Author Topic: RRSP-TFSA-NR FIRE WR Plan?  (Read 1522 times)

Goldielocks

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #50 on: November 19, 2017, 12:44:33 AM »
PTF -- I am not absorbing all of your numbers right now.  However, the basic question is -- should you try to optimized how you withdraw from taxable versus non-taxable in order to minimize net sequence of returns versus tax optimization?

My viewpoint -- I treat all my accounts as one single asset allocation, so sequence of returns will impact it nearly identically depending on where I pull money from.   If the market goes down, it may be better to pull it from one class more than another... but if it goes up the opposite is true.  I can't figure out short market runs, it could be either, but should be upwards trend.

Therefore, the solution is to optimize taxes over retirement (not just the one year).

For me , that means pulling from RRSP to top my income up to $45k per year is a slam dunk.  Especially if I build up my eligible dividend investments in a taxable account as I do so.  Eligible dividends are tax free income up to $45k total income for the year.

Pulling out to top up to $60k (for me)  is also better than paying more tax on RRSP in later years.

Sequence of returns -- will be managed by spending less of my savings in the poor market years.   We have planned $80k per year of spend in retirement, (before tax) so there will be a lot of room to reduce as needed.(2 persons, so $40k each).

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #51 on: November 19, 2017, 08:28:29 AM »
R-C is trying to figure out if by saving taxes in the beginning, will he then have a larger portfolio anyways (avoiding the sequence of returns). So he doesn't care about the taxes, but rather which of the options will allow him to have the best use of his money. It's an interesting question about if/when the long-term taxation optimization becomes equal to short-term beginning tax optimization. because for sure the short-term one will win out in the beginning, it's a question of how long it remains the better choice.

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #52 on: November 19, 2017, 08:49:13 AM »
My viewpoint -- I treat all my accounts as one single asset allocation, so sequence of returns will impact it nearly identically depending on where I pull money from.

It won't be identical unless taxes don't constitute a significant portion of your annual outgoing cash flow. If you "spend" say $5K/yr more initially on taxes for the first 10yrs. Your sequence of returns is higher than if you don't. How you withdraw your money will determine the taxes owed in the early years and the later years allowing you to pay more or less.

The downside is that you might pay more taxes overall, but we haven't nailed this down as well due to the difficulty of calculating it. It does seem apparent that paying more taxes only happens if your investments do very well in which case you may not be fussed about that since you'll have more money than you need.

The benefit of this approach is that it requires no changes to your FIRE spending. Simply a different approach to which accounts you pull money from.

If you are interested in the question go through the various calculations earlier in this thread. Until I ran some numbers it wasn't as clear to me how this approach would work.
« Last Edit: November 19, 2017, 08:51:45 AM by Retire-Canada »

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #53 on: November 19, 2017, 08:51:25 AM »
Actually, I think it's because your income brackets are so large that there is such a small difference in tax rates. it's quick to get up to the bracket, and then stays there for almost 40 extra thousand in income.

Goldielocks

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #54 on: November 19, 2017, 08:58:30 PM »
My viewpoint -- I treat all my accounts as one single asset allocation, so sequence of returns will impact it nearly identically depending on where I pull money from.

It won't be identical unless taxes don't constitute a significant portion of your annual outgoing cash flow. If you "spend" say $5K/yr more initially on taxes for the first 10yrs. Your sequence of returns is higher than if you don't. How you withdraw your money will determine the taxes owed in the early years and the later years allowing you to pay more or less.

The downside is that you might pay more taxes overall, but we haven't nailed this down as well due to the difficulty of calculating it. It does seem apparent that paying more taxes only happens if your investments do very well in which case you may not be fussed about that since you'll have more money than you need.

The benefit of this approach is that it requires no changes to your FIRE spending. Simply a different approach to which accounts you pull money from.

If you are interested in the question go through the various calculations earlier in this thread. Until I ran some numbers it wasn't as clear to me how this approach would work.

I see, yes.

The answer that is taught in the CFP manual, when you have at least 20 years to invest, is to leave the investment in the tax sheltered accounts as long as possible.  Use taxable first, then RRSPs (in moderation), then TFSA's last.   

TFSA's touched last because this allows you to pull lumpy sums into any year, as it is needed, which more than pays off for that one occurance, versus any tax reduction scenario, IMO. 

Money that remains in the RRSP account -- let's imagine you could pay 15% tax now, or 28% tax 20 years in future when you withdraw a larger amount.   You would need to earn more than 3.6%/yr  interest over 20 years, to make leaving it in the RRSP pay better than the lower tax rate today.   Pretty low hurdle to beat, so leaving it in the RRSP is usually much better.

The next question comes if you are leaving it in there for less than 15 years.. or if you would have a exceptionally low RRSP marginal tax rate.. (eg., 6% because you have zero income this year and will only pull $20k) . Now it may make sense to drain some of the RRSP amounts earlier... the investment rate over 15 years needs to be much higher.
« Last Edit: November 19, 2017, 09:01:03 PM by Goldielocks »