Author Topic: Canadians - can we have too much in RRSP?  (Read 8127 times)

MMMdude

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Canadians - can we have too much in RRSP?
« on: February 22, 2014, 11:49:33 AM »
I have diligently maxed out my RRSP since I was 22 (16 years ago).  It has built up to about 250K plus of course I have assets outside my RRSP.  One of my goals in retiring early (hopefully in 7 years) is that I would have a marginal tax rate of under 10% versus the 30%+ now while i'm working.  This may not be possible due to eventual RRSP withdrawals (ie RRIF's).  The RRIF withdrawals may put me in the mid tax bracket rather than the lowest AND even worse, may result in clawback of OAS.  OAS is of course free $ so it would be a shame to lose that benefit because of saving (and thereby working) too much in ones lifetime.

 Based on my calculations it would seem that about 700K in RRSP at time of RRIF would trigger OAS clawback ASSUMING NO OTHER INCOME which is unlikely as there would be dividend/interest income from non registered assets.  So I would assume that one should systematically draw down their RRSP before they hit RRIF age so that it would not trigger clawback and not kick one into a higher tax bracket at age of 71.  Have any other Canadians given some thought on this subject?

anisotropy

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Re: Canadians - can we have too much in RRSP?
« Reply #1 on: February 22, 2014, 12:57:01 PM »
Canadian here too. OAS seems to me that it was designed to be more for the low income/networth crowd.

Not sure if this will be of any help, it's just an opinion by this guy:

http://www.theglobeandmail.com/globe-investor/investment-ideas/how-to-avoid-the-dreaded-oas-clawback/article4192451/

"Let's get something straight up front, though. The OAS clawback does not actually have a huge negative impact on your income in retirement. "On a net, after-tax basis, it's nominal," said Mr. Diamond, who runs Diamond Retirement Planning in Winnipeg and is the author of Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement. "But it's just absolutely sand in people's gears. They say, wait a minute, I scrimped and saved and put all this money away and because I did a really good job, I'm being penalized?"

OAS is a federal social program designed to provide a very modest pension to low- to middle-income retirees. The maximum monthly benefit right now is $526.85 or $6,322.20 a year. The clawback of OAS benefits starts with a net income of $67,668 and it completely eliminates OAS with income of $109,764.

Mr. Diamond's clawback avoidance strategy contradicts the conventional thinking that money should be left in a tax-sheltered retirement plan as long as possible. His view is that you can end up with too much money in your registered retirement plan.

You may, for example, have enough in your RRSP that your assets will keep growing even as you start making withdrawals. When you turn 71 and convert your RRSP into a RRIF, you may find that meeting the required annual minimum withdrawal puts you into OAS clawback territory.

Mr. Diamond's solution is to take more than you need out of your RRSP in your early retirement years, pay the tax on it and then park it in tax-efficient investments. By shrinking your RRSP, you put yourself in a position to draw less from your RRIF and thereby keep your total income low enough to keep all OAS benefits."

daverobev

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Re: Canadians - can we have too much in RRSP?
« Reply #2 on: February 26, 2014, 03:44:42 PM »
Yes; you need to look at 'tax now' vs 'tax then'... if you have room, TFSA should be maxed first. If you need to buy a lot of Canadian stuff, having that unregistered (but dividends basically tax free) is good - it is taxed more favourably. And obviously capital gains are taxed more favourably.

That aside, if you're going to be in the low bracket in the future and high bracket now, it's worth it.

I'm starting to think having ALL eligible dividend stuff unregistered is best.

daverobev

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Re: Canadians - can we have too much in RRSP?
« Reply #3 on: February 26, 2014, 08:57:10 PM »
I'd suggest that, in any case, maximizing both TFSA and RRSP should be a priority over investing in non-registered accounts.

Straight question:

$50k of Canadian dividend enhanced tax credit eligible ETF, grows at 4% capital + 3% dividend. Over 10 years, is it better to have it unregistered, or in an RRSP - assuming you're going to have ~ $15k of OTHER income. So any income withdrawn from this $50k investment would be in the 20%(ish) bracket.

I'm thinking it's better to have it UNregistered.

What about International (so no divi tax credit) - I'm still thinking unreg is better!

Cecil

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Re: Canadians - can we have too much in RRSP?
« Reply #4 on: February 26, 2014, 11:58:34 PM »
Quote
$50k of Canadian dividend enhanced tax credit eligible ETF, grows at 4% capital + 3% dividend. Over 10 years, is it better to have it unregistered, or in an RRSP - assuming you're going to have ~ $15k of OTHER income. So any income withdrawn from this $50k investment would be in the 20%(ish) bracket.

It's always better to have it in the RRSP, because you don't pay tax on the investment income. You pay income tax on the withdrawals, sure, but that's exactly offset by the income tax you didn't pay on the contributions.

RRSP growth is tax-free exactly the same way TFSA growth is.

daverobev

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Re: Canadians - can we have too much in RRSP?
« Reply #5 on: February 27, 2014, 06:30:06 AM »
Quote
$50k of Canadian dividend enhanced tax credit eligible ETF, grows at 4% capital + 3% dividend. Over 10 years, is it better to have it unregistered, or in an RRSP - assuming you're going to have ~ $15k of OTHER income. So any income withdrawn from this $50k investment would be in the 20%(ish) bracket.

It's always better to have it in the RRSP, because you don't pay tax on the investment income. You pay income tax on the withdrawals, sure, but that's exactly offset by the income tax you didn't pay on the contributions.

RRSP growth is tax-free exactly the same way TFSA growth is.

That's my point. You pay *income* tax on withdrawals, you do NOT get the benefit of only paying capital gains tax, or qualified-dividend tax.

Say your $50k + 20% deferral = $60k grows to $90k plus gives you $30k in divis. RRSP you have $120k of income at 20% tax to use, so you will get out 0.8 x 120 = $96k.

Unreg you have $50k which is yours plus $25k growth taxed at 10% + $25k of qualified divis, effectively or nearly tax free. $50k + $22.5k + $25k = $97.5k

RRSP growth is not the same as TFSA because the TFSA is not deferring paying the tax. Any growth is 100% yours. Vs being 100% taxable!

Cecil

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Re: Canadians - can we have too much in RRSP?
« Reply #6 on: February 27, 2014, 08:00:24 AM »
Quote
$50k of Canadian dividend enhanced tax credit eligible ETF, grows at 4% capital + 3% dividend. Over 10 years, is it better to have it unregistered, or in an RRSP - assuming you're going to have ~ $15k of OTHER income. So any income withdrawn from this $50k investment would be in the 20%(ish) bracket.

It's always better to have it in the RRSP, because you don't pay tax on the investment income. You pay income tax on the withdrawals, sure, but that's exactly offset by the income tax you didn't pay on the contributions.

RRSP growth is tax-free exactly the same way TFSA growth is.

That's my point. You pay *income* tax on withdrawals, you do NOT get the benefit of only paying capital gains tax, or qualified-dividend tax.

Say your $50k + 20% deferral = $60k grows to $90k plus gives you $30k in divis. RRSP you have $120k of income at 20% tax to use, so you will get out 0.8 x 120 = $96k.

Unreg you have $50k which is yours plus $25k growth taxed at 10% + $25k of qualified divis, effectively or nearly tax free. $50k + $22.5k + $25k = $97.5k

RRSP growth is not the same as TFSA because the TFSA is not deferring paying the tax. Any growth is 100% yours. Vs being 100% taxable!

Your numbers are not quite right. In your RRSP example you would actually have $50k/0.8 = $62.5k to invest. Look at it this way: suppose I earn $50k pre-tax.

RRSP: Invest $50k. Earn 50% growth and 50% dividends, now I have $100k. Pay 20% income tax = $80k after-tax.

Unreg: Invest $50k * 0.8 = $40k. Earn $20k growth at 10% tax + $20k dividends tax-free. That's $40k + $18k + $20 = $78k after-tax.

The $2k difference is the extra tax you had to pay on your capital gains in the unreg account. In the RRSP, you didn't pay any tax on your capital gains.

Multiplication is transitive, which means that when you pay tax on money, it's as thought you've paid the same tax on all growth of that money.

So in an RRSP, you pay no tax until you withdraw. All your money gets taxed only once. In an unreg account, you pay income tax once, and then you pay tax again on the growth.

Gerard

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Re: Canadians - can we have too much in RRSP?
« Reply #7 on: February 27, 2014, 06:25:23 PM »
RRSP: Invest $50k. Earn 50% growth and 50% dividends, now I have $100k. Pay 20% income tax = $80k after-tax.

Unreg: Invest $50k * 0.8 = $40k. Earn $20k growth at 10% tax + $20k dividends tax-free. That's $40k + $18k + $20 = $78k after-tax.


This seems to be right math-wise, but only if you spread out your RRSP withdrawals over enough years that all $100K is taxed at the same low rate (i.e., twice what the $20K growth is taxed at in the unreg account).

daverobev

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Re: Canadians - can we have too much in RRSP?
« Reply #8 on: February 27, 2014, 06:33:44 PM »

Your numbers are not quite right. In your RRSP example you would actually have $50k/0.8 = $62.5k to invest. Look at it this way: suppose I earn $50k pre-tax.

RRSP: Invest $50k. Earn 50% growth and 50% dividends, now I have $100k. Pay 20% income tax = $80k after-tax.

Unreg: Invest $50k * 0.8 = $40k. Earn $20k growth at 10% tax + $20k dividends tax-free. That's $40k + $18k + $20 = $78k after-tax.

The $2k difference is the extra tax you had to pay on your capital gains in the unreg account. In the RRSP, you didn't pay any tax on your capital gains.

Multiplication is transitive, which means that when you pay tax on money, it's as thought you've paid the same tax on all growth of that money.

So in an RRSP, you pay no tax until you withdraw. All your money gets taxed only once. In an unreg account, you pay income tax once, and then you pay tax again on the growth.

Aaaaah. Ok, brain hurt, but yeah ok I get it. Thanks!

Cecil

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Re: Canadians - can we have too much in RRSP?
« Reply #9 on: February 27, 2014, 09:27:28 PM »
RRSP: Invest $50k. Earn 50% growth and 50% dividends, now I have $100k. Pay 20% income tax = $80k after-tax.

Unreg: Invest $50k * 0.8 = $40k. Earn $20k growth at 10% tax + $20k dividends tax-free. That's $40k + $18k + $20 = $78k after-tax.


This seems to be right math-wise, but only if you spread out your RRSP withdrawals over enough years that all $100K is taxed at the same low rate (i.e., twice what the $20K growth is taxed at in the unreg account).

Not quite.

All that's important is that the (total) income tax rate you pay in retirement is less than the (marginal) income tax rate you paid while working. It's not the income tax rate vs the capital gains tax rate that matters, it's the tax savings while working vs the tax paid while withdrawing.

Cecil

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Re: Canadians - can we have too much in RRSP?
« Reply #10 on: February 27, 2014, 09:28:37 PM »

Your numbers are not quite right. In your RRSP example you would actually have $50k/0.8 = $62.5k to invest. Look at it this way: suppose I earn $50k pre-tax.

RRSP: Invest $50k. Earn 50% growth and 50% dividends, now I have $100k. Pay 20% income tax = $80k after-tax.

Unreg: Invest $50k * 0.8 = $40k. Earn $20k growth at 10% tax + $20k dividends tax-free. That's $40k + $18k + $20 = $78k after-tax.

The $2k difference is the extra tax you had to pay on your capital gains in the unreg account. In the RRSP, you didn't pay any tax on your capital gains.

Multiplication is transitive, which means that when you pay tax on money, it's as thought you've paid the same tax on all growth of that money.

So in an RRSP, you pay no tax until you withdraw. All your money gets taxed only once. In an unreg account, you pay income tax once, and then you pay tax again on the growth.

Aaaaah. Ok, brain hurt, but yeah ok I get it. Thanks!

I love it when things click for people! :)

It took me a long time to fully wrap my head around why this was the case, and I'm glad I could get the idea across.

RetiredAt63

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Re: Canadians - can we have too much in RRSP?
« Reply #11 on: February 28, 2014, 07:49:13 AM »
Been there, done that.  I put my RRSP into a RIFF and started withdrawing this January, in the year I turn 64.  My minimum withdrawal is much lower than it would be if I started at 71.  Right now my RRIF should make more money than I withdraw, but at some point the withdrawals will be more than the growth. This means that at 71 my income from the RIFF will be a lot less than if I had started it then, and I will not take a sudden tax hit.   Also, at this point I am actually using the income (think lawyer's fees), but once my divorce (and financial affairs) are settled I should be able to dump in the maximum allowed into a TFSA, and use the RRIF income to contribute to it each year.  That way as the RRIF shrinks, I will have assets accumulating in the TFSA for when I need them (i.e. when I move to assisted living, 20 years or so from now).  I should add that my RRSP was never huge, because I had very little contribution room (main pension is from work).

My work pension is indexed so that when I hit 65 it goes down by the amount of CPP I will be eligible for.  My financial adviser pointed out that at 65 I will be eligible for OAS, which means that I should start the CPP earlier, the drop in pension at 65 will be made up by the OAS.  I am OK with this because CPP is better indexed than my pension is - it will not keep up with inflation, which is something I have to be careful about.  Given my family history and present health, I should live well into my 90's.

My lifestyle is fairly frugal, my almost-ex was the spendy one.  His retirement is going to be a shock for him.  I am doing fine, my pleasures are pretty inexpensive, and I live in a mainly farming area where being fairly frugal is the norm.  If only Hydro One would get its act together I would be living in luxury.

I read a lot of personal finance books - do not read American ones, their tax situation is so different.  Read Canadian ones.  And don't worry if the authors have different viewpoints - it is educational to see how different people think about Canadian retirement issues.

Gerard

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Re: Canadians - can we have too much in RRSP?
« Reply #12 on: March 01, 2014, 02:13:05 PM »
This seems to be right math-wise, but only if you spread out your RRSP withdrawals over enough years that all $100K is taxed at the same low rate (i.e., twice what the $20K growth is taxed at in the unreg account).
Not quite.
All that's important is that the (total) income tax rate you pay in retirement is less than the (marginal) income tax rate you paid while working. It's not the income tax rate vs the capital gains tax rate that matters, it's the tax savings while working vs the tax paid while withdrawing.

OK, I see what you mean. Although it requires that (a) your money goes into the RSP in small enough amounts that it's always at a marginal rate higher than your likely withdrawal tax rate, and/or (b) that it comes out slowly enough that it's always at rate(s) that were lower than what went in.

So if I earn (say) $50K a year and retire with $25K a year in other income, I should invest the $50K from the example in $8K annual chunks (to be above the $42K at which my marginal rate jumps), and the $100K would come out in $17K annual chunks or less (to be below that cutoff). If it goes in and comes out at the same tax rate, as in the example we were previously discussing, then the RSP shows a slight advantage; but if I pull out more than the $17K each year, then the lower tax rate on the capital gains eventually wins out over the fully-taxed RSP loot.

Or am I still missing something?

Joan-eh?

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Re: Canadians - can we have too much in RRSP?
« Reply #13 on: January 20, 2020, 11:51:34 AM »
Fabulous thread, IM not sure I get it all.
Was there a conclusion about a maximum amount to have in RRSP?

bluebelle

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Re: Canadians - can we have too much in RRSP?
« Reply #14 on: January 20, 2020, 01:03:46 PM »
I think the answer is - it depends......
- not the OP - since they are looking to 'retire' at 45.....but for someone working to the more conventional age of 65, and following the conventional advice or leaving tax deferred money alone as long as possible (leave the money in the RRSP until forced to convert and withdraw at 71), you can absolutely have too much money in an RRSP.   Not just because of OAS clawback rules, but because of the minimum withdrawal percentage.   
- it's not hard to have a million dollar RRSP balance if you work to 65, and maybe your spouse has one too.....let's say you follow the boggle head advice and leave that money alone for another 6 years (age 71).   Each RRSP should have grown to at least 1.34 million. (5% return), each spouse will need to pull over $67,000 out of the RRSP at age 71 PLUS OAS and CPP payments.....that's getting close to OAS clawback territory, not to mention the tax hit - marginal tax rate will be nearly 30%.   And if one spouse passes, that RRIF passes tax free to the surviving spouse - now they're looking at a forced withdrawal approaching the highest tax bracket - ouch!!!!!!!!

but for those of us here, planning on an early retirement, judicial withdrawals starting in our early years of retirement gives us the best of both worlds.   A tax savings during our peak income earning years, and withdrawals in a lower tax bracket.

To the OP - RRSP/RRIF withdrawals are taxed as income.  If you expect your taxable income to be the same in retirement as it is during your working years, RRSP contributions will not have the same benefit as someone making 6 figures.

damyst

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Re: Canadians - can we have too much in RRSP?
« Reply #15 on: January 24, 2020, 09:03:03 AM »
Maybe I'll understand this better when I'm older, but right now I'm confused as to why high-income (sometimes very-high-income) seniors are so stressed out about paying income taxes.

Do they need this money to support themselves or their immediate family? No.
Are they very determined to maximize the value of their estate? That's a morally very questionable pursuit IMO, when the alternative is to help your community by paying taxes.

It seems better to let the government have its share, and focus one's efforts on other aspects of one's legacy.

bluebelle

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Re: Canadians - can we have too much in RRSP?
« Reply #16 on: January 24, 2020, 10:21:20 AM »
Maybe I'll understand this better when I'm older, but right now I'm confused as to why high-income (sometimes very-high-income) seniors are so stressed out about paying income taxes.

Do they need this money to support themselves or their immediate family? No.
Are they very determined to maximize the value of their estate? That's a morally very questionable pursuit IMO, when the alternative is to help your community by paying taxes.

It seems better to let the government have its share, and focus one's efforts on other aspects of one's legacy.
a couple of points:
- when you've been a high income earner, with a marginal tax rate of over 50%, it PISSES you off to watch the government waste your tax dollars
- RRSPs were sold to folks as the be all and end all....people did't look at the tax ramifications of million+ RRSPs in your 80s and minimum withdrawals, some are now in a higher tax bracket than when they were working
- OAS claw-back limits quietly introduced 34 years ago...the limit seemed high back then, now, not so much.....people think they are entitled to OAS payments
- be careful about talking about letting the 'government get its share', see point above - they have gotten well more than their 'share'
- there is nothing wrong with trying to ensure that the lifetime tax payable is as low as possible.   I'm not trying to maximum my estate, I'm trying to spend more of my money than the government.

RetiredAt63

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Re: Canadians - can we have too much in RRSP?
« Reply #17 on: January 26, 2020, 04:56:57 PM »
Maybe I'll understand this better when I'm older, but right now I'm confused as to why high-income (sometimes very-high-income) seniors are so stressed out about paying income taxes.

Do they need this money to support themselves or their immediate family? No.
Are they very determined to maximize the value of their estate? That's a morally very questionable pursuit IMO, when the alternative is to help your community by paying taxes.

It seems better to let the government have its share, and focus one's efforts on other aspects of one's legacy.

I'm medium high income in retirement, high enough that I have partial OAS claw back.  I'm fine with paying taxes, because that means I have a good income. 

The point is that if I had more in my TFSA and less in my RRIF my taxes would be lower.  But RRSPs were introduced first, and TFSAs have really changed tax planning.  Some of us ended up with an inefficient tax setup because of this.  But it is way better than being eligible for GIS.

bluebelle

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Re: Canadians - can we have too much in RRSP?
« Reply #18 on: January 27, 2020, 09:36:22 AM »
Maybe I'll understand this better when I'm older, but right now I'm confused as to why high-income (sometimes very-high-income) seniors are so stressed out about paying income taxes.

Do they need this money to support themselves or their immediate family? No.
Are they very determined to maximize the value of their estate? That's a morally very questionable pursuit IMO, when the alternative is to help your community by paying taxes.

It seems better to let the government have its share, and focus one's efforts on other aspects of one's legacy.

I'm medium high income in retirement, high enough that I have partial OAS claw back.  I'm fine with paying taxes, because that means I have a good income. 

The point is that if I had more in my TFSA and less in my RRIF my taxes would be lower.  But RRSPs were introduced first, and TFSAs have really changed tax planning.  Some of us ended up with an inefficient tax setup because of this.  But it is way better than being eligible for GIS.
I agree - having too much income in retirement is a much better problem than qualifying for GIS.   Although I would argue that having a net income in retirement of over $79,054 (clawback threshold for 2020) is more than medium high income in retirement.   Congratulations on a job well done!

RetiredAt63

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Re: Canadians - can we have too much in RRSP?
« Reply #19 on: January 27, 2020, 12:54:18 PM »
Maybe I'll understand this better when I'm older, but right now I'm confused as to why high-income (sometimes very-high-income) seniors are so stressed out about paying income taxes.

Do they need this money to support themselves or their immediate family? No.
Are they very determined to maximize the value of their estate? That's a morally very questionable pursuit IMO, when the alternative is to help your community by paying taxes.

It seems better to let the government have its share, and focus one's efforts on other aspects of one's legacy.

I'm medium high income in retirement, high enough that I have partial OAS claw back.  I'm fine with paying taxes, because that means I have a good income. 

The point is that if I had more in my TFSA and less in my RRIF my taxes would be lower.  But RRSPs were introduced first, and TFSAs have really changed tax planning.  Some of us ended up with an inefficient tax setup because of this.  But it is way better than being eligible for GIS.
I agree - having too much income in retirement is a much better problem than qualifying for GIS.   Although I would argue that having a net income in retirement of over $79,054 (clawback threshold for 2020) is more than medium high income in retirement.   Congratulations on a job well done!

We really shouldn't assume our retirement income will be lower than our working income. Between my work pension and CPP and RRIF I am making more than I ever made when I was working.  And I have investments that are set on DRIP, because I expect my COL will go up when I eventually need to move to assisted living and they will provide the extra funding.

I would not say I worked too long, I had an expensive divorce to recover from and I changed jobs 3 years before retirement and really enjoyed the new job.  No regrets.  But it is really hard to predict what one's life will be like 10 years down the road.

These days I  would prioritize TFSA over RRSP, but really they are complementary.  Use the RRSP, use the tax savings for the TFSA.  My RRSP was never huge because after work pension contributions I never had more then $3000 room.  But it sure grows over a few decades.