Author Topic: [CAN] pos-separation life planning: TFSA or RRSP?  (Read 428 times)

FemmeHawke

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[CAN] pos-separation life planning: TFSA or RRSP?
« on: July 11, 2019, 04:30:17 PM »
Hello folks,

So, bit of backstory - life kind of exploded about 3mo ago (separated from my husband. No kids, process of separation has been very civil). Now that the worst of the pain/transition has subsided, Iím looking much more hopefully into my future; more hopefully than I have in way too long. ExDH wasnít terribly pro-mustachian (ie - expensive vacation every year, didnít think it would be a problem to have a mortgage post-retirement because thereíd be no kids to leave a house to), so instead of focusing on all the bad things, trying to frame this as my chance to really embrace it and turn things around for myself.

My main goal for the next year is to pay off the rest of my student loan (approx. 16k, started at 36k, been paying it down the last 3yrs) and some face-punchy consumer debt. As long as Iím not an arsehole to myself, Iíll be able to reach that goal. In tandem with that, I want to be more aggressive in my savings.

 Iím 35 and have been working for the Federal government for the past 4+yrs (my career started late because I was a grad student for awhile), so Iíve been paying into a pension plan (defined benefit) for about 4yrs. Iíll be able to get my full pension in 26yrs (80% of the average of my last few years of salary, I think is how itís calculated. Unless it changes in the next 26yrs).

So, pension plan will be the bulk of my retirement, but I do want to save more on the side. I do like my job, so RE might not be in the cards, but FI for sure. So getting to my actual question (finally!):

TFSA or RRSP? For any Americans reading this, I think a TFSA is more like an IRA, and a RRSP is more like a 401(k) (or maybe Iím totally wrong!).

Thank you very much, any thoughts, advice, or notes on other resources are much appreciated!

red_pill

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Re: [CAN] pos-separation life planning: TFSA or RRSP?
« Reply #1 on: July 11, 2019, 06:54:32 PM »
I'm in a similar boat (pension wise, not separation wise) and I am prioritizing TFSA's.   

As was explained to me, since you have a robust pension you will make almost as much post retirement as you will while working, so  there isn't much tax savings there.  Plus, on an RRSP you pay tax on the entire amount you withdraw, meaning that you pay tax at income tax rates for what you put away and also the increase in value.   So if you put away $100K and it grows to $200K you pay income tax on the $200K as you take it out...at a rate that is very close to what you would have paid while you are working

TFSAs, on the other hand, you pay income tax on the $ you put into it, but all the gains are tax free.   

What was so suggested to me is max out TFSA, and then taxable accounts. Save the RRSP contribution room to my last few years of working and then pile the money in then take it out the first few years of retirement. So I get the immediate tax savings.

I have zero idea if any of what I just said is true or not.
« Last Edit: July 15, 2019, 03:40:34 PM by red_pill »

FemmeHawke

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Re: [CAN] pos-separation life planning: TFSA or RRSP?
« Reply #2 on: July 12, 2019, 09:10:25 AM »
Thank you very much!

That does make sense, especially since the income from my pension will (theoretically) not be wildly different than my employment income. In the short term, I donít know that the tax savings from an RRSP would be very helpful early in my career (vs. later when Iím presumably making more). So, looking like a TSFA is making more sense at the moment.

RetiredAt63

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Re: [CAN] pos-separation life planning: TFSA or RRSP?
« Reply #3 on: July 12, 2019, 09:46:03 AM »
I'm at the other end of your trajectory.

What I found was that since I had a good work pension, between my contributions and my employer's contributions I had very little RRSP room.  Most of my working career was before TFSAs, so I put the max (all $3000 at its highest) into my RRSP. 

In your case I would put massive effort into the consumer debt, because I am guessing it has the highest interest rate.  Student loan next.  And max out the TFSA. 

Save the RRSP space for when you have extra money and can really benefit from the tax rebate.  At that point you could do a cost/benefit analysis of whether it is even worth it - will the extra income from a RRIF cause a big clawback in OAS, for example?  Or can you use all your RRSP money before 65 so OAS is not affected?

One bright spot - you will most likely find you have a lot more spare cash than you thought you would have.  I have way more money than I expected, because I don't have my spendy Ex spending it.  A widowed friend found the same thing - her husband's extra spending wasn't obvious, but once he died her cash flow got much better.  She had been really worried about her finances, and they turned out to be fine.

Good luck with everything!


Lews Therin

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Re: [CAN] pos-separation life planning: TFSA or RRSP?
« Reply #4 on: July 12, 2019, 10:49:20 AM »
I`d challenge you to re-look at those assumptions, as 26 years only requires a 35% Savings rate... without including the pension.

Even if you were not saving a penny, the pension program is 10% of your salary. (before taxes)

Maybe you should look at if you really want to aim for locking yourself in for another 2 decades... and a half..... Or said another way, half of your life left. (statistically speaking)

FemmeHawke

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Re: [CAN] pos-separation life planning: TFSA or RRSP?
« Reply #5 on: July 13, 2019, 07:26:29 AM »
I'm at the other end of your trajectory.

What I found was that since I had a good work pension, between my contributions and my employer's contributions I had very little RRSP room.  Most of my working career was before TFSAs, so I put the max (all $3000 at its highest) into my RRSP. 

In your case I would put massive effort into the consumer debt, because I am guessing it has the highest interest rate.  Student loan next.  And max out the TFSA. 

Save the RRSP space for when you have extra money and can really benefit from the tax rebate.  At that point you could do a cost/benefit analysis of whether it is even worth it - will the extra income from a RRIF cause a big clawback in OAS, for example?  Or can you use all your RRSP money before 65 so OAS is not affected?

One bright spot - you will most likely find you have a lot more spare cash than you thought you would have.  I have way more money than I expected, because I don't have my spendy Ex spending it.  A widowed friend found the same thing - her husband's extra spending wasn't obvious, but once he died her cash flow got much better.  She had been really worried about her finances, and they turned out to be fine.

Good luck with everything!

Thank you very much! Yes, absolutely - consumer debt is my first priority (while still making a little over the minimum payment for my student loans), then more aggressive savings once those are both taken care of.

Youíre also right about more spare cash. Travel was very important to him (which is totally fine, itís important to a lot of people), less so for me. So, thatís an expense that I wonít really have going forward. Unless I meet someone that likes to travel, but, I donít plan on getting back into that game for probably another year. Too much stuff to sort out first!

Lews Theron - you make a good point. Perhaps after the next year when all my debt is paid off, I can reevaluate my future plans - including savings rates required, and what the earliest I can retire and access my pension; or, how much of a gap to cover between retirement and being able to access the pension. Seems that retiring early isnít super common among federal employees.