Author Topic: Do you have unused RRSP room?  (Read 2376 times)

Mighty Eyebrows

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Do you have unused RRSP room?
« on: August 17, 2020, 10:10:03 PM »
You may want to use it, even if you don't have much taxable income:

https://www.financialwisdomforum.org/forum/viewtopic.php?p=669597

It can be a useful tool even for a low-income spouse. It is important to think about your own future tax situation, though.

Goldielocks

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Re: Do you have unused RRSP room?
« Reply #1 on: August 26, 2020, 12:02:50 AM »
You may want to use it, even if you don't have much taxable income:

https://www.financialwisdomforum.org/forum/viewtopic.php?p=669597

It can be a useful tool even for a low-income spouse. It is important to think about your own future tax situation, though.

Thanks for the link.  Good response about the time value of money on the tax rebate being deferred being negligible because the owner is already in low income tax bracket and just wants to shelter earnings.

A couple of benefits of having substantial RRSP room -
1. to absorb windfalls. 
2.  when you die, your RRSP rolls over to a spouse and if no spouse, becomes immediately taxable in the year of your death, as though it is income, at full tax rate.   Which will be pretty high if you had it maxed out.   If you die before you expect, you could still have a huge RRSP with a major tax penalty on it.   You won't care (you are dead), but your kids might.

In contrast, you can set up and use an RESP for 35 years this way, like a TFSA, but only up to $50k of contributions.  You can set this up on anyone, including yourself.   $$'s  of profit used on education are tax free.  Withdrawal of original capital is tax free, So if you plan on any type of school in future this could work.  (Commercial driving school, bartender school, study a language in a foreign school, etc).

Also see spousal RRSPs for more ideas.   Here it is just a plain old shift of taxes from high to low over 3+ years, if your spouse is low income, but that beats waiting for retirement to do it.

Mighty Eyebrows

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Re: Do you have unused RRSP room?
« Reply #2 on: August 29, 2020, 12:06:09 PM »
In contrast, you can set up and use an RESP for 35 years this way, like a TFSA, but only up to $50k of contributions.  You can set this up on anyone, including yourself.   $$'s  of profit used on education are tax free.  Withdrawal of original capital is tax free, So if you plan on any type of school in future this could work.  (Commercial driving school, bartender school, study a language in a foreign school, etc).

Interesting. I had not thought about the RESP for adults. I will need to do some research.

Mighty Eyebrows

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Re: Do you have unused RRSP room?
« Reply #3 on: August 30, 2020, 01:18:02 AM »
Goldielocks, thank-you for your RESP comment. I found a decent article here:
https://www.advisor.ca/sun-life-retirement/life-events/funding-a-second-career-using-resps-for-your-adult-clients/

In looking further at it, the numbers come out the same as for the "unconventional RRSP" if the RRSP tax deduction is taken at the very end (at withdrawal). My first impression is that one should first use the TFSA & RRSP, then use an "unconventional RRSP" if there is any prospect of a tax deduction before withdrawal. Only if all these are full would it be worth doing the adult RESP.

There are some issues around favourable tax rates for dividends and capital gains, rather than the full tax on RESP profit withdrawals (like RRSP/RRIF withdrawals). However, if someone put 50k into an RESP for 20 or 30 years while they were otherwise in a high tax bracket, it could be quite powerful.

« Last Edit: August 30, 2020, 01:20:15 AM by Mighty Eyebrows »

UpNAtom

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Re: Do you have unused RRSP room?
« Reply #4 on: August 31, 2020, 12:34:53 PM »
Goldielocks, thank-you for your RESP comment. I found a decent article here:
https://www.advisor.ca/sun-life-retirement/life-events/funding-a-second-career-using-resps-for-your-adult-clients/

In looking further at it, the numbers come out the same as for the "unconventional RRSP" if the RRSP tax deduction is taken at the very end (at withdrawal). My first impression is that one should first use the TFSA & RRSP, then use an "unconventional RRSP" if there is any prospect of a tax deduction before withdrawal. Only if all these are full would it be worth doing the adult RESP.

There are some issues around favourable tax rates for dividends and capital gains, rather than the full tax on RESP profit withdrawals (like RRSP/RRIF withdrawals). However, if someone put 50k into an RESP for 20 or 30 years while they were otherwise in a high tax bracket, it could be quite powerful.

It would be interesting to see if the RESP is good for anyone not actually going back to school.  The 20% penalty on gains is a pretty big hurdle to overcome PLUS there is no upfront tax deduction to make up for it.  On top of that, you add the gains as income.  The amount of variables that have to happen "just right" set a decent hurdle to get over.

30k other income, pulls out 10k from RESP = ~4.5k extra tax/penalty on the 10k from the RESP
30k other income, pulls out 10k from capital gains = ~1k extra tax. 
(100k other income with 10k pulled out is 6.5k vs 2k)

That tells me there is a decent level of risk for very little (any?) gain, if not plannnig to 'study' to pull out the funds.

Mighty Eyebrows

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Re: Do you have unused RRSP room?
« Reply #5 on: September 01, 2020, 10:39:15 PM »
It would be interesting to see if the RESP is good for anyone not actually going back to school.

That is an important question. However, for anyone even remotely interested in doing a few courses, getting the money back out shouldn't be too hard. A great number of different educational programs qualify for RESP funding, including community colleges and trade schools. It would be perfect for a mustachian who wanted to get some solid practical skills a few years after jumping off the treadmill.

Goldielocks

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Re: Do you have unused RRSP room?
« Reply #6 on: September 07, 2020, 02:19:01 AM »
Goldielocks, thank-you for your RESP comment. I found a decent article here:
https://www.advisor.ca/sun-life-retirement/life-events/funding-a-second-career-using-resps-for-your-adult-clients/

In looking further at it, the numbers come out the same as for the "unconventional RRSP" if the RRSP tax deduction is taken at the very end (at withdrawal). My first impression is that one should first use the TFSA & RRSP, then use an "unconventional RRSP" if there is any prospect of a tax deduction before withdrawal. Only if all these are full would it be worth doing the adult RESP.

There are some issues around favourable tax rates for dividends and capital gains, rather than the full tax on RESP profit withdrawals (like RRSP/RRIF withdrawals). However, if someone put 50k into an RESP for 20 or 30 years while they were otherwise in a high tax bracket, it could be quite powerful.

The adult RESP is a good option for many; both my husband and I went back to school after age 30 for 3 years of education and more credentials.  Although we did a bit of LLP arbitrage with that, the adult RESP option adds to the registered / tax sheltered growth.    And you just need RRSP room at the end for the income portion only, to roll over your taxable portion of the RESP, if you don't end up going to a qualified program.

Actually, I can think of a few "fun" educational programs to attend as an adult on sabbatical that would qualify.  Gardening, cooking, bartending, foreign language in another country  (the school does not need to be in Canada!).
Also, you pull the income amount first (and tax free) for the schooling, then can take your original contributions penalty free when you want.
----------------
OMG, I just looked into the designated institutions that qualify -- there are over 2500 international ones, and a local one to me "Westcoast Adventure College" where you learn to be an adventure tourism guide.  You learn kayaking, sailing, group camping, survival skills, heritage talks, etc.  Hands on.
« Last Edit: September 07, 2020, 02:39:49 AM by Goldielocks »

Mighty Eyebrows

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Re: Do you have unused RRSP room?
« Reply #7 on: September 07, 2020, 10:53:18 AM »
Also, you pull the income amount first (and tax free) for the schooling
I am not sure what you mean by this? EAP ("income" and/or "grant") payments from a RESP are always taxable at the recipient's marginal rate.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps/payments-resp/educational-assistance-payments-eaps.html

Goldielocks

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Re: Do you have unused RRSP room?
« Reply #8 on: September 08, 2020, 10:08:37 PM »
My bad.
Everyone in my family that has pulled this have ensured that they are at or under the exemption.  DH did it with RRSP contributions, kids did it with only earning $10k a year.

Mighty Eyebrows

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Re: Do you have unused RRSP room?
« Reply #9 on: September 09, 2020, 11:14:43 AM »
Everyone in my family that has pulled this have ensured that they are at or under the exemption.  DH did it with RRSP contributions, kids did it with only earning $10k a year.
Well, that is certainly the best use of the account!

 

Wow, a phone plan for fifteen bucks!