Author Topic: Taxable vs RSP case study - low/high income couple  (Read 3310 times)

Heckler

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Taxable vs RSP case study - low/high income couple
« on: January 13, 2019, 01:34:30 PM »
It's looking like this is the year we max out his RSP & TFSA, and her TFSA, and the debate is on what to do with the overflow, either continue to max out her RSP or start a taxable account in her name.

Him:
Full time stable work, in a high income salary (38.29% marginal tax rate, BC)
RSP will be maxed this year through matched employer plan, have been contributing to a spousal RSP as well.  Trying to balance total value at FIRE@55 of his RSP with her RSP + spousal
For the past three years, was able to drop his taxable income down three brackets to the 28.2% marginal tax rate through massive RSP contributions, but this year only have RSP room to drop down two brackets to the 31 % marginal.
TFSA will be maxed in April this year.
No taxable investments, other than a small H.I.S. account which makes less than $10/month interest income.  Building this $200/month only to get the bonus interest rate offered by the big bank.  Should we have set this up in her name?

Her:
Part-time, 2-3 days a week, currently in lower half of lowest income bracket (20.06% marginal tax rate, BC)
Starting a new job working from home (tax write offs of home expenses??!!), 2 days a week, but will likely stay in the top of the lowest income bracket, even with both jobs.
$80,000 open RSP contribution room
TFSA will be maxed in May this year.
No taxable investments (yet)

No debt, other than monthly credit cards paid off in full; mortgage is paid off.

Plan for FIRE@50-55 (in 5-10 years) is to each be in the lowest 20.06% tax bracket through RSP withdrawals.  No pensions, other than CPP/OAS.  I'm really liking the -9.6% negative tax rate on eligible dividends, but don't know if that is a better benefit than her RSP tax delayed growth.

It is possible that due to growth rate of the Spousal RSP (holding VTI and also delayed first income due to 3 year attribution rule), that her old age income greatly exceeds his.

so.....


1. Should she open a taxable investment account holding VCN (or other TSX div ETF?) or start to max out her RSP?  If taxable, and she invests all her income to taxable via her new checking account (her paper trail), then see 2.  Can she legally put 100% of her income to this taxable account, without taxes being attributed to him?

2. Can he legally contribute more into her RSP than her current annual income?  Currently, checking account has always been a joint account, with household finances being fully integrated (his/hers = theirs). He is already filling up her TFSA.


I hope I've provided enough, but not too much (online security) to be helpful.  @Lews Therin @Stasher @Retire-Canada @RichMoose , hope to get your thoughts!
« Last Edit: January 13, 2019, 01:59:17 PM by Heckler »

Lews Therin

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Re: Taxable vs RSP case study - low/high income couple
« Reply #1 on: January 13, 2019, 03:54:03 PM »
I'd have higher income spouse pay for absolutely everything, fill TFSA, his RRSP, and Spousal RRSP; for her income, 100% taxable.

At her tax bracket, it'll come out more profitable in the long run, as long as you aim for capital gains/dividends.

I can't speak to the max amount for a spousal RRSP, will let others give their opinions.




Heckler

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Re: Taxable vs RSP case study - low/high income couple
« Reply #2 on: January 13, 2019, 04:36:16 PM »
Thanks, I'm just not seeing why we'd want to pay investment taxes now when she still has lots of RSP room to grow it tax deferred.  Care to expand?

Question 2 isn't about his spousal RSP - it's about him contributing to her RSP, which I suppose would make her taxable income negative and probably set off flags at CRA.  That would let him fill up his RSP instead of the spousal, and still build her RSP, in order to even them out.

Blissful Biker

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Re: Taxable vs RSP case study - low/high income couple
« Reply #3 on: January 13, 2019, 04:48:24 PM »
Posting to follow as I have similar quandaries.

In 2018 we also passed the milestone of fully maxing my RRSP (part mine, part spousal) and both TFSAs so we opened a taxable account in DH's name and are buying $4K of VCN each month.  I have a marginal tax rate of 46% while his income hovers around the Basic Personal Amount and thus he pays very little tax.

While there is contribution room available in his RRSP from years gone by, contributing would have no immediate tax savings, only the benefit of deferred taxation on growth.  Given that we are looking at having a sizable RRSP balance upon retirement (in 2024) and the taxation risks that go along with it, I decided to embark on taxable investments.

So far the plan seems sound, but you don't know what you don't know.


 

Heckler

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Re: Taxable vs RSP case study - low/high income couple
« Reply #4 on: January 13, 2019, 05:59:00 PM »
Based on your posts last year, blissful biker & DH have almost twice the RSP savings that we do, I can definitely see that we'd be going with a taxable account if that were our case now (we'd be forced to), and if we sell out and move to Revy or Cumby, the housing proceeds would be going mostly to taxable investments as well.  Not the case today, though... 

I'd be really curious (but feel free to keep it private) to see how DH's income taxes work out this year.  Heck, I might even fake it on our returns (without submitting, of course) to try it out in our tax software.

Lews Therin

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Re: Taxable vs RSP case study - low/high income couple
« Reply #5 on: January 13, 2019, 07:57:26 PM »
Swap-based etfs are free (until retirement), and dividends you say are negative. It gets iffy tax wise if you are saving more than your full income, if the spouse is giving it for investment purposes, it has to be loaned at 1-2% which is why spousal rrsps are better.


RichMoose

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Re: Taxable vs RSP case study - low/high income couple
« Reply #6 on: January 14, 2019, 12:19:46 PM »
Looking at the information you've provided, I think you would be best to avoid contributing to her RRSP for the time being since she is already in the lowest tax bracket. She would be better off investing in a non-registered account, making sure you think about tax efficiency there. Lews nailed it, but I'll clarify my opinion as well.

1. Have her start a non-registered account (go joint, but have her contribute) and invest in VCN.TO and swap-based ETFs for U.S., International, and bond exposure. Make sure that overall you stay at your desired allocation.
Legally the higher income spouse can pay for everything. This includes household expenses, tax expenses (for both spouses), and registered investment account contributions (for both spouses). The lower income spouse can put 100% of her gross income into the non-registered account. However, be careful if you claim certain expenses on her tax return, medical expenses or childcare expenses are most likely to apply here.

2. Yes, but contributing to her RRSP is probably not the best option while she is earning a low income. Also, don't worry about the joint chequing account issue. As long as you can demonstrate that her income goes to her non-registered account you will be fine. Just be careful that you don't contribute more to this account than what she earns. If you do, at least a portion of the non-registered account income will be attributed to you and you will have to pay taxes on it at your rate.

If you can save more than her gross income in non-registered accounts, consider separating the accounts. For example, if she earns $15,000 per year but you can save $20,000 per year beyond registered account contributions, open two non-registered accounts. Contribute $15,000 to her non-registered account and contribute $5,000 to yours. Once you have accumulated say $100,000 in your account, then consider making a spousal loan to her at the prescribed rate.
For estate purposes, make sure both accounts are joint (they list both of your names). Just keep the contributions clear for tax purposes, ie. one joint account is hers, the other one is yours.

Hope this helps.

Blissful Biker

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Re: Taxable vs RSP case study - low/high income couple
« Reply #7 on: January 14, 2019, 08:14:32 PM »
Yikes!  I thought having the taxable account in DH's name was sufficient for it to be taxed in his name.  We are saving $50K/yr in the account and he earns $10K/yr, and I now see the gaping flaw in my plan.  I'll need set up another taxable account that is mine and then loan him the money. 

RichMoose - why do you suggest waiting to accumulate $100K to create the loan?  Could I not instead loan him $40K per year?  Too much effort to track?

This article indicates we need to document the loan, which we can do.  But it also says we need to make sure interest is paid on time or the Attribution Rule kicks in (ie growth is taxed in my name).  How would we demonstrate payment?  Perhaps showing it as income on my tax return is sufficient.  https://turbotax.intuit.ca/tips/one-way-to-split-income-with-your-spouse-a-spousal-loan-2391

This is our first year with a taxable account so I am still learning.  If you are willing to share advice on a couple of other questions I would be grateful:

Asset Allocation - Both Lews and RichMoose talk about swap-based ETFs for taxable accounts.  My strategy, which perhaps errs on the side of simplicity, is to use all of our accounts (RRSPs, TFSAs and taxable) to achieve a single asset allocation.  For example I hold all the bonds in my RRSP.  Thus I only need a single fund (VCN) in my taxable account until it gets beyond 25% of our investable assets.  So I do not see any benefit in swap based ETFs.  Am I wrong?

Adjusted Cost Base - Do I need to track this or will the 2018 tax slip (T3?) coming from investorline have everything I need? Justin Bender and Dan Bortollini did a white paper "As Easy as ACB" https://www.canadianportfoliomanagerblog.com/easier-than-acb/, which doesn't seem so easy at all.  I rang BMO and the cheery lady said don't worry, everything is fine, BMO is awesome and does everything for you.  I remain skeptical.

Heckler - I would be happy to share the results of DHs taxes with you.  Will touch base when we do them in March.  Thanks again for starting this thread.  I am learning a lot!   



Cumby is awesome but Revy has my vote.  Kootenays are starting to get expensive though - our house value went up 16% in 2018.



Lews Therin

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Re: Taxable vs RSP case study - low/high income couple
« Reply #8 on: January 14, 2019, 08:26:41 PM »
Swap was interesting because you don't get taxed until you take the profits as capital gains. If you have very low income VCN is fine.

RichMoose

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Re: Taxable vs RSP case study - low/high income couple
« Reply #9 on: January 15, 2019, 07:15:18 AM »
I use $100k just as an arbitrary number. Each loan must be written down in a contract at the prescribed interest rate. Given the impact of small amounts on your taxes as well as his, I think $100k lump sums are a reasonable solution.

You demonstrate payment by him making a transfer from his account to your account. Make sure the transfer actually happens and is precisely the amount of simple interest owed. If you have a $100,000 loan at 2% interest, he pays $2,000 on December 30. You must claim that $2,000 as interest income on your tax return. He writes it off as an expense (Line 221).

If you use swap-based ETFs, there's a good case to hold bonds in your non-registered accounts. Considering your husband's income, Canadian stocks are also good. If you need to use your non-registered accounts to hold U.S. stocks to meet your overall portfolio allocation target, swap-based ETFs are an easy choice.

Prairie Stash

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Re: Taxable vs RSP case study - low/high income couple
« Reply #10 on: January 16, 2019, 08:17:30 PM »
The current spousal loan rate is 1%, lock it in. If you can save 40k and loan it, do it. Get that taxable nice and big with extra sweet Canadian dividends. The dividends in BC are a tax deduction for low incomes. On 40k, the high income is owed $400, taxes are $160ish. Dividends could be 3%, or $1200. The -9.6% rate gets a rebate of 110ish. The scheme, on $40k, will cost under $50.

But you get all the gains taxed in her name, all the dividends are tax free. In the  future, when you do withdrawals, you pay taxes on RRSP, but on a $40,000 withdrawal from a taxable account; assuming it’s half principle/half gains you pay no taxes.

If it kinda sounds like the RRSP debate vs TFSA, it should. Prior to TFSA’s existing the debate was taxable vs. RRSP, the arguments are still valid but not as widely publicized.

My wife is going to get $20k in gains on her taxable account. She’s a SAHP this year. Taxes owed are $0. Kinda like a TFSA, but I have to do a bit more planning.

RichMoose

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Re: Taxable vs RSP case study - low/high income couple
« Reply #11 on: January 16, 2019, 09:29:22 PM »
The current spousal loan rate is 1%, lock it in.
They bumped it up to 2% last year. Still cheap though.

ToTheMoon

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Re: Taxable vs RSP case study - low/high income couple
« Reply #12 on: January 16, 2019, 11:45:11 PM »
This is an amazing thread - thank you for asking the questions @Heckler.

We are in a very similar situation, though with two elementary aged school kids, it is further complicated as our choices impact the amount of Canada Child Benefit we receive.

(I am really just PTF - but will also put in a vote for Revy, though I am also Kootenay biased.) :D

Prairie Stash

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Re: Taxable vs RSP case study - low/high income couple
« Reply #13 on: January 18, 2019, 08:29:31 AM »
The current spousal loan rate is 1%, lock it in.
They bumped it up to 2% last year. Still cheap though.
You are correct, I mised the rate increase.

Prairie Stash

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Re: Taxable vs RSP case study - low/high income couple
« Reply #14 on: January 18, 2019, 09:29:16 AM »
@Heckler There is a one time option to start a taxable account without a spousal loan. You can transfer the gains from a TFSA out and that money is 100% attributed to the TFSA owner.

This does not apply to contributions you put into the TFSA. So if you put in $50kover the years (high earner) and it has grown to $70k, the $20k can be withdrawn and used to fund a taxable account. If you do this in December, you can put the oney back in the following year (january) from the high earner. This will leave the TFSA at the same level. If the low income spouse withdraws the original conributions to fund a taxable account, attribution rules apply (otherwise we could just funnel a boat load of money every year).

Of course, any money in the TFSA that the low income spouse contributed can also be withdrawn without attribution rules applying. So if in years past the low income was filling the TFSA, now you can pull that out and have the high income put it back in the next year.

To be clear, although a high income can contribute to the low incomes TFSA, those contributions are subject to attribution rules if you pull them out to invest in a taxable account.

That little trick should net $80/year/$10k that you can move; above what the spousal loan would manage. It's admittedly not much, but the cumulative savings/growth over the next 10 years will pay for a 1 week all inclusive trip to Mexico. Depending on how much came from the low income spouse in funding the TFSA, I could see $50k being available and the savings could be $400/year after taxes.

Stasher

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Re: Taxable vs RSP case study - low/high income couple
« Reply #15 on: January 24, 2019, 09:50:14 AM »
Some seriously in depth and informative advice flowing through this thread. I never got to the point where I was maxed and still working enough to have more income than registered investment room. I left work for the semi-FIREd life and now have unused RRSP room for the wife and myself. It seems you are having a fortunate problem of more cash than investment room and based on the advice you have gotten above it looks like you will do well.

I guess the biggest question for you now, what is the best non-registered account ETF to buy in Canada.

thriftyc

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Re: Taxable vs RSP case study - low/high income couple
« Reply #16 on: January 29, 2019, 02:22:07 PM »
ptf - interesting thread!

Heckler

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Re: Taxable vs RSP case study - low/high income couple
« Reply #17 on: January 13, 2020, 09:15:38 PM »
So, 1 year (exactly!) update - no taxable accounts yet, but we did drop 12K into 2 TFSAs on January 1, that felt pretty awesome!  Then she quit her job so we will travel the next 3 months.  Theeenn, she gets a taxable account setup to funnel 100% of her income to taxable!

My spreadsheet is giving me #N/A errors when we put away 47K into her RSP and taxable account although she has 19K income, had to refer back to here, thanks all! 

How does anyone do this FIRE thing without a spreadsheet?!    My guess is they don't.


« Last Edit: January 13, 2020, 09:32:09 PM by Heckler »

Lews Therin

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Re: Taxable vs RSP case study - low/high income couple
« Reply #18 on: January 14, 2020, 08:20:29 AM »
Spreadsheeting is half the fun.

The other half is watching the accounts jump in number.

Stasher

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Re: Taxable vs RSP case study - low/high income couple
« Reply #19 on: January 15, 2020, 12:58:03 PM »
How does anyone do this FIRE thing without a spreadsheet?!    My guess is they don't.

I've never had a spreadsheet once in my FIRE journey. I let MINT do all the work and just occasionally plugged numbers into CFIREsim.