Author Topic: Opening up a taxable account to keep RRSP contribution room  (Read 2574 times)

TravelJunkyQC

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I live in Canada, but I think my question is applicable to and can be answered by US mustachians as well.

My current salary is 50k a year (up from 43k in 2014 and 2015).

I am up to date with my TFSA (equivalent to a roth IRA) for this year - it's maxed out and I can't deposit anything else until January 2017. I have therefore started putting money into my RRSP (similar to a traditional). I put in just 2k for 2015 (my first time contributing since it wasn't worth it before with my tax bracket). Now that my TFSA is maxed out, I can begin really funnelling money into my RRSP (I have approximately 25k of room as of this year).

My question is this, considering my after-tax pay is 36k, and I spend approximately half that (I can therefore theoretically contribute 18k in a year), how much is TOO much. I want to keep room for subsequent years when I'll have a higher salary, but is it really worth opening up a taxable account and keeping the contribution room? At this rate, if I put everything in RRSPs, I'll have maxed my RRSP in two to three years, even while maxing my TFSA.

For those who ask, I have a mortgage for my condo, but it's rented and my tenant covers everything (I "rent" from my partner, who owns his condo in which I live). So, I can't pre-pay my mortgage as a form of saving.

Thanks!

lostamonkey

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #1 on: May 20, 2016, 11:24:59 AM »
If you put in $4,718.00 into your RRSP you will save 1,751.32 in taxes (37.12 cents on the dollar).
On the next $2,892 you will save $940.77 (32.53 cents on the dollar)
For every additional dollar you contribute, you will save 28.53%.
So if you contribute $18K you will save $5656.36 in taxes which is 31.4%.

I think it is worth contributing and deducting the maximum possible.  Quebec's tax rates are really high.

Reference: http://www.taxtips.ca/taxrates/qc.htm

RidinTheAsama

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #2 on: May 20, 2016, 11:32:16 AM »
In your situation, I would recommend the following:

-Continue to max the TFSA every year
-In your RRSP, make yearly contributions in the amount of 'salary minus tax bracket cutoff' (for you that would be around 50k - 45k = 5k) (I can't rememebr the exact tax bracket cutoff right now but it's around 45k for federal taxes)
-Put the rest of your annual savings in a non-registered account

If your income continues to grow as expected your RRSP contributions will as well, and eventually your limit for contributions will be the 18% of annual earnings rather than the tax bracket cutoff.  This method means all of your RRSP contributions over time go towards offsetting higher tax bracket earnings rather than the lower.

Another thing to consider once you are saving in all 3 account types is which holdings go where...
There's a ton of reading you could do on this online, mostly on taxation of dividends.  But generally:
-Canadian holdings are treated more favourably in terms of taxes; holding them in a non-registered account means you can take advantage of the favouritism.
-US and most international holdings have a dividend withholding tax - in a TFSA you will never recover this, in a non-registered you can probably recover this with a bit of paperwork, in an RRSP it will probably (definitely for US, unsure which internationals) be waived in the first place and not need to be recovered.

But this is the fine-tuning... don't let any confusion on this part stop you from contributing roughly in line with the top of this message!

RidinTheAsama

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #3 on: May 20, 2016, 11:36:04 AM »
If you put in $4,718.00 into your RRSP you will save 1,751.32 in taxes (37.12 cents on the dollar).
On the next $2,892 you will save $940.77 (32.53 cents on the dollar)
For every additional dollar you contribute, you will save 28.53%.
So if you contribute $18K you will save $5656.36 in taxes which is 31.4%.

I think it is worth contributing and deducting the maximum possible.  Quebec's tax rates are really high.

Reference: http://www.taxtips.ca/taxrates/qc.htm

If you were expecting your income to stay close to where it is now or only climb slowly, I would agree with this.  Take the savings now and let them start compounding.

But if you expect your income to grow to the point that all of your RRSP contributions could be in that ~37% tax savings range within the next 5 years or so I think it's better to hold onto your contribution room.

lostamonkey

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #4 on: May 20, 2016, 11:43:52 AM »
If you put in $4,718.00 into your RRSP you will save 1,751.32 in taxes (37.12 cents on the dollar).
On the next $2,892 you will save $940.77 (32.53 cents on the dollar)
For every additional dollar you contribute, you will save 28.53%.
So if you contribute $18K you will save $5656.36 in taxes which is 31.4%.

I think it is worth contributing and deducting the maximum possible.  Quebec's tax rates are really high.

Reference: http://www.taxtips.ca/taxrates/qc.htm

If you were expecting your income to stay close to where it is now or only climb slowly, I would agree with this.  Take the savings now and let them start compounding.

But if you expect your income to grow to the point that all of your RRSP contributions could be in that ~37% tax savings range within the next 5 years or so I think it's better to hold onto your contribution room.

Another option if she expects her income to grow quickly is to make the maximum contributions now but only claim a portion of the deduction now. She could use the deduction in a higher income year.

RichMoose

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #5 on: May 23, 2016, 11:26:41 AM »
I think the answer depends on what your total long-term plan is. There is no doubt that non-registered accounts are a great place to hold the Canadian portion of your portfolio. On the other hand, a RRSP is pretty good as well.

What kind of time line are you considering for retirement and what is you FI number?

Do you plan to retire (withdraw from RRSP) while living in QC, or do you plan moving to a lower-tax province?

How fast do you expect your income to grow until you reach your FI number?

sieben

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #6 on: May 23, 2016, 08:35:56 PM »
If you put in $4,718.00 into your RRSP you will save 1,751.32 in taxes (37.12 cents on the dollar).
On the next $2,892 you will save $940.77 (32.53 cents on the dollar)
For every additional dollar you contribute, you will save 28.53%.
So if you contribute $18K you will save $5656.36 in taxes which is 31.4%.

I think it is worth contributing and deducting the maximum possible.  Quebec's tax rates are really high.

Reference: http://www.taxtips.ca/taxrates/qc.htm

If you were expecting your income to stay close to where it is now or only climb slowly, I would agree with this.  Take the savings now and let them start compounding.

But if you expect your income to grow to the point that all of your RRSP contributions could be in that ~37% tax savings range within the next 5 years or so I think it's better to hold onto your contribution room.

Another option if she expects her income to grow quickly is to make the maximum contributions now but only claim a portion of the deduction now. She could use the deduction in a higher income year.

This is what makes sense to me, in almost every case I figure if you have RRSP room, use it! Feel free to hold of claiming it for a few years, but I don't see any reason to be putting money into a Margin account while you still have RRSP room kicking around.

TravelJunkyQC

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #7 on: May 24, 2016, 07:11:41 AM »
Thanks so much for the responses everyone, it's greatly appreciated!

To answer a few questions:
I think the answer depends on what your total long-term plan is. There is no doubt that non-registered accounts are a great place to hold the Canadian portion of your portfolio. On the other hand, a RRSP is pretty good as well.

What kind of time line are you considering for retirement and what is you FI number?

Do you plan to retire (withdraw from RRSP) while living in QC, or do you plan moving to a lower-tax province?

How fast do you expect your income to grow until you reach your FI number?

My financial picture in general is a bit fuzzy, since I'm a dual citizen (US as well), and have financial investments in the US as well. To answer your second question (where I'm going to be living when I FI), I can confidently say that I have absolutely no idea. My portfolio is currently split approximately 75% Canada to 25% US, but this will become an even 50%- 50% split in the next few years due to family holdings that are being passed on to me. As such, from where I will take my money during FI will depend not only on where I live, but also what makes the most sense at that time (I have options).

I expect my income to grow relatively quickly in the coming years (I'm underpaid for what I do, but I'm in a quickly expanding start-up at the moment and my income should be growing accordingly).

According to my spreadsheets, if my income doesn't grow at all and I continue on the same path, FI is in 11 years. Could be less. And I don't plan on quitting "working" as soon as I FI, I'll just transfer to online work (I'm in marketing/communications consulting) to become location independent and take contracts as they excite me. I love what I do, but I love to travel - my FI is a combination of the two.

So to sum up what I believe most people here are saying. I'll funnel at least 5k to my RRSP this year. If my condo sells, I'll put another 10k into it to reduce my taxable income (forgot to mention that part). I'll conserve at least 10k in RRSP room for subsequent years as my income grows. The rest I'll hold in taxable accounts, focusing on Canadian investments. Did I get that right?
« Last Edit: May 24, 2016, 07:13:15 AM by TravelJunkyQC »

Frugancial Advisor

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #8 on: May 24, 2016, 07:15:39 AM »
If you put in $4,718.00 into your RRSP you will save 1,751.32 in taxes (37.12 cents on the dollar).
On the next $2,892 you will save $940.77 (32.53 cents on the dollar)
For every additional dollar you contribute, you will save 28.53%.
So if you contribute $18K you will save $5656.36 in taxes which is 31.4%.

I think it is worth contributing and deducting the maximum possible.  Quebec's tax rates are really high.

Reference: http://www.taxtips.ca/taxrates/qc.htm

If you were expecting your income to stay close to where it is now or only climb slowly, I would agree with this.  Take the savings now and let them start compounding.

But if you expect your income to grow to the point that all of your RRSP contributions could be in that ~37% tax savings range within the next 5 years or so I think it's better to hold onto your contribution room.

Another option if she expects her income to grow quickly is to make the maximum contributions now but only claim a portion of the deduction now. She could use the deduction in a higher income year.

This. RRSP deductions can be made in any future year. Max it out while you can, and when your income is higher - take advantage of your previous deductions.

Mmm_Donuts

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #9 on: May 24, 2016, 09:09:28 PM »
^^^ I think you mean take advantage of your previous contributions. But yes, you can contribute your max each year, and not deduct anything until you need to, saving the deductions for higher income years. You do not need to claim a deduction the same year you make the contribution.

Goldielocks

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #10 on: May 24, 2016, 11:19:29 PM »
Ok,   given that you are 29 and dual citizen, here are a few things to consider...

1)  if you are (will be) married, then it is unlikely that your combined withdrawl rate in retirement will be much above 30% overall...  so your biggest RRSP contribution is for the money taxed at margin ABOVE 30%.    If you save the same tax today as you pay later, you just get the non tax growth and deferral -- with the risk that you spend your refund instead of topping it up...

2)  It is highly likely that you will have several high income years in future.  At age 40 plus, let me tell you I looked into revising many years of tax returns when I realized my marginal tax rate was so much more than in my 20s...   (I was going to reverse and carry over the contributions to a future year).  but no go, there is a limit on the number of years you can go back, and needs to be a better reason than just to reduce taxes.   So, I would have been happy to have had a lot more room today -- (and that is without having TFSA's back in my 20s)

3)   This means that you may as well put the money into non-reg investments...  here I highly recommend using your CASH to pay down any debt (mortgage, car loan, or any debt) and borrow to invest the same amount into dividend producing funds, so you can claim the tax rebate on the borrowed interest.

4)  Finally, when you have higher taxed years, you move money from non-reg investments into your RRSP to reduce your marginal rate back down to 30%... saving the higher income taxes later...

5) Here is a doozy -- the US does NOT recognize RRSP's as a pension fund or with any special tax treatment, so if you ever have to file dual returns, the RRSP could get you into trouble unless you have an accountant that knows what they are doing.   If you ever think about working in the USA for a few years, then become resident, it could result in extra taxation or filing.  This is not a reason to NOT use RRSP's, but it adds support to delaying starting them a bit in favour of non reg investments.

RichMoose

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #11 on: May 25, 2016, 09:57:40 AM »
I would put your money into a non-registered account. It offers more flexibility for you and your income right now just isn't that high. Deferring to future years is also not a great solution because your next tax bracket doesn't start until $84,780. If you knew that you would probably leave Quebec and move to a lower tax jurisdiction that is not in the US, RRSPs would be a good option. But you can always transfer in-kind to a RRSP later.

Non-registered accounts are a great place to put your Canadian allocation. Don't buy high dividend stocks / dividend ETFs as the QC government will take ~18% of that income too. A good option might be HXT.TO (doesn't pay dividends but tracks the total return of TSX 60). With capital gains taxed at just 1% higher than dividends, you are MUCH better to get taxed on deferred gains when you withdraw than get taxed on your compounding dividend income along the way.

You can always put internationals in your TFSA.

plainjane

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #12 on: May 25, 2016, 12:27:21 PM »
I am sorry to be the bearer of bad news, but if you are filing taxes in the US, which you should be as a dual citizen (don't get me started on this stupidity - no other developed company forces you to file in a country if you don't have any income from it), TFSAs are a quagmire of red tape because the US doesn't recognize them as a legit savings account.  From their perspective you might as well be opening up a Swiss bank account to stash your untold millions. (It's a "foreign trust" because it is in Canada, which is foreign to the IRS)

Anything non-registered is a mess unless you're doing it in USD and buying US stocks or EFTs (not the Canadian version of the US EFT, the actual US EFT).  Canadian stocks are apparently ok too (though you lose out on the lower taxed dividend afaict), but not ETFs or Canadian mutual funds unless you want to make your accountant rich.

TravelJunkyQC

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Re: Opening up a taxable account to keep RRSP contribution room
« Reply #13 on: May 25, 2016, 01:01:37 PM »
Again, thanks so much for your suggestions everyone!

To answer some questions, I do file taxes in the states as well, so everything is declared on both sides of the border. My uncle is my accountant here in Canada, and my father is my accountant down in the US, so in terms of complicated forms, it isn't too much of an issue (until either one tells me to find someone else).

I currently don't pay any taxes in the US, since my income (along with any and all gains through all of my accounts) don't add up to the minimum needed to pay taxes in the states (approx. 108k this year I believe, I'd have to double check). Regardless of whether I pay taxes, I still file my return every year.