Author Topic: RRSP am I contributing too much?  (Read 641 times)

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
RRSP am I contributing too much?
« on: February 02, 2019, 07:42:54 PM »
My annual income is $45,000 and I'm 35.

I currently have a work one which has about $22,000. 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!

ILikeDividends

  • Bristles
  • ***
  • Posts: 439
Re: RRSP am I contributing too much?
« Reply #1 on: February 02, 2019, 10:44:42 PM »
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!
This is a high quality kind of problem to have!

I'm not a Canadian, but were I in your shoes, I certainly wouldn't go out of my way to reduce my contributions to either account.  Max them to the max!

I have no familiarity with Canadian tax laws, but I'll go out on a limb and assume they are bracketed and progressive; similar to the US.  If so, in retirement, you can balance your distributions from the RRSP and TFSA to manage your marginal tax bracket.  Seems the more you have of both, the better off you'll be.

Does Canada have any conversion (or recharacterization) options to pay taxes on portions of your RRSP, and then convert the after-tax net to a TFSA?  That would be sweet, if possible; especially if you expect to retire into a higher tax bracket than you are in right now.
« Last Edit: February 02, 2019, 11:02:54 PM by ILikeDividends »

JAYSLOL

  • Handlebar Stache
  • *****
  • Posts: 1072
Re: RRSP am I contributing too much?
« Reply #2 on: February 02, 2019, 11:31:57 PM »
Canadian here, similar age and income, Most of my savings goes in the TFSAs, and I've been contributing only $3k/year to my RRSP for a few years now, but after doing some rough math charting what I pay in taxes now, projected account values by FI and resulting taxable income in retirement I figure I can at least double what I'm contributing now without meaningfully impacting what I pay in tax at FIRE and be able to get there a little quicker.  I'm definitely upping the contributions this year to at least $6k.  I think the right balance for me at least is around 30% RRSP, 70% TFSA.  If you are maxing your TFSA, I would then max the RRSP before a non-registered account if I were you. 
« Last Edit: February 02, 2019, 11:49:42 PM by JAYSLOL »

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: RRSP am I contributing too much?
« Reply #3 on: February 03, 2019, 12:02:45 PM »
Thank you for the responses. It came to my mind last night that even if I will be potentially making more in retirement, it will still be in the same tax bracket I currently am in.

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1671
Re: RRSP am I contributing too much?
« Reply #4 on: February 04, 2019, 08:22:41 AM »
RRSP or Taxable Account is the question to answer. Are you certain that RRSP is better than a taxable account? Its a nuanced question, tailored to an indivdual so a one size fits all answer doesn't work.

Too much in an RRSP is hard to achieve, I need at least $300,000 before that becomes a concern. So no matter what, you have a long time before it matters too much. I want to start by saying, you should have 3 accounts, not two, since you fall into the realm of maxed out TFSA.

Lets make the basic assumption that you will have a balanced portfolio wth some amount (whatever you decide) of CDN ETF that have eligible dividends. At your tax bracket, canadian dividends have no tax in most provinces...pretty cool! Gains are taxable, losses provide a tax credit. At some future point you can shift those into RRSP if you feel it's worthwhile, or keep them in a taxable account forever. In a bear market, a taxable account always beats out the RRSP, in a bull market it depends on time frame.

Looking at my wifes dividends last year, in her taxable account, she's low income so she won't pay taxes on them, just like a TFSA Actually, she gets a small credit, reducing her taxes by a few dollars). We also sold stock last week to get some capital gains in 2019, she's unemployed so its tax free ($10,000 in gains, no tax, I'll fund her TFSA with it). Her taxable account is basically a TFSA without limits.

The biggest question of course; what province do you live in? In a negative tax rate province, if you have a lower income (<$45k), then a CDN ETF with eligible dividends will achieve a better after tax return than a TFSA or RRSP in a buy/hold strategy.

https://www.taxtips.ca/
Check out your tax rates on taxtips for your province.

Confused? most people are when it comes to taxable accounts. The simple strategy is to forget about it and recommend RRSP.

RRSP only are advantagous if you are in a lower tax bracket in retirement than in contribution. In my case of early retirement I plan on drawing $10,000/year from my RRSP, below the basic deduction, so I will meet that criteria (you would too). That is why I can have $250-$300k without worry in my RRSP. You see, I play all three accounts to my advantage, theres no such thing as a single best account for every situation.

FrugalToque

  • Global Moderator
  • Pencil Stache
  • *****
  • Posts: 521
  • Location: Canada
Re: RRSP am I contributing too much?
« Reply #5 on: February 04, 2019, 08:51:25 AM »
My annual income is $45,000 and I'm 35.

I currently have a work one which has about $22,000. 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!

What province are you in?  That affects what your marginal tax rate is at the $45k level.

But $45k puts you in a fairly low marginal tax rate, so you have to compare that to what you're expecting in retirement.

Remember, though, we're talking about the *marginal* tax rate.  If using an RRSP takes your net income down from $45k to $35k, you're avoiding taxes paid on the $35k-$45k level.
When you cash that money out later, even if you intend to pull $45k out of the RRSPs, and only the RRSPs, it will be taxed at $0k-$45k, spreading it out to a lower *effective* tax rate.

Since you also have TFSAs, will some of your retirement income come from them?  In that case, your retirement income might look like this:
$45k total:
$20k from RRSPs
$20k from TFSAa
$5k dividends from normal investment accounts.

If that's the case, you'll pay very little income tax because you only pay income tax on the $20k RRSP + $5 dividends.

Toque.

JAYSLOL

  • Handlebar Stache
  • *****
  • Posts: 1072
Re: RRSP am I contributing too much?
« Reply #6 on: February 04, 2019, 09:44:45 AM »
My annual income is $45,000 and I'm 35.

I currently have a work one which has about $22,000. 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!

What province are you in?  That affects what your marginal tax rate is at the $45k level.

But $45k puts you in a fairly low marginal tax rate, so you have to compare that to what you're expecting in retirement.

Remember, though, we're talking about the *marginal* tax rate.  If using an RRSP takes your net income down from $45k to $35k, you're avoiding taxes paid on the $35k-$45k level.
When you cash that money out later, even if you intend to pull $45k out of the RRSPs, and only the RRSPs, it will be taxed at $0k-$45k, spreading it out to a lower *effective* tax rate.

Since you also have TFSAs, will some of your retirement income come from them?  In that case, your retirement income might look like this:
$45k total:
$20k from RRSPs
$20k from TFSAa
$5k dividends from normal investment accounts.

If that's the case, you'll pay very little income tax because you only pay income tax on the $20k RRSP + $5 dividends.

Toque.

Exactly, thats what i'm banking on.  Even if half of my Stache is in RRSPs, i'm not planning to pull more than 40k/year so that would only be 20k taxable which isn't much, and even though I'm not in a high tax bracket now while I'm contributing, i still get to FIRE measurably quicker from the tax savings of contributing to my RRSP

FrugalToque

  • Global Moderator
  • Pencil Stache
  • *****
  • Posts: 521
  • Location: Canada
Re: RRSP am I contributing too much?
« Reply #7 on: February 04, 2019, 12:06:38 PM »
My annual income is $45,000 and I'm 35.

I currently have a work one which has about $22,000. 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!

What province are you in?  That affects what your marginal tax rate is at the $45k level.

But $45k puts you in a fairly low marginal tax rate, so you have to compare that to what you're expecting in retirement.

Remember, though, we're talking about the *marginal* tax rate.  If using an RRSP takes your net income down from $45k to $35k, you're avoiding taxes paid on the $35k-$45k level.
When you cash that money out later, even if you intend to pull $45k out of the RRSPs, and only the RRSPs, it will be taxed at $0k-$45k, spreading it out to a lower *effective* tax rate.

Since you also have TFSAs, will some of your retirement income come from them?  In that case, your retirement income might look like this:
$45k total:
$20k from RRSPs
$20k from TFSAa
$5k dividends from normal investment accounts.

If that's the case, you'll pay very little income tax because you only pay income tax on the $20k RRSP + $5 dividends.

Toque.

Exactly, thats what i'm banking on.  Even if half of my Stache is in RRSPs, i'm not planning to pull more than 40k/year so that would only be 20k taxable which isn't much, and even though I'm not in a high tax bracket now while I'm contributing, i still get to FIRE measurably quicker from the tax savings of contributing to my RRSP

Yes.  And if you take Ontario tax rates as an example, you'll be taking some money that's taxed at about 20.05% (The $12k to $44k bracket) and moving it down to the 0% bracket ($0k - $12k exemption).

Toque.

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: RRSP am I contributing too much?
« Reply #8 on: February 04, 2019, 05:20:18 PM »
My annual income is $45,000 and I'm 35.

I currently have a work one which has about $22,000. 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!

What province are you in?  That affects what your marginal tax rate is at the $45k level.

But $45k puts you in a fairly low marginal tax rate, so you have to compare that to what you're expecting in retirement.

Remember, though, we're talking about the *marginal* tax rate.  If using an RRSP takes your net income down from $45k to $35k, you're avoiding taxes paid on the $35k-$45k level.
When you cash that money out later, even if you intend to pull $45k out of the RRSPs, and only the RRSPs, it will be taxed at $0k-$45k, spreading it out to a lower *effective* tax rate.

Since you also have TFSAs, will some of your retirement income come from them?  In that case, your retirement income might look like this:
$45k total:
$20k from RRSPs
$20k from TFSAa
$5k dividends from normal investment accounts.

If that's the case, you'll pay very little income tax because you only pay income tax on the $20k RRSP + $5 dividends.

Toque.

I'm in BC.

The plan is to withdraw from my non-registered account first. Then my RRSP. And then finally my TFSA.

FrugalToque

  • Global Moderator
  • Pencil Stache
  • *****
  • Posts: 521
  • Location: Canada
Re: RRSP am I contributing too much?
« Reply #9 on: February 05, 2019, 08:41:52 AM »
I'm in BC.

The plan is to withdraw from my non-registered account first. Then my RRSP. And then finally my TFSA.

So only two tax brackets apply to you (I'm combining federal and provincial here)
20.06%  first $40,707
22.70%  over $40,707 up to $47,630
Also:
0%         first $10,412 (basic deduction in British Columbia)
0%         first $11,635(basic deduction in Canada)

So, even in retirement, you can withdraw about $11k from your RRSPs without paying any taxes.

I'm looking at this myself as my retirement is coming up.  I think it's tax optimal to take out as much as you can from your RRSPs every year, without paying income taxes.  You then supplement this with as much non-sheltered money as you can.

If you actually go straight through your non-registered first, you'll end up having to take more out of your RRSPs at once, thus inviting more taxation.  I'd have to run the numbers to be sure, but I feel like that's tax optimal.  Time to hit a spreadsheet.

Toque.

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1671
Re: RRSP am I contributing too much?
« Reply #10 on: February 05, 2019, 02:23:11 PM »
I'm in BC.

The plan is to withdraw from my non-registered account first. Then my RRSP. And then finally my TFSA.
Work the problem from the other side; how much do you want in a year?

In retirement theres a flaw in the plan, your non-registered is the MOST VALUABLE part of the portfolio, more than TFSA or RRSP. You should hold all your Canadian ETF in it, which you do, right?

The reason for that is the dividends, in B.C. are NEGATIVE tax! This allows you to withdraw larger sums from the RRSP than otherwise possible...tax free. You can't get a refund for it, its only applied against taxes owed, so you keep it as long as possible so that you can pull as much RRSP out tax free.

Of course, the next criticism is capital gains, but if you use real world examples you'll find that at low income levels its not a thing. For example, if you pull $40,000 from a non-registered account that you've had for 10 years; you will likely not pay taxes on it. I rough ball that of that $40k, 20 is return of principal, leaving $20k as gains. If you assume no other income, that gains is tax free.

non-registered accounts are weird. Theres a lot of assumptions here; the biggest is how much do you want to spend in a year?

Basically I think in retirement that my non-reg is functionally equivalent to my TFSA. I predict that I'll pay the same amount of taxes on both, $0.

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: RRSP am I contributing too much?
« Reply #11 on: February 06, 2019, 10:51:05 AM »
I'm in BC.

The plan is to withdraw from my non-registered account first. Then my RRSP. And then finally my TFSA.

So only two tax brackets apply to you (I'm combining federal and provincial here)
20.06%  first $40,707
22.70%  over $40,707 up to $47,630
Also:
0%         first $10,412 (basic deduction in British Columbia)
0%         first $11,635(basic deduction in Canada)

So, even in retirement, you can withdraw about $11k from your RRSPs without paying any taxes.

I'm looking at this myself as my retirement is coming up.  I think it's tax optimal to take out as much as you can from your RRSPs every year, without paying income taxes.  You then supplement this with as much non-sheltered money as you can.

If you actually go straight through your non-registered first, you'll end up having to take more out of your RRSPs at once, thus inviting more taxation.  I'd have to run the numbers to be sure, but I feel like that's tax optimal.  Time to hit a spreadsheet.

Toque.

Maybe I'm being naive here, but isn't there a withholding tax if you withdraw early (prior to it being turned into a RIF)?

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: RRSP am I contributing too much?
« Reply #12 on: February 06, 2019, 10:54:12 AM »
I'm in BC.

The plan is to withdraw from my non-registered account first. Then my RRSP. And then finally my TFSA.
Work the problem from the other side; how much do you want in a year?

In retirement theres a flaw in the plan, your non-registered is the MOST VALUABLE part of the portfolio, more than TFSA or RRSP. You should hold all your Canadian ETF in it, which you do, right?

The reason for that is the dividends, in B.C. are NEGATIVE tax! This allows you to withdraw larger sums from the RRSP than otherwise possible...tax free. You can't get a refund for it, its only applied against taxes owed, so you keep it as long as possible so that you can pull as much RRSP out tax free.

Of course, the next criticism is capital gains, but if you use real world examples you'll find that at low income levels its not a thing. For example, if you pull $40,000 from a non-registered account that you've had for 10 years; you will likely not pay taxes on it. I rough ball that of that $40k, 20 is return of principal, leaving $20k as gains. If you assume no other income, that gains is tax free.

non-registered accounts are weird. Theres a lot of assumptions here; the biggest is how much do you want to spend in a year?

Basically I think in retirement that my non-reg is functionally equivalent to my TFSA. I predict that I'll pay the same amount of taxes on both, $0.

No, I don't!

It is 50% CDN, 25% international, 25% US. It is only a small amount at this stage. Sounds like I should change it to all CDN. If I purchased VANGUARD U.S. TOTAL MARKET INDEX ETF  (VUN :TSX) through the Qtrade account that is a Canadian ETF correct? Sorry for the potentially basic questions in this thread, but just trying to get a clear picture.

Thanks for all the responses btw!

FrugalToque

  • Global Moderator
  • Pencil Stache
  • *****
  • Posts: 521
  • Location: Canada
Re: RRSP am I contributing too much?
« Reply #13 on: February 06, 2019, 11:32:52 AM »

If you actually go straight through your non-registered first, you'll end up having to take more out of your RRSPs at once, thus inviting more taxation.  I'd have to run the numbers to be sure, but I feel like that's tax optimal.  Time to hit a spreadsheet.

Toque.

Maybe I'm being naive here, but isn't there a withholding tax if you withdraw early (prior to it being turned into a RIF)?

That's a common misconception.  The institution that holds your RRSP will extract a withholding tax whenever you withdraw money, no matter how much you withdraw or at what age.

https://www.investingforme.com/classroom/account-type/rrsp/withdrawals/faq?q=200
"You should never assume that the amount of withholding tax deducted from your withdrawal is sufficient to cover the resulting income tax owing."

What they really mean is that the withholding tax is a guess at the income tax you'll owe.  If you owe less money, you'll get it back.  If you end up owing more, you'll pay more.
The reason financial planning websites freak out is because they're worried about you doing something silly, like withdrawing in the same year you have regular income.  That can go badly, obviously, tax wise:

https://www.investingforme.com/classroom/account-type/rrsp/withdrawals/faq?q=201
"On the T4RSP slip, in Box 22 Withdrawal and Commutation Payment, will be the full amount withdrawn from your RRSP account. On the same T4RSP slip, in Box 30 Income Tax Deducted, the total withholding Tax deducted from your RRSP withdrawal will be stated."

So, no, there is no *penalty*, and no one should call it that.  It's just a withholding tax - a guess at your proper income tax rate.

Toque.

BNgarden

  • 5 O'Clock Shadow
  • *
  • Posts: 60
  • Location: Alberta
Re: RRSP am I contributing too much?
« Reply #14 on: February 06, 2019, 11:45:07 AM »
Maybe I'm being naive here, but isn't there a withholding tax if you withdraw early (prior to it being turned into a RIF)?

Withholding taxes are different from taxes owed.  While some taxes may be withheld, if your income is not above the stated thresholds you would receive excess taxes back upon filing your return. 

RRIFs are different from RRSPs wrt withdrawals in that the RRIF annual minimum withdrawal is not subject to a withholding tax; this does not mean no tax is owed.  That is dependent on your overall income and deductions.  You may owe money, or the government may owe you.

Itrembac

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: RRSP am I contributing too much?
« Reply #15 on: February 06, 2019, 12:09:25 PM »

If you actually go straight through your non-registered first, you'll end up having to take more out of your RRSPs at once, thus inviting more taxation.  I'd have to run the numbers to be sure, but I feel like that's tax optimal.  Time to hit a spreadsheet.

Toque.

Maybe I'm being naive here, but isn't there a withholding tax if you withdraw early (prior to it being turned into a RIF)?

That's a common misconception.  The institution that holds your RRSP will extract a withholding tax whenever you withdraw money, no matter how much you withdraw or at what age.

https://www.investingforme.com/classroom/account-type/rrsp/withdrawals/faq?q=200
"You should never assume that the amount of withholding tax deducted from your withdrawal is sufficient to cover the resulting income tax owing."

What they really mean is that the withholding tax is a guess at the income tax you'll owe.  If you owe less money, you'll get it back.  If you end up owing more, you'll pay more.
The reason financial planning websites freak out is because they're worried about you doing something silly, like withdrawing in the same year you have regular income.  That can go badly, obviously, tax wise:

https://www.investingforme.com/classroom/account-type/rrsp/withdrawals/faq?q=201
"On the T4RSP slip, in Box 22 Withdrawal and Commutation Payment, will be the full amount withdrawn from your RRSP account. On the same T4RSP slip, in Box 30 Income Tax Deducted, the total withholding Tax deducted from your RRSP withdrawal will be stated."

So, no, there is no *penalty*, and no one should call it that.  It's just a withholding tax - a guess at your proper income tax rate.

Toque.

Incredible information!

Thank you!

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1671
Re: RRSP am I contributing too much?
« Reply #16 on: February 07, 2019, 06:24:37 PM »
(snip)

No, I don't!

It is 50% CDN, 25% international, 25% US. It is only a small amount at this stage. Sounds like I should change it to all CDN. If I purchased VANGUARD U.S. TOTAL MARKET INDEX ETF  (VUN :TSX) through the Qtrade account that is a Canadian ETF correct? Sorry for the potentially basic questions in this thread, but just trying to get a clear picture.

Thanks for all the responses btw!
balance your portfolio across all your accounts, not in each account :) Its easier and better for taxes later on. Its great when you can do something that's easier and better!

VCN is Canadian. You get some dividends, that you use to buy more. VUN is American; non-eligble dividends.