vehicle. You can have cash or GICs in them if you wanted. They are just types of registered accounts that you can open with your bank.

The first step is to open the accounts. Open a self directed TFSA and RRSP account, if you haven't done so already. Don't let the bank sell you anything! Self directed means you can choose your own things to invest in. The bank will try to sell you their expensive mutual funds if you tell them you don't know what you're doing.

But it's very easy to learn. Check out the couch potato link above for starters. You basically want to start out with ETFs and index funds -- these are the simplest way to get into investing, where you're buying funds that track the stock market, and have very low fees.

If investing small amounts at a time, another option instead of a bank is questrade, because you can buy ETFs for free. (Most other cdn banks charge 10$ per buy or sell.)

Couch potato has articles on asset allocation, where you can learn about what types of funds go best in what account. Typically bonds are best in RRSPs, and higher growth funds are best in TFSA, because you won't pay tax on the growth. There are more details but that is a good start.

You're making 80k so I would start with the rrsp. If you get a tax refund, you can put that into your TFSA. Or pay off debt.

Perfect, I will do some reading on the couch potato and get that ball rolling. Thank you so much for pointing me in the right direction. For now Ill just put my money into my debt and I will start investing once I gain a little more knowledge. Have a wonderful day

nobodyspecial

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Summary:
Easiest way is to go to your bank and pay 2.5%
Next easiest is Tangerine (ie. ING, ie. really Scotiabank) for 1% they have a choice of plans with a mix of Canadian/US/international stocks and bonds

But the Mustachian way is to open an account at an online broker (eg Questrade) and setup a TFSA and RRSP.
Buy Vanguard ETFs, there is no fee to buy and you pay typically 0.2%/year fee, choose some mix from CanadianCouchPotato or just buy VXC


RichMoose

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Hi guys, I am a working professional as a physiotherapist in Canada. I currently am at 54000 in student loan debt and am working hard to pay that down ASAP. Now I was wondering is if I should put money into RRSP at the same time. It will delay the speed of the loan but I could get some tax breaks. I gross approximately 80k and am single.

Second, I really do not understand how RRSP really work and the best types to invest in. Im looking for a good source of information to help me with that when the time comes.

I really appreciate any help I can get.

For the time being, I would focus on reducing expenses as much as possible while paying down your debt aggressively. This will give you a guaranteed 5.5% return on your money. That's darn good at a time when the next most guaranteed investment, Canadian government bonds, return around 1.5%.

Do some more research into your options for investment, account types (RRSP vs TFSA), and so on. Here are some good resources that are relatively easy to understand. Just go into the archives of these blogs and they contain valuable information for new investors.

http://canadiancouchpotato.com/
http://retirehappy.ca/
http://www.boomerandecho.com/
http://www.myownadvisor.ca/

This next one is American, but I highly recommend reading the Stock Series from beginning to end. Although Canadians can't directly invest in Vanguard accounts, as previous posters mention we can open Questrade online brokerage accounts and purchase Vanguard ETFs for low cost equivalent investments.

http://jlcollinsnh.com/stock-series/

Retire-Canada

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Lots of ways to skin this. Here is a possibility:

- you make $80K gross
- say your after tax income is $60K
- live off $30K
- save and invest $30K
--- $10K to RRSP
--- $8K to TFSA
--- $12K to student loans
- any tax return $$ put onto your student loans
- if TFSA goes back to $5500 drop the extra $$ onto your student loans [you may have enough TFSA contribution room built up to keep adding $8K/yr for a while]
- as you get raises don't inflate your spending just pay the loan down faster

This plan does a few things:

- forces you to hit a high savings goal
- gets you started investing in RRSP and TFSA so you can learn your lessons early
- gets your student loan paid off in a reasonable time
- your TFSA is fairly liquid so if you do need $$ for something you have an option

Areas for improvement:

- if possible get that loan interest rate reduced
- if not possible see if you can get a lower rate from the bank to pay off the student loan now and then repay the bank loan/LOC

okits

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If you didn't contribute the maximum then any extra accumulates for future years. So there is a strategy of wait until you are a higher earner  where the tax saving is bigger, but you will have lost out on any gains your investments would have made.

You can contribute to your RRSP and hold off claiming the deduction (typically if you anticipate higher-earning years ahead.)  So your investments can start growing right away, but you use the deduction when most advantageous to you (just do not contribute more than your total contribution room and you are good.)

nobodyspecial

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Thanks - didn't know that.
I'm one of those immigrants taking yur jawbs - so I have only been a high earner / high rate tax payer.

ps. Playing with one of those tax calculators, if my income in FIRE is from capital gains on stocks and Canadian dividends I seem to pay no tax ?
« Last Edit: November 29, 2015, 02:33:05 PM by nobodyspecial »

okits

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Thanks - didn't know that.
I'm one of those immigrants taking yur jawbs - so I have only been a high earner / high rate tax payer.

ps. Playing with one of those tax calculators, if my income in FIRE is from capital gains on stocks and Canadian dividends I seem to pay no tax ?

I love people who pay lots of taxes into our system. :) 

I'm in Ontario and in the lower tax bracket the eligible dividend tax credit is worth more than the tax you'll pay, so you're effectively negatively taxed on those if you're lower income.  Perhaps it's similar in B.C.?  (And you do "pay tax" on that dividend income, but at the corporate level, before it is distributed to you.  I don't consider it a free lunch.)

Retire-Canada

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ps. Playing with one of those tax calculators, if my income in FIRE is from capital gains on stocks and Canadian dividends I seem to pay no tax ?

If those CG and dividends were earned inside a RRSP account you end up paying for them at your marginal income tax rate. Not at the prefered tax rate for those income streams if they were held in a non-registered account.  It's one of the downsides of the RRSP.