Author Topic: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question  (Read 2109 times)

SandyBoxx

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CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« on: April 08, 2016, 11:45:02 AM »
I have a friend who will soon be receiving a lump sum from an ex-DH for her share of their business that he is buying her out of.

Rough details:

Approx 30 years old, one DD (3 years old)
Lump sum to be received of around $400,000
Assume no TFSA contributions so far (so $46,500 of space)
Not sure about RRSP space, but assumption is that there is not a lot (perhaps around $50,000)
Assume annual income going forward of around $30-35,000

Question: We know she should fill her TFSA, however where would the remainder of the lump sum be best put to work?  Her income will likely remain relatively low (based on career choice) so is the RRSP even worth using, or should she be diverting all excess into a non-registered account?

Thank you for any input!



curly1973

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #1 on: April 08, 2016, 12:47:00 PM »
Hi Sandy, while I don't have an answer (but would be interested in any that you receive), finiki (a Canadian financial wiki) may be able to help point you in the right direction:

http://www.finiki.org/wiki/Main_Page

There is a discussion forum associated with the wiki where members discuss Canadian financial matters:

http://www.financialwisdomforum.org/forum/

Good luck - hopefully you report back!

techwiz

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #2 on: April 08, 2016, 02:09:10 PM »
Really depends on the situation and what the money will be used for. However, I would recommend it is always best to use a tax advantage accounts if there is room.

My order of preference would be:
1. TFSA- is the most flexible and investments grow tax free (you can withdraw the money easier)
2. RRSP- Benefit of deferring income tax (money to be used for long term retirement saving)
3. Non-registered

Option of using a combination of the above two and a non-registered for any amount over the room available in the tax advantage accounts.   

daverobev

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #3 on: April 08, 2016, 02:17:02 PM »
TFSA first as you and others have said.

RRSP is a tricky one. Any idea what they are expecting to live on in retirement? Because if their post-retirement income is greater than the current $35k, putting money in an RRSP may be a losing proposition; you do get tax-free growth, of course.

Unreg should be ANY allocation of Canadian stuff (divi tax credit, yay), and any allocation of bonds (they are taxed "as income" - but rates are so low and growth minimal vs stocks, you want to shelter the long term high reward stuff more than ~20% of 2%!).

Now, having a load of money unregistered will of course increase your friend's income. It'll take a long time to move that money into a TFSA at the current allowance. So assume 3% on what, $300k unreg = 9k income a year (guesstimate). That is, if anything, an argument for putting as much of that money as possible into the RRSP - it lowers the income received, see?

So if they have $30k of room, I would say put maybe $5k in this year, then $10k or so until the room is used - you want to get down one tax bracket only.

Think that makes sense, not sure if my writing style does.

Point being that by retirement, most of the money IS sheltered, so having a decent chunk in the RRSP isn't a "problem" (but make sure to withdraw most of it before you die!!).

RetiredAt63

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #4 on: April 08, 2016, 06:31:54 PM »
You don't mention any debts.  But once the TFSA and RRSP room is used, does she have debts?  CCs?  LOC? Mortgage?  Income that pays those down is still being taxed.  Paying them means the debt is not hanging over her head, and her lower income (less investment income) does just fine, because she does not have those carrying costs and those income taxes.

Playing with spreadsheets might be a good option here - do lots of "what-if" scenarios and see which ones work out best.

lostamonkey

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #5 on: April 08, 2016, 08:43:44 PM »
Does she have any non-mortgage debt at >5%?
If yes:Pay that off first
If no: Does she own a house or rent?
If she owns:
Is the house paid off:
If yes, TFSA first, RRSP second, claim RRSP deduction over time, non-reg last
If no: Consider the interest rate, the mortgage payment amount and her risk tolerance in determining whether to prepay the mortgage or invest. If she chooses to invest TFSA first, RRSP second, claim RRSP deduction over time, non-reg last

If she rents:
Does she want to buy and the local market favours buying: Decide on downpayment amount based on interest rate, and risk tolerance. This amount should be atleast 20% and can be up to 100%. Invest the rest, TFSA first, RRSP second, claim RRSP deduction over time, non-reg last
Does she want to continue renting or the local market favours renting: Invest TFSA first, RRSP second, claim RRSP deduction over time, non-reg last

Jschange

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #6 on: April 08, 2016, 08:54:01 PM »
I am low income due to career choice, and I've just started my RRSP. My logic is that it's in the same type of fund I'd put it  in anyway, but this labels the funds as retirement, and discourages me from withdrawing any for non retirement or home buying.

$400 000 is most of a retirement fund for a lower income person.

Given her daughter's age, I'd max out the RESP this year, have a 6-12 month e-fund in my TFSA, and pop the rest in the RRSP. Probably a low risk one from tangerine. Maybe help her think about if she needs any other lump sums pretty soon like first and  last rent, a down payment, a roof, or a vehicle.

Also check how much of the money will be income- if it's all income she will want to reconsider her 2016 tax bracket.

SandyBoxx

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #7 on: April 10, 2016, 04:39:37 PM »
Thank you for all the quick responses!

In response to questions, there is no debt, and she is currently renting.  Not sure if there is intentions of buying a home anytime soon. 

I think @daverobev nailed what I was having trouble sorting out in my head.

TFSA first as you and others have said.

RRSP is a tricky one. Any idea what they are expecting to live on in retirement? Because if their post-retirement income is greater than the current $35k, putting money in an RRSP may be a losing proposition; you do get tax-free growth, of course.

Unreg should be ANY allocation of Canadian stuff (divi tax credit, yay), and any allocation of bonds (they are taxed "as income" - but rates are so low and growth minimal vs stocks, you want to shelter the long term high reward stuff more than ~20% of 2%!).

Now, having a load of money unregistered will of course increase your friend's income. It'll take a long time to move that money into a TFSA at the current allowance. So assume 3% on what, $300k unreg = 9k income a year (guesstimate). That is, if anything, an argument for putting as much of that money as possible into the RRSP - it lowers the income received, see?

So if they have $30k of room, I would say put maybe $5k in this year, then $10k or so until the room is used - you want to get down one tax bracket only.

Think that makes sense, not sure if my writing style does.

Point being that by retirement, most of the money IS sheltered, so having a decent chunk in the RRSP isn't a "problem" (but make sure to withdraw most of it before you die!!).

Also, @lostamonkey brought up a good point about making the RRSP contributions NOW and claiming them over time.

Desired income in retirement is a tough one - she is just beginning to get a handle on finances, but may not make a full transition to mustachianism, but there is always hope!  If she desired a $50,000 annual income in retirement, how would that impact maxing RRSP's now?  This is the type of thing where I begin to get lost :)

This forum is awesome!  Cheers

Edited to add: apparently I also do not know how to tag people in posts *sheepish face*

PharmaStache

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Re: CANADA - Non-Registered, TFSA, or RRSP? Lump sum question
« Reply #8 on: April 10, 2016, 05:27:31 PM »
You say her income will remain low because of career choice.  Is there no career in the world she'd want to do that makes more money?  30-35k/year is extremely low- assuming she's doing full time work.  I think she needs to use the money to retrain for a more profitable career.  The 400k could easily pay for school, childcare, living expenses, etc for 4 years of schooling or even longer. 

Now if she's making that much because she's working part time and would be making 70k+ per year at a full time rate once her child is older, that's fine.