Author Topic: Canada - Is my income to low to consider contributing to an RRSP?  (Read 2210 times)

West996

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I apologize if this question is extremely basic. I have tried to research the information myself including searching through this forum but I want to be sure.

My wife and I are about to max out our TFSA. I just started investing a few months ago when I sold my house for a decent windfall and moved into an apartment with her.

We each make 60k a year. I have about $120k in the bank that I am trying to figure out how to invest. Our TFSA's will be maxed by the end of next year through monthly contributions. This might be unrealistic but I hope to retire in about 12 years very modestly and hopefully have enough passive income at that point to make it happen.

Do I dump the rest of the money I just have sitting in the bank right now and max our RRSP accounts? We are investing through WealthSimple right now. (I know it's not as good as doing it myself through Quest Trade but I'm working on that.) While I educate myself and build up the courage to do it myself, would it be a bad thing to throw that liquid cash into a WealthSimple RRSP fund? I don't currently have anything in an RRSP.

RichMoose

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #1 on: December 11, 2017, 01:11:47 PM »
I apologize if this question is extremely basic. I have tried to research the information myself including searching through this forum but I want to be sure.

My wife and I are about to max out our TFSA. I just started investing a few months ago when I sold my house for a decent windfall and moved into an apartment with her.

We each make 60k a year. I have about $120k in the bank that I am trying to figure out how to invest. Our TFSA's will be maxed by the end of next year through monthly contributions. This might be unrealistic but I hope to retire in about 12 years very modestly and hopefully have enough passive income at that point to make it happen.

Do I dump the rest of the money I just have sitting in the bank right now and max our RRSP accounts? We are investing through WealthSimple right now. (I know it's not as good as doing it myself through Quest Trade but I'm working on that.) While I educate myself and build up the courage to do it myself, would it be a bad thing to throw that liquid cash into a WealthSimple RRSP fund? I don't currently have anything in an RRSP.

It depends on the province and your annual expenses. Simply put, you benefit from an RRSP if your income right now is in a higher tax bracket than your required income in the future. You also want to make sure you get the RRSP refund right away and reinvest this money. Use a form T1213 to get taxes reduced at the source.

Typically you want to invest in a TFSA first, RRSP second, and non-registered investment account last. So fill both your TFSAs now with that cash.

If your RRSP room is large, you may want to stagger contributions between this year and next to make sure you don't contribute to an RRSP when in the lower tax bracket. In the meantime, invest in the non-registered account.

anisotropy

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #2 on: December 11, 2017, 01:20:34 PM »
The following is not an advice, it's just my opinions.

rrsp is good (intended?) for deferring taxes, ie, you pay the taxes when you are in a lower bracket, for example, in retirement. I am sure you knew this already.

Bear in mind when you withdraw, the money will be treated as earned income and taxed at your marginal rate, as opposed to capital gains and dividends from a non-sheltered account.

While you don't "have" to draw out a whole bunch of money at once from the rrsp, once you live past 71 the mandatory rrif withdrawal will be enforced and you could wind up paying more than you had originally thought.

Most people will benefit from having a rrsp, but I believe it's really a case-by-case kind of thing. If your passive income (cap gain & divi) exceeds 70k after you retire then having a rrsp might actually make you pay more taxes in the long run, but again, it depends.

If you choose to start a rrsp, it might be beneficial to withdraw from it as soon as you retire, not much, but just below the individual exemption amount every year.

we are currently withdrawing 5-10k every year from our low 6 digit rrsp, because if we leave it untouched, and if we live to 71, we will be surrendering many many k ( >100K) to the cra.

These are not advices, just my opinions.

Retire-Canada

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #3 on: December 11, 2017, 03:22:09 PM »
This might be unrealistic but I hope to retire in about 12 years very modestly and hopefully have enough passive income at that point to make it happen.

How much are you saving/investing per year now? How much do you plan to spend in retirement?

West996

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #4 on: December 11, 2017, 05:36:42 PM »
This might be unrealistic but I hope to retire in about 12 years very modestly and hopefully have enough passive income at that point to make it happen.

How much are you saving/investing per year now? How much do you plan to spend in retirement?

Thanks everyone for the info thus far. Apologies for not supplying all the required info up front.

Right now my wife and I are each investing $1000 per month.

My Wife's parents are also multiple property landlords and have agreed to help us purchase and rent out a property in the town they live in and then act as property managers for us. So I'm keeping around 50k around for that, we're still on the look out for a good property.

I don't have a clear plan as to how much we plan to spend in retirement. I want to retire early and have lofty goals of being able to live the mustachian way but I am not 100% sure how much of a mustache my wife will agree to grow. ;)

I knew it seemed as simple as save now to reinvest and take out later when you are at a lower bracket. It sounds like for the most part I'm better off going into RRSP now before non-registered. Even if I am at the same bracket when I take it out I've invested the tax savings in the mean time right?

Retire-Canada

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #5 on: December 11, 2017, 05:56:06 PM »
I don't have a clear plan as to how much we plan to spend in retirement. I want to retire early and have lofty goals of being able to live the mustachian way but I am not 100% sure how much of a mustache my wife will agree to grow. ;)

Well until you know how much you can optimize your spending you can start planning based on what you are spending now since you know that does work for you.

If you have $120K saved so far and as a couple you have $24K/yr to invest based on a 7% after inflation return you'll have ~$727K after 12yrs. At 4%WR that gives you ~$29K/yr before tax to spend in retirement. That's something like ~$26K/yr after taxes depending how you split the income and what deductions you can apply for.

Currently you are making $60K/yr each which in ON [not sure where you live so I guessed] gives you ~$46K/yr after tax each. So you are spending [$46k - $12K] x 2/yr = $68K/yr after taxes.

These are just some general numbers/calculations, but at first glance there is a pretty big gap between your current spending and your likely early retirement income. Eventually you'll also get CPP/OAS...how much that helps depends on how old you'll be when you retire and your contribution history for CPP. Maybe some of that "spending" is a mortgage which will get paid off by the time you retire?

Anyway...hopefully this gives you some idea how to ballpark your situation and you can refine it based on more detailed information.
« Last Edit: December 11, 2017, 06:44:56 PM by Retire-Canada »

GreatLaker

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #6 on: December 11, 2017, 06:41:50 PM »
As others have said it really depends on your tax rate when contributing compared to your tax rate when withdrawing, which will require estimating and some flat out guessing.

Here are a couple of good resources that will explain it better than I can:
http://www.finiki.org/wiki/TFSAs_versus_RRSPs
http://www.taxtips.ca/calculator/tfsavsrrsp.htm
(There is lots of other good information at both of those sites.)

West996

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #7 on: December 12, 2017, 09:48:51 AM »
I don't have a clear plan as to how much we plan to spend in retirement. I want to retire early and have lofty goals of being able to live the mustachian way but I am not 100% sure how much of a mustache my wife will agree to grow. ;)

Well until you know how much you can optimize your spending you can start planning based on what you are spending now since you know that does work for you.

If you have $120K saved so far and as a couple you have $24K/yr to invest based on a 7% after inflation return you'll have ~$727K after 12yrs. At 4%WR that gives you ~$29K/yr before tax to spend in retirement. That's something like ~$26K/yr after taxes depending how you split the income and what deductions you can apply for.

Currently you are making $60K/yr each which in ON [not sure where you live so I guessed] gives you ~$46K/yr after tax each. So you are spending [$46k - $12K] x 2/yr = $68K/yr after taxes.

These are just some general numbers/calculations, but at first glance there is a pretty big gap between your current spending and your likely early retirement income. Eventually you'll also get CPP/OAS...how much that helps depends on how old you'll be when you retire and your contribution history for CPP. Maybe some of that "spending" is a mortgage which will get paid off by the time you retire?

Anyway...hopefully this gives you some idea how to ballpark your situation and you can refine it based on more detailed information.

I live in Toronto, Ontario. Our household is Myself, my wife and her daughter (my step-daughter).

We did a spreadsheet just the other week, I'll attach it here for the real details. Much easier then vaguely describing our finances. We are far from mustachian yet, but we are working on it. Don't be nice to me, all criticism is welcome.

RichMoose

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #8 on: December 12, 2017, 12:59:59 PM »
I knew it seemed as simple as save now to reinvest and take out later when you are at a lower bracket. It sounds like for the most part I'm better off going into RRSP now before non-registered. Even if I am at the same bracket when I take it out I've invested the tax savings in the mean time right?

Yes, you're investing the tax savings but why fool yourself into the illusion of having more money than you really have and work hard to fund the government.

If you're in the 25% tax bracket making deposits, you invest $1,066 a month (including the $266 tax refund) earning 6% for 30 years, and then you withdraw in the 25% tax bracket you are basically seeing no gain from the tax savings on your deposits. Yes, your account looks big at $1,072,000, but after deducting the embedded 25% tax liability, your net account value is still $804,495.

Meanwhile, if you invest just $800 (no tax refund) in a TFSA for 30 years and you withdraw at 0% tax, your net account value there is $804,495.

However, if you contribute to RRSP while in the 25% tax bracket, same $1,066 a month for 30 years, and you withdraw at a 15% tax rate, you are quite a bit better off. Your net account value would be $911,760, better than the TFSA and non-registered account.

Use this calculator to get an idea of your own numbers: https://www.raymondjames.ca/en_ca/personal_investing/investor_resources/calculator-rrsp-tfsa.aspx

West996

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #9 on: December 12, 2017, 04:03:34 PM »
I knew it seemed as simple as save now to reinvest and take out later when you are at a lower bracket. It sounds like for the most part I'm better off going into RRSP now before non-registered. Even if I am at the same bracket when I take it out I've invested the tax savings in the mean time right?

Yes, you're investing the tax savings but why fool yourself into the illusion of having more money than you really have and work hard to fund the government.

If you're in the 25% tax bracket making deposits, you invest $1,066 a month (including the $266 tax refund) earning 6% for 30 years, and then you withdraw in the 25% tax bracket you are basically seeing no gain from the tax savings on your deposits. Yes, your account looks big at $1,072,000, but after deducting the embedded 25% tax liability, your net account value is still $804,495.

Meanwhile, if you invest just $800 (no tax refund) in a TFSA for 30 years and you withdraw at 0% tax, your net account value there is $804,495.

However, if you contribute to RRSP while in the 25% tax bracket, same $1,066 a month for 30 years, and you withdraw at a 15% tax rate, you are quite a bit better off. Your net account value would be $911,760, better than the TFSA and non-registered account.

Use this calculator to get an idea of your own numbers: https://www.raymondjames.ca/en_ca/personal_investing/investor_resources/calculator-rrsp-tfsa.aspx

I did the calculator but don't really understand it. I've attached an image.

My question though was less about comparing TFSA to RRSP and more about RRSP vs NREG. I'm we are about to Max our TFSA and I don't know what to do with the the rest of my money. I always thought RRSP was useless to me because I've always made so little money. Up until a few years ago I was making around 40k a year gross. Now I'm at 60k a year gross and was wondering if that is still too low to benefit from an RRSP.

I guess the real answer is, only if you can drop at least one tax bracket when you are taking it out. So it will only be good to withdrawl from if my income is less then $46k a year.

Retire-Canada

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #10 on: December 12, 2017, 05:07:40 PM »
I guess the real answer is, only if you can drop at least one tax bracket when you are taking it out. So it will only be good to withdrawl from if my income is less then $46k a year.

Not necessarily:

1. As Mr. RM posted above even if you put money in a RRSP at a marginal rate of 25% and pulled it out at a marginal rate of 25% you get the same tax free growth as a TFSA.

2. Your RRSP contributions are always going to be a deferment of being taxed your highest marginal rates. But your RRSP withdrawals will be taxed at a variety of marginal rates in retirement so even if you put money in a RRSP at at margin rate of 25% and your highest withdrawal marginal rate was also 25% a lot of the money you withdraw will be taxed at less than that top marginal rate.

As an example of point #2:
 
- for someone in ON making $60K/yr the top marginal tax rate is ~30%
- for someone in ON living on $60K/yr of RRSP/RRIF your average tax rate is 19%

So if even if your income level stays the same you can still benefit from some tax deferment via a RRSP in retirement.

West996

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #11 on: December 14, 2017, 06:42:46 AM »
I guess the real answer is, only if you can drop at least one tax bracket when you are taking it out. So it will only be good to withdrawl from if my income is less then $46k a year.

Not necessarily:

1. As Mr. RM posted above even if you put money in a RRSP at a marginal rate of 25% and pulled it out at a marginal rate of 25% you get the same tax free growth as a TFSA.

2. Your RRSP contributions are always going to be a deferment of being taxed your highest marginal rates. But your RRSP withdrawals will be taxed at a variety of marginal rates in retirement so even if you put money in a RRSP at at margin rate of 25% and your highest withdrawal marginal rate was also 25% a lot of the money you withdraw will be taxed at less than that top marginal rate.

As an example of point #2:
 
- for someone in ON making $60K/yr the top marginal tax rate is ~30%
- for someone in ON living on $60K/yr of RRSP/RRIF your average tax rate is 19%

So if even if your income level stays the same you can still benefit from some tax deferment via a RRSP in retirement.

Oh right, I"m forgetting that you are taxed on a scale from low to high. Sometimes I think it all gets taxed at the ~30% but that's not true. Thanks a lot everyone this thread has helped me a lot.

Ok so if I wanted to invest 50k into RRSP right now. Should I put it all into my RRSP or should I split it between my wife and I? Does it matter?
« Last Edit: December 14, 2017, 07:48:43 AM by West996 »

RichMoose

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #12 on: December 14, 2017, 04:57:25 PM »
Ok so if I wanted to invest 50k into RRSP right now. Should I put it all into my RRSP or should I split it between my wife and I? Does it matter?

Generally you want to plan your finances so that in retirement your income is evenly split between spouses. This makes the income the most tax efficient and reduces the likelihood of clawbacks for certain senior entitlement programs (think OAS for example).

However, during your working years, you want the higher income spouse to pay all living expenses and contribute to all registered accounts (using a Spousal RRSP if necessary). The lower income spouse should invest everything in TFSA first then in a non-registered account. Where the higher income spouse earns a lot more, they can make spousal loans to the lower income spouse for investing in a non-registered account.

Since it appears both of your incomes are currently quite even, it probably would be best to contribute to each person's RRSP evenly.

BrakeForTurtles

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #13 on: December 14, 2017, 05:32:30 PM »
A couple of things jump out at me
- If you think you're likely to increase your earning potential over the next few years you can defer claiming your RRSP contribution and have it count to a later year. I'll be doing this as my income this year was <$30K so I'd rather wait until I'm settled in a full time job and count my contribution for that year (which hopefully will be 2018). If your income looks steady then this isn't worth doing.
- Would you be eligible for the first home buyers RRSP withdrawal thingy? If you have the contribution room and one of you has less than $25K it might be worth topping that RRSP up (either through individual or spousal RRSP). My SO and I kinda screwed ourselves this year because he maxed out his RRSP early on, then we decided to buy a house next year. I have way less than $25K in my RRSP and he has way more, so it would have made sense for him to top up a spousal RRSP that I could draw from for the down payment.

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #14 on: December 15, 2017, 09:47:08 AM »
A couple of things jump out at me
- If you think you're likely to increase your earning potential over the next few years you can defer claiming your RRSP contribution and have it count to a later year.

I have read several times that this is a bad option. Here's a good summary from Reddit: https://www.reddit.com/r/PersonalFinanceCanada/comments/2wnywd/should_you_delay_claiming_your_rrsp_contributions/

West996

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #15 on: December 20, 2017, 12:57:31 PM »
Ok so I signed up for a Questrade account. (I have not funded it yet.)

I am going to give my spouse 25k, she will probably invest this through wealthsimple into her RRSP.

I am debating also investing through wealthsimple. It will cost $125 a year based on their 0.5% fee (not including the actual fund fees). Or I can do it through Questtrade, I've just never used it before and am a little hesitant to do it on my own. I know it is a small amount to most people here I am just not sure I want to worry about the re-balancing and everything on my own vs doing it through wealthsimple.

If I did that though my total amount in wealthsimple is approaching 60k. Now we are talking about paying wealthsimple $300 a year to do this for me. If I did a couchpotato portfolio of 3 funds in questtrade between rrsp and tfsa I would still have to do say.. 6 trades a quarter? Six months? Depending on how often I wanted to add. Isn't that more expensive?

So I'm thinking of just throwing the 25k at wealthsimple into an rrsp account, doing the same for my wife and calling it a day for a year or two. (Still contributing $1000 a month.)

Maybe once our portfolios hit 100k it will be more worth getting out of wealthsimple? That would be 400 a year at that point? Hrm, maybe not even then.

Retire-Canada

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #16 on: December 20, 2017, 01:01:33 PM »
I am debating also investing through wealthsimple. It will cost $125 a year based on their 0.5% fee (not including the actual fund fees). Or I can do it through Questtrade, I've just never used it before and am a little hesitant to do it on my own. I know it is a small amount to most people here I am just not sure I want to worry about the re-balancing and everything on my own vs doing it through wealthsimple.

Rebalancing will take you less than 15mins/year whether you have $25K, $250K or $2.5M invested.

RichMoose

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Re: Canada - Is my income to low to consider contributing to an RRSP?
« Reply #17 on: December 20, 2017, 01:04:31 PM »
Questrade is super easy to use. They've got some amazing how-to videos on their site and Youtube channel which are pretty dummy-proof. Watch the videos on buying using limit orders and you can't go wrong.