Author Topic: Canadian Investing - RSP vs. RRSP?  (Read 6539 times)

Healthie

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Canadian Investing - RSP vs. RRSP?
« on: May 11, 2016, 05:40:20 AM »
Hi everyone,

I'm 25 and I have my first full-time job making 40k/year. I have some money in a TFSA, but in researching RRSP's I've seen the appeal of these accounts. While using a redflagdeals grid to find an optimum RRSP rate, I found Oaken Financial which has a RSP rate at 2.05%.  I looked into the difference between RRSP and RSP and RRSP's you get a tax shelter, and with RSP's you do not. I also know money can be borrowed from an RRSP for education (which I will be doing) or a home.

Bearing this, is the only reason you would invest in an RSP is for a better tax rate? For those with knowledge about RSP's vs RRSP's, am I missing something?

Le Dérisoire

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #1 on: May 11, 2016, 06:20:11 AM »
To my knowledge RSP are Retirement Saving Plans while RRSP are Registered Retirement Savings Plans. A RSP becomes a RRSP after you invest in it and register it to the CRA. I think the CRA does not want financial institutions to say the RSP is registered until it actually is.

So I think it's exactly the same.

You should obviously verify that with them first and not blindly trust a stranger on the internet.

Mmm_Donuts

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #2 on: May 11, 2016, 06:47:47 AM »
I can't answer your question about an RSP vs RRSP, but I do recall vaguely that the RSP is for a company pension. Generally individuals open an RRSP.

But I want to point out that you don't "invest in an RRSP". RRSPs and TFSAs are not investments. They are places to store your investments, that are registered and treated in different ways by the government.

In other words, you can have stocks, bonds, GICs, or cash in an RRSP or TFSA. A bank that's offering 2.05% is probably selling a GIC, I'm guessing. If you're investing long term for your retirement, I recommend you read up on how to invest in equities. They're more volatile, and of course your principal isn't guaranteed like cash or GICs, but you have a lot of time to weather the ups and downs, and your money will compound over time.

The Canadian Couch Potato website is a great place to start your research. At your age and income level I would focus on the TFSA, and would invest in a balance portfolio of equities. But you need to do the research and figure out what you're comfortable with.

Eta: if you're using the funds for a home buyers plan or education, then you are allowed to withdraw tax free from an RRSP, but you have to pay the money back in 15 years, I believe. And in that case a GIC would be fine, but you can also do this with a TFSA, and you'd be able to reinvest it at any time, with no restrictions.
« Last Edit: May 11, 2016, 06:54:16 AM by Mmm_Donuts »

plainjane

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #3 on: May 11, 2016, 06:49:50 AM »
A rate of 2.05% isn't "investing" in the way most people on the forum would use the term.  We're generally talking about buying ETFs or mutual funds within an RSP/RRSP account. There is a risk of losing your money, but also the opportunity to grow your investment further.  In a 2% cash account, you are "saving".

If you're only putting in the money with the plan to take it out soon for your education, then I suppose it makes sense to do it for the RRSP tax refund (so that you aren't risking the money in the short term).  Tangerine has a 2.4% rate on regular savings accounts for six months if you are a new customer.

At your marginal tax rate, you probably should focus on maxing out your TFSA room first, and then your RSP space. 

RichMoose

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #4 on: May 11, 2016, 09:45:31 AM »
At your age and income level a TFSA is almost surely the better way to go. If you are saving for the purpose of retirement, you should invest via ETFs or TD e-series mutual funds. I see a lot of reading in your future regarding this. Here are some books I would recommend:

The Wealthy Barber Returns, David Chilton
The Four Pillars of Investing, William Bernstein
Millionaire Teacher, Andrew Hallam

These should all be available at your local library as they are quite popular.

Healthie

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #5 on: May 11, 2016, 07:02:30 PM »
Thanks for all the replies and the book suggestions, I definitely need to have a read.

Tuxedo, for my situation (working for ~1 year and returning to school full-time afterwards), don't I lose out on RRSP contributions by contributing to the TFSA? What I read was the money taken out of the RRSP for education is something to paid back to the RRSP - wouldn't it be better to contribute to the RRSP over TFSA as the RRSP has a finite amount I can invest into it per year (and investing in it now would maximize these contributions)?

plainjane

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #6 on: May 11, 2016, 07:44:39 PM »
You get back the space in the next calendar year if you take money out of a TFSA too.  Your marginal tax rate is so low right now (at 40k that's only 20% in Ontario), that it's almost a waste to use that RRSP space now (when you pay back the RRSP money, it is one for one, no additional tax benefits).  Much better to be using that space when you're at the 30% or 40% marginal rate.

What are you planning to do with this money?  Are you just saving to spend it when you go back to school?  Or are you planning to keep it invested and pay for school another way?  How much money are you looking to save this year for the short term?  For the long term?

JAYSLOL

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #7 on: May 11, 2016, 08:43:29 PM »
Hi there, congrats on the job and planning to save. 

An RRSP is sometimes attractive depending on how much tax you end up paying with your income/deductions.  Because you plan to use this money in the future for education or a home purchase down payment and your current income doesn't put you in a very high tax bracket, I would strongly suggest maxing out your TFSA first and then putting anything left over into an RRSP.  Use the cash from the TFSA first in the future for education or whatever you need it for, as it doesn't cost anything to withdraw and funds can be re-deposited in your TFSA as early as the year following the withdrawal. 

I would try not to withdraw from your RRSP at all even though it is possible to do so.  An RSP at many banks is the same as an RRSP, you just need to confirm with them that it will become registered and have the same tax benefits when you start contributing to it. 

IMO, if you plan to need the money out of your investment accounts within a just a few years, go with the best interest rate you can find for your TFSA.  Look into low-fee index funds for your RRSP, and for your TFSA if you don't plan to need the money for longer than that.  Tangerine mutual funds may be a good option for you at this point as your saving and investing vehicle, I would prefer the Balanced Growth or Equity Growth portfolios for long term investing with your current income and investing experience.

Good luck and happy saving

dess1313

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #8 on: May 11, 2016, 08:47:07 PM »
As a student with potential student credits your return on taxes may be very small due to being in a low bracket.

Also just because you do not use up your RRSP room this year, that contribution room rolls forward to another year , same as with a tfsa.

http://www.taxtips.ca/tfsa/tfsavsrrsp.htm

http://www.taxtips.ca/calculators.htm

A lot of the TFSA vs RRSP depends on
Your income now vs future income tax brackets
Any big tax credits that reduce your income can reduce the effectiveness of RRSP.
What the purpose of the money is being saved for

You sound like you are not at peak earnings, and may have student credit to reduce your taxes.  A TFSA may be more valuable for now

RichMoose

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Re: Canadian Investing - RSP vs. RRSP?
« Reply #9 on: May 12, 2016, 10:35:56 AM »
Tuxedo, for my situation (working for ~1 year and returning to school full-time afterwards), don't I lose out on RRSP contributions by contributing to the TFSA? What I read was the money taken out of the RRSP for education is something to paid back to the RRSP - wouldn't it be better to contribute to the RRSP over TFSA as the RRSP has a finite amount I can invest into it per year (and investing in it now would maximize these contributions)?

Unused RRSP and TFSA room is carried over. Saving in one account does not impact the other account in any way. Both of these accounts are unique because of their tax advantages, but they work very differently. With a RRSP, the money you put into the account is not taxed (so theoretically you would get a refund or something like that back when you do your taxes). With a TFSA the money you put into the account has already been taxed (so no refund). However, when you take money out of an RRSP you will be taxed on it as regular income. With a TFSA you pay no tax on withdrawals. In both accounts, money you withdraw does not affect your "room". However, the RRSP has some special payback rules on withdrawals for a house deposit or education plan.

If you have been going to school the past few years you probably have tuition / education credits built up. This means you would be paying virtually no tax anyways next year. For this reason a TFSA is a much better option. As well, to make investing in an RRSP worthwhile you should be earning a higher salary (think more like $70 - $80k vs $40k. Let that RRSP room carry over until some time in the future when you are earning more and can benefit more from legal tax sheltering in the RRSP.