Looking for some Canadian inputs regarding this issue, as the tax situations are somewhat different in Canada.
I understand that generally a RRSP account helps with paying less taxes in retirement, assuming one's retirement ordinary income is less than income during employment.
Last night gf and I had a RRSP discussion. While we have a RRSP account (for the match), it's no where near our contribution limit. The problem I have is that, as RRSP withdrawals count as salary/ordinary income, there's only so much we can take out (I think it's around $33,000 for two) before we start paying ~25% taxes on every dollar we take out.
I guess the question boils down to, does interest from GIC ladders and Bond Investments count as ordinary income? If we anticipate to receive $33,000/yr from interests in retirement using today's rates, does that mean we should forget about RRSP and just use taxable accounts ?
Thanks.
The RRSP doesn't help you pay less taxes in retirement, it really just defers your tax bill from today until the time that you retire. All RRSP withdrawals, regardless of the form of income, are taxed as regular income. When people talk about lowering your tax bills by investing through RRSP, they are talking about claiming RRSP deduction when you're earning in the 30-40% tax brackets and then cashing RRSP's in retirement in the 15-25% tax brackets.
In Canada, you basically have three choices of saving:
1) RRSP
2) TFSA
3) Taxable accounts
Edit: 4) RDSP for people with qualified disability Rule of thumb says that if you're "maxing out" all three accounts, you definitely do NOT want to hold bonds / GIC's in your taxable account. Your taxable account should really hold only Canadian dividend stocks. Some dividend ETF's are ok if they aren't to heavy in REIT and they have very low turnover. Then you also want to hold U.S. stocks in your RRSP because of tax agreements related to that account only. To see these benefits you need a USD RRSP account and you must purchase US securities directly (ie. they must be listed on the NYSE/NASDAX/ASE). It can not be a TSE listed ETF or a Canadian mutual fund that holds U.S. stocks (with a few that are exceptions because of their unique designs).
So armed with this knowledge, you then plan your investing together with your risk profile. If you're close to retirement you'll probably want bonds and GIC's in the mix. Where would you put these first? Theoretically your TFSA because your RRSP is filled with U.S. stocks and your taxable account with Canadian dividend stocks. If your TFSA is filled to the brim with bonds and GIC's and you need more, where do you put them next? Your RRSP. Sell some U.S. stocks and replace them with bonds. Because of the extremely good tax treatment of Canadian dividends and quite good tax treatment of Canadian capital gains, you should avoid holding anything other than Canadian stocks in your taxable account.
I hope this helps explain it a little better. If you have any more questions, just ask. :)