Author Topic: Canada - What account should my investments be in?  (Read 4540 times)

Flashwit

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Canada - What account should my investments be in?
« on: May 20, 2015, 05:13:15 PM »
It's all in TFSA right now although I was considering putting some in an RRSP in the future.

My problem is, the general idea here is to be 'retired' as early as possible, and I'm figuring on reaching that point in my mid-40s or so. If I have a large portion of my money in an RRSP I'd be paying massive taxes if I started withdrawing from it early.

Assuming that my mid-40s retirement is accurate, is it better to just fill up my TFSA and then invest everything else in taxable accounts? I figure it's worth it to put some in an RRSP since I will eventually reach that age and be able to withdraw no problem, but I can't put the majority in there or else I would be blowing a ton of money on taxes when I start withdrawing.

Retire-Canada

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Re: Canada - What account should my investments be in?
« Reply #1 on: May 20, 2015, 05:41:48 PM »
It's all in TFSA right now although I was considering putting some in an RRSP in the future.

My problem is, the general idea here is to be 'retired' as early as possible, and I'm figuring on reaching that point in my mid-40s or so. If I have a large portion of my money in an RRSP I'd be paying massive taxes if I started withdrawing from it early.

Assuming that my mid-40s retirement is accurate, is it better to just fill up my TFSA and then invest everything else in taxable accounts? I figure it's worth it to put some in an RRSP since I will eventually reach that age and be able to withdraw no problem, but I can't put the majority in there or else I would be blowing a ton of money on taxes when I start withdrawing.

There is no tax on withdrawing money from a RRSP beyond the fact you add it to any other income you earn that year from other sources.

If you are not working and take $40K out of a RRSP at 45yrs old it's the same taxes as if you worked and made $40K from your job. The CRA treats RRSP withdrawals like normal income for tax purposes.

You will have some of your $40K with held as a tax instalment payment, but this is not an extra level of taxation. It's just the gov't grabbing some of the $$ upon withdrawal so you are able to pay your tax bill that year.

The way you need to look at the TFSA vs. RRSP option is whether your marginal tax rates in retirement will be lower, the same or higher than now. A RRSP allows you to defer taxes until later. That only helps if the tax rate in retirement is lower than when you contributed.

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« Last Edit: May 20, 2015, 05:44:44 PM by Vikb »

fb132

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Re: Canada - What account should my investments be in?
« Reply #2 on: May 20, 2015, 06:25:16 PM »
Yea, I believe if you make under 42000$(i don't have the exact figure, but I think its 42K$), you are in the lowest tax bracket (if we don't count those on welfare), so you are better off with the TFSA as your retirement vehicle, the RRSP is almost useless if you are in the lower tax bracket, although if I were to have the TFSA fully funded, RRSP would be of course your second choice and then followed by non-registered investments.

Sarnia Saver

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Re: Canada - What account should my investments be in?
« Reply #3 on: May 20, 2015, 06:36:46 PM »
Assuming no other income or deductions, you are able to pull out $11,138 out of an RRSP while paying absolutely no taxes.  As previously stated, the bank will hold back a tiered amount of tax, based on the size of the withdrawal.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/300-eng.html

A nice blend of TFSA and RRSP account is the perfect solution for a Canadian Mustachian as you are able to inject money into the RRSP, receive the tax rebate at your high income tax rate, and withdrawal a small amount each year from your RRSP account, paying no income tax and using the tax free growth and withdrawal from the TFSA to supplement all your spending needs.

Despite the urge to not spend any money, visiting a fee-based financial planner, not a commission-based mutual fund flogger, will be money well spend to develop a plan to maximize the vehicles available and to create a road map to success.

daverobev

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Re: Canada - What account should my investments be in?
« Reply #4 on: May 21, 2015, 04:46:10 AM »
Also remember Cdn eligible dividends get preferential treatment.

US in RRSP (US domiciled eg VTI NOT VUN.TO), international *direct* eg XEF or ZEA in TFSA, Canadian and bonds unregistered makes most sense IF that also fits your asset allocation.

But the idea is to figure your AA, then put stuff where it should go, not vice versa.

RichMoose

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Re: Canada - What account should my investments be in?
« Reply #5 on: May 21, 2015, 10:08:43 AM »
Using RRSPs to their fullest potential has great benefits for Mustachians. We earn much more than we spend which means our retirement RRSP withdrawals (taxed as regular income) should be quite small compared with our current income. I would say for most of us the RRSP is a better tool for retirement than the TFSA, looking at taxes only, if you earn a median or higher income and don't spend it all (thanks for pointing this out fb132).

Most financial planners do not understand this at all. They will follow their protocols and believe you will need $60,000 - $80,000 a year to live a comfortable retirement. When you income needs are this high, yes the taxes with RRSPs will start to bite hard (in the range of 15%). However, if you only need $35,000 a year to live and you are married or common-law, this translates to just $17,500 per person. Assuming no deductions, if you live in BC that translates to a tax rate of just 5.3%. If you live in Ontario bump that up to 7%. Almost every working Canadian pays higher tax rates than this.

With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

For these reason, you should save in a TFSA to supplement your CPP/OAS with tax-free income once your RRSP runs dry. If you have $200,000 in your TFSA at age 45 (when you retire), at 6% it will compound to $650,000 in 20 years when you need to start withdrawing from it. That will comfortably generate $24,000 a year for life to supplement CPP/OAS.
« Last Edit: May 21, 2015, 10:16:57 AM by Tuxedo »

fb132

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Re: Canada - What account should my investments be in?
« Reply #6 on: May 21, 2015, 10:10:41 AM »
Using RRSPs to their fullest potential has great benefits for Mustachians. We earn much more than we spend which means our retirement RRSP withdrawals (taxed as regular income) should be quite small compared with our current income. I would say for most of us the RRSP is a better tool for retirement than the TFSA, looking at taxes only.

Most financial planners do not understand this at all. They will follow their protocols and believe you will need $60,000 - $80,000 a year to live a comfortable retirement. When you income needs are this high, yes the taxes with RRSPs will start to bite hard (in the range of 15%). However, if you only need $35,000 a year to live and you are married or common-law, this translates to just $17,500 per person. Assuming no deductions, if you live in BC that translates to a tax rate of just 5.3%. If you live in Ontario bump that up to 7%. Almost every working Canadian pays higher tax rates than this.

With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

For these reason, you should save in a TFSA to supplement your CPP/OAS with tax-free income once your RRSP runs dry. If you have $200,000 in your TFSA at age 45 (when you retire), at 6% it will compound to $650,000 in 20 years when you need to start withdrawing from it. That will comfortably generate $24,000 a year for life to supplement CPP/OAS.
I only disagree because of those in the lower tax bracket would benefit more on TFSA than RRSP. One of the few times where the TFSA actually beats the RRSP.
« Last Edit: May 21, 2015, 10:14:46 AM by fb132 »

FI40

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Re: Canada - What account should my investments be in?
« Reply #7 on: May 21, 2015, 12:10:20 PM »
Using RRSPs to their fullest potential has great benefits for Mustachians. We earn much more than we spend which means our retirement RRSP withdrawals (taxed as regular income) should be quite small compared with our current income. I would say for most of us the RRSP is a better tool for retirement than the TFSA, looking at taxes only, if you earn a median or higher income and don't spend it all (thanks for pointing this out fb132).

Most financial planners do not understand this at all. They will follow their protocols and believe you will need $60,000 - $80,000 a year to live a comfortable retirement. When you income needs are this high, yes the taxes with RRSPs will start to bite hard (in the range of 15%). However, if you only need $35,000 a year to live and you are married or common-law, this translates to just $17,500 per person. Assuming no deductions, if you live in BC that translates to a tax rate of just 5.3%. If you live in Ontario bump that up to 7%. Almost every working Canadian pays higher tax rates than this.

With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

For these reason, you should save in a TFSA to supplement your CPP/OAS with tax-free income once your RRSP runs dry. If you have $200,000 in your TFSA at age 45 (when you retire), at 6% it will compound to $650,000 in 20 years when you need to start withdrawing from it. That will comfortably generate $24,000 a year for life to supplement CPP/OAS.

Great points. I'm having a hard time figuring out how a mustachian could get their RRSP larger than 150k per 10k in annual spend before reaching FI. You'd need a pretty low salary I think, and I don't know if it's possible if you only contribute using the portion of your annual salary that you didn't use for expenses.

I think the best strategy is simple - max out RRSP first, then TFSA, then taxable. In retirement draw taxable first, then TFSA, then RRSP.

FrugalFan

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Re: Canada - What account should my investments be in?
« Reply #8 on: May 21, 2015, 12:18:15 PM »
Using RRSPs to their fullest potential has great benefits for Mustachians. We earn much more than we spend which means our retirement RRSP withdrawals (taxed as regular income) should be quite small compared with our current income. I would say for most of us the RRSP is a better tool for retirement than the TFSA, looking at taxes only, if you earn a median or higher income and don't spend it all (thanks for pointing this out fb132).

Most financial planners do not understand this at all. They will follow their protocols and believe you will need $60,000 - $80,000 a year to live a comfortable retirement. When you income needs are this high, yes the taxes with RRSPs will start to bite hard (in the range of 15%). However, if you only need $35,000 a year to live and you are married or common-law, this translates to just $17,500 per person. Assuming no deductions, if you live in BC that translates to a tax rate of just 5.3%. If you live in Ontario bump that up to 7%. Almost every working Canadian pays higher tax rates than this.

With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

For these reason, you should save in a TFSA to supplement your CPP/OAS with tax-free income once your RRSP runs dry. If you have $200,000 in your TFSA at age 45 (when you retire), at 6% it will compound to $650,000 in 20 years when you need to start withdrawing from it. That will comfortably generate $24,000 a year for life to supplement CPP/OAS.

This is really helpful. I am still just getting started. Just finished reading Milionaire Teacher. Will be switching my investments to Index ETFs soon, but would like to know more about the advice in bold. Our situation is a bit more complicated because our pension contribution eats up most of our RRSP contributions each year, but we still get to add about $6k total between us each year. Should we still be doing that? Does it depend on when we plan to retire? Our income is quite high now but likely to be quite a bit lower when we retire.

RichMoose

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Re: Canada - What account should my investments be in?
« Reply #9 on: May 21, 2015, 01:41:53 PM »
Great points. I'm having a hard time figuring out how a mustachian could get their RRSP larger than 150k per 10k in annual spend before reaching FI. You'd need a pretty low salary I think, and I don't know if it's possible if you only contribute using the portion of your annual salary that you didn't use for expenses.

I think the best strategy is simple - max out RRSP first, then TFSA, then taxable. In retirement draw taxable first, then TFSA, then RRSP.

If you earn $70,000 per year and save the max 18% in your RRSP for 25 years, you will have $750,000 @ 6% interest. That's good for $30,000/yr for life (4% WR), or more if you increase your WR as I plan to.

As for withdrawals, I have done quite a few scenarios for tax efficiency. It seems that for early retirees (not eligible for CPP/OAS yet) the best sequence for retirement income is RRSP first, dividends from taxable second, capital gains from taxable third, and save the TFSA for later in retirement (when you are collecting CPP/OAS). This counts for my personal situation anyways and there are a few reasons for this.

1) RRSP is taxed as regular income, so it is preferable to deplete this before CPP/OAS kicks in so it doesn't run up the tax bill too high or God forbid result in clawbacks of OAS (effectively giving you a really high "real" tax rate) as I point out in #3

2) Dividends on taxable accounts are often taxed negatively at low incomes, so it works great alongside RRSP withdrawals. For example, in BC if you and your spouse each take $20,000 in RRSP withdrawals your tax rate is 7%. If you each take $15,000 in RRSP and $5,000 in eligible dividends your tax rate drops to 2.5%

3) If you wait to take your RRSP, your account balance could get very high. Example: you retire at 45 and live off TFSA and taxable until you're 65. Now you collect CPP/OAS and start drawing down the RRSP. At 45 your RRSP was worth $400,000, now its worth $1.3M because its compounded at 6% for the last 20 years. You convert to a RRIF and minimum withdrawals at 65 start at 4% (they go up quickly from there). That's $52,000 in RRIF income alone. Add CPP and OAS and you will start getting clobbered with taxes in a hurry.

4) TFSAs are great for adding to CPP/OAS income because withdrawals are not taxable. They also have the biggest benefit of growth because you don't get taxed along the way like you do with dividend income from taxable accounts. If you need more money for emergencies / vacations etc, you can always take capital gains on your taxable account. They're taxed at 50% of regular income, so if you and your spouse each take $10,000/yr in cap gains on top of $5,000 each in CPP and $5,000 each in OAS, your tax bill in BC is 3.7%. That still gets you $40,000 in combined income with a tax bill of around $1,000.

Of course these are just scenarios that I've come up with, but so far it seems like the most tax efficient method to me.

RichMoose

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Re: Canada - What account should my investments be in?
« Reply #10 on: May 21, 2015, 01:50:09 PM »
With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

This is really helpful. I am still just getting started. Just finished reading Milionaire Teacher. Will be switching my investments to Index ETFs soon, but would like to know more about the advice in bold. Our situation is a bit more complicated because our pension contribution eats up most of our RRSP contributions each year, but we still get to add about $6k total between us each year. Should we still be doing that? Does it depend on when we plan to retire? Our income is quite high now but likely to be quite a bit lower when we retire.

Yes it 100% depends on when you retire. Both my wife and I are in DB pension careers. If we retire at 35-40 years old, we can't collect our pension until 55. The pensions will be small anyways because we will only have contributed to them for 12-17 years. I'm still contributing the max to our RRSP because the RRSP income will make an excellent bridge between the start of our retirement and when our pension begins to pay out at 55. If however we retired at say 50 years old, I would start to worry about maxing the RRSP. We would only have 5 years to spend it down and our pension income will be much larger (due to 25-27 years of contributions). At this point it would probably make more sense to invest in TFSA and taxable after the pension contributions, assuming all debts paid off by retirement.

Flashwit

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Re: Canada - What account should my investments be in?
« Reply #11 on: May 21, 2015, 02:59:05 PM »
Ah thanks for all the information. My mistake was thinking that the witholding was in addition to the normal tax on RRSP withdrawals. That all makes sense then.

I'm expecting a significant jump in income this year as I will be looking for a new job and I am severely underpaid in my current position (software developer) and there's plenty of those jobs around.

So I believe my plan will be to max out RRSP, then TFSA, and then taxable accounts if there's anything left. Then withdraw at RRSP -> taxable -> TFSA so that I still get the government benefits later in life. As an added bonus my wife has a government job with a pretty cushy pension. She's not all hyped up on early retirement like I am, which is fine, and it means that she's likely to draw between 50-60k in pension per year if she works all the way to 55.

If you were wondering, I'm currently following the CCP ETF Model Portfolio so I'm spread out on VXC, VCN, and VAB.

Thanks for the help guys, it's good to find a group of people who are interested in this sort of thing like I am.
« Last Edit: May 21, 2015, 03:10:37 PM by Flashwit »

FI40

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Re: Canada - What account should my investments be in?
« Reply #12 on: May 22, 2015, 08:15:11 AM »
Great points. I'm having a hard time figuring out how a mustachian could get their RRSP larger than 150k per 10k in annual spend before reaching FI. You'd need a pretty low salary I think, and I don't know if it's possible if you only contribute using the portion of your annual salary that you didn't use for expenses.

I think the best strategy is simple - max out RRSP first, then TFSA, then taxable. In retirement draw taxable first, then TFSA, then RRSP.

If you earn $70,000 per year and save the max 18% in your RRSP for 25 years, you will have $750,000 @ 6% interest. That's good for $30,000/yr for life (4% WR), or more if you increase your WR as I plan to.

As for withdrawals, I have done quite a few scenarios for tax efficiency. It seems that for early retirees (not eligible for CPP/OAS yet) the best sequence for retirement income is RRSP first, dividends from taxable second, capital gains from taxable third, and save the TFSA for later in retirement (when you are collecting CPP/OAS). This counts for my personal situation anyways and there are a few reasons for this.

1) RRSP is taxed as regular income, so it is preferable to deplete this before CPP/OAS kicks in so it doesn't run up the tax bill too high or God forbid result in clawbacks of OAS (effectively giving you a really high "real" tax rate) as I point out in #3

2) Dividends on taxable accounts are often taxed negatively at low incomes, so it works great alongside RRSP withdrawals. For example, in BC if you and your spouse each take $20,000 in RRSP withdrawals your tax rate is 7%. If you each take $15,000 in RRSP and $5,000 in eligible dividends your tax rate drops to 2.5%

3) If you wait to take your RRSP, your account balance could get very high. Example: you retire at 45 and live off TFSA and taxable until you're 65. Now you collect CPP/OAS and start drawing down the RRSP. At 45 your RRSP was worth $400,000, now its worth $1.3M because its compounded at 6% for the last 20 years. You convert to a RRIF and minimum withdrawals at 65 start at 4% (they go up quickly from there). That's $52,000 in RRIF income alone. Add CPP and OAS and you will start getting clobbered with taxes in a hurry.

4) TFSAs are great for adding to CPP/OAS income because withdrawals are not taxable. They also have the biggest benefit of growth because you don't get taxed along the way like you do with dividend income from taxable accounts. If you need more money for emergencies / vacations etc, you can always take capital gains on your taxable account. They're taxed at 50% of regular income, so if you and your spouse each take $10,000/yr in cap gains on top of $5,000 each in CPP and $5,000 each in OAS, your tax bill in BC is 3.7%. That still gets you $40,000 in combined income with a tax bill of around $1,000.

Of course these are just scenarios that I've come up with, but so far it seems like the most tax efficient method to me.

I'm not sure about the first thing you said - wouldn't you be FI much sooner than 25y in that example, since you'd be saving around 16,500/yr in that case in TFSA/taxable in addition to the RRSP? Using simpletax's BC calculator. So you'd never get the RRSP that high, I think.

Regarding drawdowns in retirement, you're definitely right that the TFSA should be last; I wasn't thinking about CPP/OAS as it's just so far away, but there will likely still be some kind of social program for old people when we reach that age.

Where I'm not so sure still is about drawing RRSP first. Pulling money out of the RRSP means it no longer grows tax free. It seems like a prudent option might be to pull from the RRSP if it's huge, but once it's a bit more manageable size, let it be and withdraw from taxable until you can start to plan your receipt of CPP/OAS, then fully deplete it before reaching that point.

Also worth mentioning: a future government might nerf RRSPs/TFSAs somehow, and that could turn into a reason to use them sooner rather than later.

I guess the ideal case is to save enough of the RRSP until retirement so that your RRIF is small enough that it doesn't reduce any of your subsidies. Tough to plan but I suppose that would be optimal because you would prolong the tax free growth for as long as possible.

Flashwit

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Re: Canada - What account should my investments be in?
« Reply #13 on: May 22, 2015, 09:59:04 AM »
Yes, it's probably not so strict as that.

I can see that the general idea would be to withdraw from RRSP and taxable as you see fit, just as long as you end up withdrawing enough from the RRSP that it's not going to ruin your benefits later on.

FrugalFan

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Re: Canada - What account should my investments be in?
« Reply #14 on: May 24, 2015, 11:25:40 AM »
With RRSPs you do have to be careful about a few things. Don't let your account get too big. Assuming withdrawals rates of 6% or 7% (because you ideally want to bleed the account down significantly before CPP/OAS/RRIF kick in) you should make sure that your RRSP doesn't get larger than $150,000 for every $10,000 in annual spending.

This is really helpful. I am still just getting started. Just finished reading Milionaire Teacher. Will be switching my investments to Index ETFs soon, but would like to know more about the advice in bold. Our situation is a bit more complicated because our pension contribution eats up most of our RRSP contributions each year, but we still get to add about $6k total between us each year. Should we still be doing that? Does it depend on when we plan to retire? Our income is quite high now but likely to be quite a bit lower when we retire.

Yes it 100% depends on when you retire. Both my wife and I are in DB pension careers. If we retire at 35-40 years old, we can't collect our pension until 55. The pensions will be small anyways because we will only have contributed to them for 12-17 years. I'm still contributing the max to our RRSP because the RRSP income will make an excellent bridge between the start of our retirement and when our pension begins to pay out at 55. If however we retired at say 50 years old, I would start to worry about maxing the RRSP. We would only have 5 years to spend it down and our pension income will be much larger (due to 25-27 years of contributions). At this point it would probably make more sense to invest in TFSA and taxable after the pension contributions, assuming all debts paid off by retirement.

Thank you for this and the previous post. The scenarios you described in the previous post are really helpful, but they make my head spin a bit. And I'm not sure how things compare in Ontario.

My husband and I have a hybrid pension plan that is a mix of defined contribution and defined benefits. But we can only retire at 55 at the earliest. If we quit before 55, we can take a lump sum or leave it in the pension plan but only start collecting pension at 65. If we retire at 55, we can start collecting a reduced pension. Or we can retire any time after that up until 71. This makes trying to plan for FIRE really challenging.

RichMoose

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Re: Canada - What account should my investments be in?
« Reply #15 on: May 24, 2015, 10:33:08 PM »
Yes, with pension plans things get complicated in a hurry because different pensions have different rules. This is where it gets really important to develop an efficient plan that works best for your situation (pension plan, current income, province of residence in working years as well as retirement years, age of retirement, any income generated in retirement apart from savings, and so on).

The plan I've shared is the one that I found works best for me after running literally around 100 different scenarios. My guess is that it will also be great for many others who are similar to me (married, upper middle income, started saving young, retire young, open to part time work or some self employment in retirement, DB pensions that are quite restrictive and heavily penalize early retirees, debt aversion, and moderately  low living expenses).

One of the main things that will assist with my early retirement are trying to minimize taxes as much as possible in working years and making sure I pay less than 10% tax in retirement, my goal is actually 5%.

Retire-Canada

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Re: Canada - What account should my investments be in?
« Reply #16 on: May 25, 2015, 09:39:01 AM »
Where I'm not so sure still is about drawing RRSP first. Pulling money out of the RRSP means it no longer grows tax free.

Money in a RRSP doesn't grow tax free unlike in a TFSA. It's tax deferred and all growth will get taxed as income vs. some of the other preferential tax rates for example capital gains.

You have some control over when you pay taxes on RRSP dollars so you can optimize the withdrawals before you hit 71.

I'd agree that it makes sense withdrawing from your RRSP early strategically so that you don't get stung by large mandatory withdrawals at 71. How much and how fast really has to be analysed vs. your specific financial situation and your goals.

-- Vik