Reader Case Study - Money in RRSP (401k) vs keeping it in a savings account

[Nepoxx]

Hi everyone, just a quick intro about me, I'm a 27 years old Software Engineer working full time. I just started reading this blog so I'm quite new (but I've always been frugal). I just recently started investing in Mutual Funds because my bank called me to let me know I had too much money sitting in a savings account (about 65k shared between a regular savings account and a RRSP).

Income: 50 000$ CAD / year
Spending: Usually around 2k per month (according to mint.com)
Assets: 11k in chequing account
    25k in RRSP sitting in a savings account
    30k in mutual funds (20k in TD's balanced portfolio, 5k in Tangerine's balanced portfolio and 5k in Tangerine's equity growth portfolio)

For anyone wondering, RRSP (registered retirement savings plan) is (I think) the Canadian equivalent of your 401k. In short, the money you put in your RRSP is substracted from your income for that year.

Now, the government has a program to help new homeowners, they allow you to withdraw up to 25 000$ from your RRSP at no cost to help with a downpayment, given that you reimburse it (to yourself) within 15 years. (For more info: http://www.cra-arc.gc.ca/hbp/).

Here's the thing, I already have more than 25 000$ in my RRSP account (currently sitting in a bank savings account (I know I know, I'm scared :P)) and I'm planning to buy a house relatively soon. If I contribute the maximum this year, I will get a tax refund of 6k, however I will not be able to withdraw that money to buy a house. On the other hand, if I do not contributed, I will only get a tax refund of 1k but that money will be freely available. What should I do?

(Edit: added more details on assets)

[Retire-Canada]

Hi everyone, just a quick intro about me, I'm a 27 years old Software Engineer working full time. I just started reading this blog so I'm quite new (but I've always been frugal). I just recently started investing in Mutual Funds because my bank called me to let me know I had too much money sitting in a savings account (about 65k shared between a regular savings account and a RRSP).

Income: 50 000$ CAD / year
Spending: Usually around 2k per month (according to mint.com)
Assets: 11k in chequing account
    25k in RRSP sitting in a savings account
    30k in mutual funds (20k in TD's balanced portfolio, 5k in Tangerine's balanced portfolio and 5k in Tangerine's equity growth portfolio)

For anyone wondering, RRSP (registered retirement savings plan) is (I think) the Canadian equivalent of your 401k. In short, the money you put in your RRSP is substracted from your income for that year.

Now, the government has a program to help new homeowners, they allow you to withdraw up to 25 000$ from your RRSP at no cost to help with a downpayment, given that you reimburse it (to yourself) within 15 years. (For more info: http://www.cra-arc.gc.ca/hbp/).

Here's the thing, I already have more than 25 000$ in my RRSP account (currently sitting in a bank savings account (I know I know, I'm scared :P)) and I'm planning to buy a house relatively soon. If I contribute the maximum this year, I will get a tax refund of 6k, however I will not be able to withdraw that money to buy a house. On the other hand, if I do not contributed, I will only get a tax refund of 1k but that money will be freely available. What should I do?

(Edit: added more details on assets)

The way I read that is that you can't take out $25K the same year you put it in, but if you have $25K in your RRSP from a previous year and you add $25K to it this year for a total of $50K you can take out $25K [essentially the previous contribution] for your home purchase.

-- Vik

[Nepoxx]

The way I read that is that you can't take out $25K the same year you put it in, but if you have $25K in your RRSP from a previous year and you add $25K to it this year for a total of $50K you can take out $25K [essentially the previous contribution] for your home purchase.

-- Vik

I should have clarified further, my mistake. The issue isn't that I won't be able to withdraw 25k$, the issue is that I will only be able to withdraw 25k$ (which is not enough for a downpayment). Should I add more money to my RRSP in order to get a bigger tax refund, and then wait on more income to be able to make a downpayment, or keep the money outside the RRSP and have enough funds to make a downpayment right now? I'm not in a hurry to buy, yet.

[going2ER]

It obviously depends on how much you need for a down payment. Will you be saving the remainder of it this year? or will it take longer? Would you be better off putting what you now have into an RRSP, get a decent tax return and save that also for the down payment and look at purchasing a home next year? Then you would have access to at least $56000 for a down payment.

[ldk]

Why not use a TFSA for saving for a downpayment? You won't get the tax refund this year, but the money will be accessible when you need it and can be re contributed at any time (after that calendar year.).

[Nepoxx]

Why not use a TFSA for saving for a downpayment? You won't get the tax refund this year, but the money will be accessible when you need it and can be re contributed at any time (after that calendar year.).

That's what my TD/Tangerine investments are in, but unfortunately they do not deduct from my income when contributing to it. It's not a bad idea though.

I think I'll max out my RRSP and then max out my TSFA. I should be able to have more than enough funds in 1-2 years to make a nice down payment even with the 25k limit from RRSP (especially if following the mustachian way!=).

Thanks guys!

[SK Joyous]

Hi Nepoxx,

Something I didn't see others bring up here - with an income of $50,000, it is probably not worth it from a tax perspective to put additional money into your RRSP.  Remember it is just 'deferred tax', not 'no tax'!  The 2014 upper limit for the lowest tax bracket is $44,000, so assuming inflation of 2% next year, the 2015 upper limit will be $44,800.  This means that if you contribute more than $5200 to any registered pension plan, you have now dropped your tax rate down to the minimum rate (which is the same tax rate you will be in during retirement), which means there is no benefit to using an RRSP at that rate.  You are better off in a TFSA at that rate, and the money can be taken out for a down payment eventually (as much as you want!) and then even replaced in subsequent years in the TFSA.

On one more note - this is completely unsolicited advice now :)  you have a lot of your money in mutual funds, which I know from experience in Canada are fairly high on the MER fees.  You're definitely better off with the Tangerine products and TD (if it is the TD e-series) than you would be with 'traditional' mutual funds, but if you want to take the time over the next couple of years to put in some work on self-directed investing and ETFs, it will end up saving you 1% or more in fees every single year forever.  My total portfolio of ETFs have fees of less than 0.2%, and I buy the ETFs for free with Questrade as my brokerage.

Sorry to complicate things, I just thought you sound like a really sharp young guy/girl that has your crap together and might be interested :)

[Nepoxx]

Hi Nepoxx,

Something I didn't see others bring up here - with an income of $50,000, it is probably not worth it from a tax perspective to put additional money into your RRSP.  Remember it is just 'deferred tax', not 'no tax'!  The 2014 upper limit for the lowest tax bracket is $44,000, so assuming inflation of 2% next year, the 2015 upper limit will be $44,800.  This means that if you contribute more than $5200 to any registered pension plan, you have now dropped your tax rate down to the minimum rate (which is the same tax rate you will be in during retirement), which means there is no benefit to using an RRSP at that rate.  You are better off in a TFSA at that rate, and the money can be taken out for a down payment eventually (as much as you want!) and then even replaced in subsequent years in the TFSA.

On one more note - this is completely unsolicited advice now :)  you have a lot of your money in mutual funds, which I know from experience in Canada are fairly high on the MER fees.  You're definitely better off with the Tangerine products and TD (if it is the TD e-series) than you would be with 'traditional' mutual funds, but if you want to take the time over the next couple of years to put in some work on self-directed investing and ETFs, it will end up saving you 1% or more in fees every single year forever.  My total portfolio of ETFs have fees of less than 0.2%, and I buy the ETFs for free with Questrade as my brokerage.

Sorry to complicate things, I just thought you sound like a really sharp young guy/girl that has your crap together and might be interested :)

Definitely not unsolicited, it's highly welcomed advice :). I just opened a Questrade account (waiting for my initial funding to go through) and was planning on buying some Vanguard ETFs (not quite certain about that yet though). My TD mutual fund isn't performing very well and the MER is close to 2%. Unfortunately I was very new to financing and took the bank's adviser advice. They are NOT e-series unfortunately, and I was told that there would be an additional fee if I were to withdraw from their mutual funds in the first three months (but I can't quite find out where that fee is).

What does your Questrade portfolio look like if you don't mind me asking?

Thanks a lot for the advice! :D

[SK Joyous]

Ouch, 2% hurts but no worries, it's still early days and at least you were saving, which is awesome!

We are 100% in equities (we have employer pension plans that are 'balanced' (60% equities/40% bonds), and we also treat mortgage pre-payments as a 'conservative' part of our portfolio (at 3% it's a low return, but I think it balances out our 100% equities in RRSPs)

My investments:

VCN 30% (Vanguard total Canada market)
VUN 30% (Vanguard U.S. total market)
XEF 20% (iShares developed country markets)
XEC 10% (iShares emerging markets)
ZRE 10% (BMO REIT)

My husbands:

VCN 30% (Vanguard total Canada market)
VXC 70% (Vanguard whole world except Canada)


HOWEVER, don't take these as any kind of ideal blend, everyone is different and there are newer funds that might be more efficient now (there are funds for everything and every index these days!)

We also only go in non-currency hedged funds, there are currency-hedged funds of pretty much everything too

I would strongly, strongly recommend that you go to Canadian Couch Potato and read from there - it is a fabulous site for Canadian index investors and has a ton of great information and education (like why we don't currency-hedge, for example) and there are sample portfolios and such to look at and figure out what would work for you.  I spent many happy months learning all about this stuff years ago, and I now feel very comfortable managing our investments - it was a great process too as I am a money nerd and loved learning it!

http://canadiancouchpotato.com/

[Prairie Stash]

I think you should recalculate your taxes. At 50k earnings you should contribute just enough to hit the bracket below. The rest of your money should go to a TFSA until you max out its contribution room.

In a few years you can top up your RRSP. Hopefully in the next 5 years you get some raises at work. With the extra money the RRSP room becomes more valuable. I assume you're expecting significant raises over the next few years :)

For Americans; RRSP and TFSA room is cumulative. It just keeps adding up every year you don't use it.

[Nepoxx]

I think you should recalculate your taxes. At 50k earnings you should contribute just enough to hit the bracket below. The rest of your money should go to a TFSA until you max out its contribution room.

In a few years you can top up your RRSP. Hopefully in the next 5 years you get some raises at work. With the extra money the RRSP room becomes more valuable. I assume you're expecting significant raises over the next few years :)

For Americans; RRSP and TFSA room is cumulative. It just keeps adding up every year you don't use it.

I moved from Toronto to Quebec City this year, so for this year my taxable income is closer to 85k than the 50k I'm currently making, bummer.