Thanks for your answers.
@Prairie Stash, I read your posts several times, but I'm still not sure I understood everything. I usually understand better with concrete examples, so I thought I'd throw some numbers (close to my actual position) to see if I understood correctly.
First, in order to reduces variables, the following example would all follow the same strategy which is buy and hold ETF until retirement. At retirement time, it is expected that all the money withdrawn from RRSP will be at lower taxes bracket (under 43K$/year as for now). Any returns would also be reinvested. Finally, all the investment would be would of similar kind (similar AA) and yield be the same.
Ok, so let's say someone has that profile :
2016 earning : 50K$
TFSA contribution room : 0$ (full contribution achieved)
RRSP contribution room : 30K$
Money to invest : 15K$
How I see it, the person has 3 choices:
1. Contribute 15K$ to a RRSP. Deduct the whole 15K$ and get a 5K$ tax return. Then invest that 5K$ in taxable account or RRSP (not sure here). This would mean part of the deduction isn't ''optimal'' since it is deducted at the same tax bracket that it is going to be withdrawn in the future. Therefore, this would simply be tax differed.
2. Contribute 15K$ to a RRSP. Deduct 6K$ (minimum to get to the lower tax bracket) and get a 2K$ tax return. Then invest that 2K$ in taxable account or RRSP (not sure here). In that case, all the deduction is from a higher tax bracket. Therefore, instead of being taxed at 32.53%, this 6K$ will eventually get taxed at 28.53%. This can been seen a 4% gain. In the mean time, the remaining 9K$ that hasn't been deducted keeps growing and can be deducted in the following years in order to lower tax brackets.
3. Contribute 6K$ to a RRSP, deduct 6K$ (minimum to get to the lower tax bracket) and get a 2K$ tax return. Invest the remaining 9K$ in a taxable account. During that time, the dividends are taxed and you have the possibility, later on, to transfer to a RRSP.
I think what you suggest is choice #3. You're suggesting :
If you want to keep it simple just invest in an taxable account. Pay capital gains tax at 18% on the money you earn, transfer the money, plus gains, into the RRSP (next year or later) and get 36% back (net 36-18=18% bonus). As opposed to getting 0% now when you invest in an RRSP and carry credits. If you carry over the money indefinitely it doesn't matter, the money just keeps growing. If its at a loss it stings a little but most of us will use the loss to offset a gain in the future, at that point the loss balances out.
Not sure about the 18% and what you suggest here. In the case of option #3, what's the difference of investing 9K$ in taxable account or in RRSP? Why do you say 0% in RRSP, that 9K$ would still be growing even by the time it's not deducted. Yes, it'll get taxed when you withdraw in many years, but again the goal is that it gets taxed at the lowr bracket.. I am missing something here?
The second part of the strategy is to have a taxable account that you pay $0 taxes on. In Quebec the dividends are taxed at 5.64%, you can offset this by your RRSP contribution that receives refunds at 28.53%. Capital gains are only paid when you sell an ETF that's appreciated in value, if its at a loss when you sell you owe no taxes!!! Take a second to dwell on this, if you have an ETF inside your TFSA and in a taxable account you can sell at a loss and transfer the money into the RRSP or sell at a gain (the TFSA); either way you avoid taxes. Its a simple hedge, if stocks go up/down you have a good strategy. In practice the dividends will pay for the RRSP contribution, for example you get $300 in dividends, owe $15 in taxes, take the $300 and put it into RRSP's to get $90 back...net gain of $75. Meanwhile your RRSP credits gain you $0.
At this point you may probably think, what an idiot, why would I want a capital loss? Well capital losses carry forward and can be used to offset future capital gains, you will get the money back in the future. I've used losses before, they work out to be very beneficial, they make future gains tax free. The loss is only temporary...Please remember the RRSP or TFSA account could also lose money, however you can't claim losses on RRSP or TFSA accounts. Losses are always bad but if you have a loss its always best in an investment account outside your RRSP or TFSA to minimize the damage.
This plan allows you to reap rewards in a down market, holding extra cash in an RRSP does not help in a down market. It also allows you to reap rewards in an up market, in excess of making current RRSP contributions. In any event, one day you will max out the RRSP, the goal is to get there efficiently and patiently. There is no prize for rushing.
This part is very interesting, never thought of it. One more reason to go towards option #3.. That requires active accounts management though. So at the end of every year, you'd apply this strategy? Could you elaborate with a numerical example of what you'd do in a case of a up/down market for someone who have money (and free room) in all 3 account types?
In an ETF buy/hold strategy a low income should never use an RRSP. Its always TFSA then investment account. For low incomes that don't trigger capital gains all the dividends are tax free (RRSP will force you to pay tax later) and the gains can be managed easier to avoid any future tax bills as well. In retirement if you sell a stock that's doubled from $20k (purchase price) to $40k its 100% tax free unless you have other income (you don't pay tax annually, just when you sell). Essentially low income individuals have almost unlimited TFSA room (unless you get a whopping inheritance), the tax can all be avoided with some planning. If you believe TFSA is better at low income then why isn't an investment account, with some planning, better? Please note this strategy fails if you buy/sell frequently and trigger gains regularly. They might have different names but you can make them both tax free.
Can you explain the sentences in bold? Until what point it's considered ''low income'' where you can offset dividends taxes by moving to RRSP? I don't get the 20K$ doubling to 40K$ and being tax free.. Are you talking about TFSA?