Author Topic: RRSP & TFSA & real-estate & mortgage & regular investments.... in what order?  (Read 4914 times)

K-ice

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I know this is a debate for many people.

I am trying to max out both my TFSA and my RRSP.

For me there is no debate. Contribute to both TFSA & RRSP with the others low priority.

My spouse is very concerned about future tax implications with a RRIF and OAS clawbacks.

I guess I am looking to hear peoples RRSP stories and strategies.

Do you contribute to your RRSP, Why or Why not?

Has anyone changed their mind on RRSP contributions and why?




powersuitrecall

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We will be retiring in the next 3-4 years (I am 44 and DW is 36).  Our plan is to draw about $40K per year from RRSPs, TFSAs, and taxable accounts in such a way to minimize taxes.  (to me) The benefits of RRSPs far outweigh any concerns about inclusion in OAS - I don't even count it in our retirement calculations.

K-ice

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(to me) The benefits of RRSPs far outweigh any concerns about inclusion in OAS - I don't even count it in our retirement calculations.

I agree, I would rather be self sufficient and pay my share of taxes anyway.  Especially for early retires, you could draw down the RRSP faster before the mandatory withdrawals kick in.

lostamonkey

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I know this is a debate for many people.

I am trying to max out both my TFSA and my RRSP.

For me there is no debate. Contribute to both TFSA & RRSP with the others low priority.

My spouse is very concerned about future tax implications with a RRIF and OAS clawbacks.

I guess I am looking to hear peoples RRSP stories and strategies.

Do you contribute to your RRSP, Why or Why not?

Has anyone changed their mind on RRSP contributions and why?

If in a high tax bracket:
1. RRSP
2. TFSA
3. Regular Investments
4. Low Interest debt

If in a low tax bracket:
1. TFSA
2. RRSP
3. Regular Investments
4. Low Interest debt

I won't even discuss housing and whether housing is a good investment in Canada as that will likely lead to an argument.

Retire-Canada

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Do you contribute to your RRSP, Why or Why not?

My current income is approximately double what my FIRE COL will be.

I max my RRSP and TFSA and put the rest in Non-Reg [only stocks with qualified CDN dividends for the tax benefit]. When I FIRE I'll withdraw exclusively from my RRSP until I get to the point where my projected annual mandatory withdrawal is equal to or less than my COL - OAS - CPP. I also plan to withdraw enough extra each year to max my TFSA every year even once I FIRE.

If you are on the path to early retirement there is no real worry about having a huge RRSP since you'll be withdrawing funds long before you hit mandatory withdrawal age and you'll stop contributing decades before a normal retiree.

I'm in no rush to pay off my mortgage with my rate at sub-2%. I may well pull money out of my house to invest in the stock market as my equity grows - assuming mortgage rates stay low.


« Last Edit: October 25, 2016, 02:43:20 PM by Retire-Canada »

meghan88

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Do you contribute to your RRSP, Why or Why not?
I max my RRSPs and TFSA and put the rest in Non-Reg [only stocks with qualified CDN dividends for the tax benefit]. When I FIRE I'll withdraw from my RRSP first until I get to the point where my projected annual mandatory withdrawal is equal to or less than my COL - OAS - CPP. I also plan to withdraw enough extra each year to max my TFSA every year even once I FIRE.

I was thinking about doing this, but will only have 8 years to draw down from the RRSP before age 70.  Would you know how to calculate the projected annual mandatory RRSP withdrawal?  I think my RRSP might still be around 300K by the time I hit age 70.

Retire-Canada

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I was thinking about doing this, but will only have 8 years to draw down from the RRSP before age 70.  Would you know how to calculate the projected annual mandatory RRSP withdrawal?  I think my RRSP might still be around 300K by the time I hit age 70.

http://www.agf.com/static/en/learning-centre/income-for-retirement/withdrawals/

First year of RRIF you have to take out 5.28% so if you had $300K that would be $15.84K.

« Last Edit: October 25, 2016, 02:51:05 PM by Retire-Canada »

KMMK

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First TFSA for both of us. (Him because he'll have a good pension, and RRSP will add to the tax burden. Me because I'm low income right now. Both of us so that we can dump extra on the mortgage in 5 years if needed.)
Then RRSP for me; for him split between RRSP and extra house payments.
If I'm maxed at both, then house.
Then non-registered.

TrMama

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We're also maxing out RSPs and TFSAs before investing in a taxable account. When we do retire, we'll draw from the RSPs first, then from taxable, then from TFSA.

My DH was also concerned about having too large of an RSP, since he will also have a defined benefit pension. I will not have a pension. We're mitigating some of the risk of him having too large of an RSP, by having him contribute to a spousal RSP for me. This gives him the deduction now, but allows me to have a larger RSP to draw on in early retirement. "His" income will come mainly from his pension.

Mandatory RIF withdrawals aren't onerous, as long as you actually take them starting at 71. OAS clawbacks don't start unless you earn more that approx $70K/yr in taxable investment income (or $140K for a couple). Note that OAS clawbacks also apply to earned and rental income. So try not to work or have a rental when collecting OAS.

If your RSP is too large, you worked too long.

K-ice

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Thanks for the replies.

I would be happy to hear any debate of this. My SO is more into real estate investing so that is definitely part of the argument.

I won't even discuss housing and whether housing is a good investment in Canada as that will likely lead to an argument.

ME
1) RRSP (but its quite small due to a work pension)
2) TFSA
3) Regular Investments
4) Low interest debt on rental properties

My SO
1) Low interest debt (3-4%) on rental properties
2) TFSA
3) Regular Investments
4) RRSP (basically never)

I honestly think my SO has the math wrong and is just making an emotional choice.

Maybe I am missing something that real-estate investors know, but most of you here seem to agree more with my plan.



daverobev

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First TFSA for both of us. (Him because he'll have a good pension, and RRSP will add to the tax burden. Me because I'm low income right now.

Spousal contrib? Wouldn't that take "high-tax-now" money and put it in "low tax later"?

I'm throwing money in both RRSP and TFSA as room is available, particularly because the RRSP contrib brings down income = higher child benefits. Crazy, but there you go.

I will in theoretical late-early retirement (ie, after kiddlywinks have gone to uni) pull down RRSPs before I start taking CPP/OAS/whatever is there in ~30 years. So I have a 10-ish year window.

KMMK

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First TFSA for both of us. (Him because he'll have a good pension, and RRSP will add to the tax burden. Me because I'm low income right now.

Spousal contrib? Wouldn't that take "high-tax-now" money and put it in "low tax later"?

I'm throwing money in both RRSP and TFSA as room is available, particularly because the RRSP contrib brings down income = higher child benefits. Crazy, but there you go.

I will in theoretical late-early retirement (ie, after kiddlywinks have gone to uni) pull down RRSPs before I start taking CPP/OAS/whatever is there in ~30 years. So I have a 10-ish year window.

True. But not the current plan for a few reasons. I have a lot of RRSPs already, I have tons of TFSA room to fill, we don't have spare money ATM, relationship is fairly new so money is fairly separate, and he is somewhat concerned about interest rates rising eventually. So TFSA for now (when there is money again) and then we can always use that for anything later.

lostamonkey

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Thanks for the replies.

I would be happy to hear any debate of this. My SO is more into real estate investing so that is definitely part of the argument.

I won't even discuss housing and whether housing is a good investment in Canada as that will likely lead to an argument.


Can you make a new thread about this topic (real estate investing in Canada) and I would be happy to contribute. If we start discussing it here it would completely derail this thread.


dess1313

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It will also depend on if you will receive a pension, how big it is, and when you choose to/are forced to take that pension

It will be harder later on to bring out the RRSP contribution at the low tax rate when you are already withdrawing your pension at the same time

powersuitrecall

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I wanted to add our personal situation:

1) RESP -- contribute first of the year to get gov't grant sooner
2) TFSA -- contribute regularly throughout year
3) RRSP -- contribute once a year (little room due to DB pension)
4) Mortgage -- accelerated payments
5) Taxable Account -- will start contributing once the mortgage is done

I realize that paying a mortgage before investing is not generally accepted as being the correct thing to do, but it fits our psychology.  I will RE before DW and we want the mortgage gone before that happens.

Mmm_Donuts

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Here's what we do / did:

- TFSAs filled January 1 (it is currently maxed for me and DH)
- rrsp is maxed for DH (he's not working) but I have about 10-20k room, so I still contribute to that
- eventually I'll contribute to a taxable account, once rrsp is maxed
- I don't use my rrsp deductions as my income is fairly low (semi retired)
- our mortgage is already paid off. When we were paying it off, we made sure to max his rrsp and both of our TFSAs first. When mortgage was gone, DH started investing in his taxable act.

PharmaStache

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Add us to the list of people who do RRSP, TFSA and then mortgage.  Taxable will start once mortgage is paid off. 

Mattzlaff

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I'm 25 and I am having a tough time with this exact question. I started my personal investment journey this year in Feb. So I'm still working out some kinks.

Currently my plan is:

Pay mortgage accelerated biweekly
Invest once per quarter 5k into RRSP(20k total)
Invest once per year 5k into TFSA(5k total for emergency cash)
Company savings plan I contribute 7% they contribute 4% of my salary. The 7% I plan to take out once a year but have to pay capital gains tax on it. I use it to lump sum into my mortgage.
Company pension 4% of my salary(they pay it not me)

So I have been playing around with a few ideas to add 100$ biweekly to my mortgage. But I need to see at the years end where I have room to get it from. I should probably smarten up and stop hanging out with my friends so much that would easily free up the 100$ biweekly.

Some guys are hard core invest over mortgage at all costs. Some like the opposite. I think I found an OKAY compromise that lets me sleep at night. I work on areas where I could spend less and there are tonnes but I feel I'm doing fine at 25 and my job is awesome so I don't really have plans to retire early yet.

TravelJunkyQC

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I have an average Canadian income, so last year was the first year that I contributed to an RRSP (there was little use before). The reason I finally started contributing was because my TFSA was maxed out finally.
Personally:
TFSA - maxed at the beginning of the year
RRSP - now at a little over 18% for the year (so "maxed" for this year, but I still have some latent room from previous years that I keep for future years when my salary should go up - I have to check with my accountant this year how much I can contribute to reduce my taxable income, while still leaving some extra room; I think I may have contributed more than necessary, so I may actually get a bigger return than I want. But I'll manage to level it out next year with his insight).
Taxable investments - this is the first year I have them, all my extra money is going there
Mortgage is currently paid by my renter (my condo is rented, I live in one owned by my partner), but once I buy a house, I'll probably still do mortgage last (as in pay regular amount), unless rates go up.

I've always been taught that TFSA and RRSP come first (which between the two depends on your income and what else you can deduct from your income). Mortgage comes 3rd if you want peace of mind, taxable investments come 3rd if you want a better probability of growth. I don't think either of the options are better, they're a matter of what is more important to you (and also, making sure that if shit DOES hit the fan, you can still cover your mortgage with your taxable investments if need be).

My only "horror story" at this point is that I over-contributed to my TFSA this year thanks to an error I made when entering the numbers in my Excel spread-sheet. I figured it out 5 months later, this October. 1000$: 1% penalty, means I'm out 50$. Not enormous, but still, shouldn't have happened.

If you plan on maxing things out, keep EXCELLENT records and triple-check your data entry!
« Last Edit: October 28, 2016, 08:08:22 AM by TravelJunkyQC »

Mmm_Donuts

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A note to Travel Junky: you don't have to use your entire RRSP contribution as a deduction. In fact, you can contribute up to your max without deducting anything, delaying your deduction to a year when your income is higher.

More info here:

http://www.cbc.ca/news/business/taxes/tax-time-2015-6-ways-that-deferring-tax-credits-deductions-can-pay-off-1.1204898

Greenway52

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I know Iím going to be in the minority here, but personally I donít like RRSPs. The conversion of dividend taxes and capital gains taxes into incomes tax doesnít sit well with me. Maybe if you have bonds or bond ETFs it might make sense, but Iím 100% equity. I also donít want to place any bets on future tax rates. Sure, your tax bracket might be lower when you retire, but if governments across the board increase the tax rates of everyone in the future, you might end up not getting the type of tax rate discount you were hoping for.

Housing for sure is a very polarizing issue in Canada, and personally Iím not a huge fan of housing.

So how I would rank is:
1.   TFSA
2.   Taxable investments

If you have kids I would also recommend RESP because of the government match (though it does have some of the tax drawbacks of RRSPs).

Mmm_Donuts

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I know Iím going to be in the minority here, but personally I donít like RRSPs. The conversion of dividend taxes and capital gains taxes into incomes tax doesnít sit well with me. Maybe if you have bonds or bond ETFs it might make sense, but Iím 100% equity.

The reason you're in the minority on this is because RRSPs are the mathematically sound choice for saving money on taxes. John Heinzl has written a few math-based articles about this in the Globe. Here's one of his rrsp "myth busting" articles:

http://www.theglobeandmail.com/globe-investor/investor-education/anti-rrsp-arguments-are-merely-financial-urban-legends/article30833688/
« Last Edit: October 30, 2016, 08:12:59 AM by Mmm_Donuts »

Greenway52

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I know Iím going to be in the minority here, but personally I donít like RRSPs. The conversion of dividend taxes and capital gains taxes into incomes tax doesnít sit well with me. Maybe if you have bonds or bond ETFs it might make sense, but Iím 100% equity.

The reason you're in the minority on this is because RRSPs are the mathematically sound choice for saving money on taxes. John Heinzl has written a few math-based articles about this in the Globe. Here's one of his rrsp "myth busting" articles:

http://www.theglobeandmail.com/globe-investor/investor-education/anti-rrsp-arguments-are-merely-financial-urban-legends/article30833688/

The article you cited is good in that itís simple. It holds most of the variables that impact a portfolio constant and just looks at the impact of your money growing pre-tax inside an RRSP vs post-tax in a regular account. The drawback though is that there are many details that are ignored.

1.   The article ignores the impacts of Foreign Withholding Taxes completely. They may seem small, but with compound growth it can really add up. For example, if you invest in a Canadian Listed US Equity ETF like VFV, and assume a 7% total growth with 5% from capital appreciation and 2% dividends, a 15% FWT corresponds to a 0.3% drag on your returns. If you hold this investment for 30 years without the FWT drag, your initial investment would be 7.61 times what it originally was, but with the drag you will experience in your RRSP, the investment will only by 7.00 times what it originally was. Thatís an 8.8% better pre-tax return without the drag. If you hold the investment for longer than 30 years, that gap widens even further.

2.   At lower incomes, with the dividend tax credit, your effective dividend tax rate could be close to 0%.

3.   The article ignores the impacts of higher income in later years on OAS, GIC, home energy tax credits, and other benefits you could have by having a lower income.

4.   Then there are the non-financial, but rather, the psychological effects. RRSP lead to what I call ďinflated net worthsĒ. People tend took at their assets (home, investments, etc.) and liabilities (mortgage, LOC, etc.) when calculating their net worth, but rarely do they include future tax liabilities of RRSPs. This may lead them to overestimate their wealth.

5.   By not having an RRSP, but rather paying the tax earlier, youíre avoiding the risk (and potentially the benefits) of future tax rate changes.

6.   But, the real killer of RRSPs is in estate planning. Since according to tax law, you have considered to have sold all your investments on the date of your death, if you die with a $1 million RRSP, and assuming you cannot transfer it to a spouse, you have considered to have withdrawn that money. Now in the year of your death, you are considered to have a $1 million income and taxed as such. This will lead most of your investment to be taxed at the highest tax rate in the country will lead to a very poor overall post tax returns. If you're in Ontario, the combined provincial and federal top marginal tax rate is 53.53% and this will apply for any income over $220,000. Since most of your income will be in this tax bracket, your average tax rate on your RRSP will be close to 53.53%. This is not even including the Ontario surtax which will be huge at this level of income.

There are many positives with RRSPs and it could be beneficial for a lot of people. Personally I donít like it because of all of the above reasons. But claiming that RRSPs are always more tax efficient and more ďmathematically soundĒ than regular taxable accounts is simply wrong.

TL;DR: The article is good, but simple. Tax planning for investments is a lot more complicated than the article leads you to believe.


Mmm_Donuts

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Greenway, thanks for expanding on your thoughts here. I'm still learning so take my points as my trying to figure it out. I have gone back and forth on this, and decided to max out my rrsp before investing in a taxable account. Counterpoints to yours above:

1. Or, you could forego withholding tax by having your US investments in your RRSP in USD. Downside being the cost of currency exchange. I happened to make a lot of US investments in my rrsp when the dollar was at par, so I haven't needed to address this drag.

2. Generally when people are in the accumulation stage building their RRSPs their incomes are higher than they will be in retirement, and therefore high enough for qualified dividends to be taxed. If someone is very low income, then yes, they should focus in maxing their TFSA first.

That said, if one is concerned about being taxed in the dividends outside a registered plan, there are ETF options that don't pay divs but rather reinvests them. But I think the MERs may be higher.

3. OAC is clawed back at a very high income (I believe over 100k for an individual) and most on this forum would not qualify for GIS. I'm not counting on either for retirement.

4. This could of course apply to taxable assets as well.

5. Agreed - this could go either way, taxes could be higher or lower.

6. I don't plan on having $1MM in my RRSP when I die, or ever for that matter, since I'll be withdrawing from it first, but since I do not have heirs, this doesn't really bother me.

Anyway, interesting points, and I agree, everyone's situation is different. It's good to understand the basics, however. I would rather be in control of when I withdraw money, in order to reduce taxes. An rrsp is a very flexible tool for allowing this freedom.

Greenway52

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Hi Mmm_Donuts. Thank you for responding.

I myself am also learning to invest, which is why I really enjoy being a part of this community, and among financially wise individuals (compared to conversations with my coworkers, which typically end up in the Anti-Mustachian Wall of Shame section).

Just some comments and clarifications that I wanted to add:

1.   Yes, thatís a good point. And you can reduce the cost of currency conversion using Nobertís Gambit. And if I was investing 4 or 5 years earlier I may have done just that because Canadian listed US Equity ETFs had a much higher MER than the US-listed versions. But the MERs of Canadian listed ones have come down significantly. Now the Canadian listed VFVís MER is 0.08% and the US-listed version, VOO, is 0.05%. Theyíre so close that I feel US-listed version is not worth the hassle anymore.

2.   Thatís a valid point. I guess I was thinking more about when you FIRE and youíre income is lower.
But I do want to let you know that if your fund reinvests dividends, you still have to pay dividend taxes even if you donít receive it. Itís only if the fund does not pay a dividend (or converts the dividend to capital gains) that you wouldnít have to pay it.

3.   I agree with you there. Most of us wonít get GIS, so it wonít be a concern. But the OAS limit is actually $72,809, which if you have a large enough portfolio, I can see someone getting the claw back. Your full OAS will be clawed back at $117,000, but the OAS claw back will start at $72,809.

4.   Agree. This would apply to taxable assets as well, but the difference is that in RRSP every dollar is taxable, whereas in any other investment, itís only the growth that is taxable.

5.   Agree.

6.   Fair point. My example of $1M was just for illustration, but would be accurate with any amount. I am not married and do not have kids, but if I do, itís important for me to leave behind something significant for them to help them along with their journey to FI.

daverobev

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You'd be crazy to, over the long term, hold large amounts of stuff in a Canadian etf that could be held in a US one. Norbert's gambit should cost $20 or less once or twice, vs 0.3% a year.

Rrsps are not all or nothing. You can put $100k in, and take it out in your fifties or early sixties (assuming you retired early and your children have gone), keeping the TFSA for later. That, at least, is my plan.

Greenway52

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You'd be crazy to, over the long term, hold large amounts of stuff in a Canadian etf that could be held in a US one. Norbert's gambit should cost $20 or less once or twice, vs 0.3% a year.

Rrsps are not all or nothing. You can put $100k in, and take it out in your fifties or early sixties (assuming you retired early and your children have gone), keeping the TFSA for later. That, at least, is my plan.

It's not 0.3%. It's 0.03% (or 0.0003). For a $100,000 investment, over 30 years that's an additional cost of $900.

$20/year for 30 years is $600 for Norbert's Gambit. And keep in mind you have to covert it back to CAD, when you need it.

Plus if you have over $100,000 in US situs property, you have additional tax complications, and with US ETFs you have to track your ACB in US dollars and consider exchange rates, and you can have US estate tax implication (unlikely unless you're very high net worth, but still).

I don't think it's crazy to go one way or another. I can totally see why someone would go for US-listed, and I myself would have done that a few years ago. But the spread is too small now for me to justify the additional complications, and the cost savings even over a 30 year time horizon is too small.

My investing style is all about cost control, but $300 over a 30 year span is too small for even me to consider.

daverobev

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You'd be crazy to, over the long term, hold large amounts of stuff in a Canadian etf that could be held in a US one. Norbert's gambit should cost $20 or less once or twice, vs 0.3% a year.

Rrsps are not all or nothing. You can put $100k in, and take it out in your fifties or early sixties (assuming you retired early and your children have gone), keeping the TFSA for later. That, at least, is my plan.

It's not 0.3%. It's 0.03% (or 0.0003). For a $100,000 investment, over 30 years that's an additional cost of $900.

$20/year for 30 years is $600 for Norbert's Gambit. And keep in mind you have to covert it back to CAD, when you need it.

Plus if you have over $100,000 in US situs property, you have additional tax complications, and with US ETFs you have to track your ACB in US dollars and consider exchange rates, and you can have US estate tax implication (unlikely unless you're very high net worth, but still).

I don't think it's crazy to go one way or another. I can totally see why someone would go for US-listed, and I myself would have done that a few years ago. But the spread is too small now for me to justify the additional complications, and the cost savings even over a 30 year time horizon is too small.

My investing style is all about cost control, but $300 over a 30 year span is too small for even me to consider.

Sorry, I was replying on my tablet, not a proper keyboard. I was meaning inside an RRSP only. In an unregistered account, if you don't have other foreign property, then yes, for the love of god don't - as you have to file a T1135.

Inside an RRSP, it is 0.3%. 15% withholding on dividends, lost in a Canadian ETF that wraps a US one, not withheld at all if US domiciled. That's assuming a 2% yield. 15% of 2% is 0.3%.

Decent brokerages would track your ACB. I don't believe US estate tax matters for ETFs, but I could be wrong. For real property, yes.

scrubbyfish

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My order:
1. RDSP
2. RDSP #2.
3. RESP
4. TFSA
5. Non-registered investments
6. No RRSP because by the time I've done everything else, I owe no personal tax and, even if I did, an RRSP would make me ineligible for some emergency benefits.
7. No real estate currently, though considering looking for a $20k plot for fun.

Notes:
a. Because of some extreme life circumstances, I set mine up to always be eligible for emergency social benefits in case needed.
b. Within that plan, I invest according to highest govt match to lowest.
c. I don't own real estate because, outside of unplannable market jumps, the cost:income ratio is too low to be worthwhile to me.
d. I don't landlord anymore because the tenancy laws here make it too tricky to protect one's asset by the book (which is how I prefer doing things).

Goldielocks

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I have been working through this same scenario.

Once you have enough money saved in combined (RRSP, pension, OAS and CPP) to will provide your target post 65 retirement income, all additional monies put into an RRSP should be planned to be withdrawn PRE age 65.  -- up to you if you include TFSA in that calculation.

The solution to TFSA or RRSP? is to calculate your expected income post 65, including RRSP, OAS and CPP.  Then,  do not put money into your RRSP today, unless the retirement income projected (in today's dollars) is well below what you make today....   OR, unless you plan draw it in a low income year during FIRE pre 65.

OAS and CPP (average) for a married couple will provide approximately $36k per year in income, plus any RRSP, TFSA and pension income you have accumulated / will draw down.   

For us, we have sufficient RRSP to fund our post 65 age retirement, so adding to RRSP's is only a benefit when the contributor makes more than $80k or $90k.  Above that, and we are virtually guaranteed to pay more tax on withdrawal than saved in contributions.

Note that the OAS clawback starts at 72k per year, per person, currently, so you need to make over $140k /yr in income as a couple in order to get hit by it. This limit may change in future, but for now, it is less likely to apply unless there are some great pensions involved. 

GreenQueen

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