Author Topic: What to do with profit from house sale - RRSP or TFSA  (Read 6125 times)

TGod

  • Stubble
  • **
  • Posts: 125
  • Location: Vancouver Island
What to do with profit from house sale - RRSP or TFSA
« on: September 12, 2013, 02:43:31 PM »
I'm counting my chickens a bit early, but we are currently trying to sell our house as we've moved to a new city. We've already bought a new place, and when we sell the old one we are anticipating (here's the getting ahead of myself part) having about 60K in our pocket. Not a huge amount to invest but still. We already have a monthly budget plan (if we can stick to it, it will be epic) to maximize our monthly payments and anniversary payments on our mortgage to get rid of it by the end of the 5 year term (@ 2.99%)  I'd rather invest the chunk of cash if I can get a decent return considering my low mortgage rate. But as I'm pretty new to this investing thing i'm not sure what my best path is. If we sell quickly and get our hands on the cash we have an option to buy into an REIT @ 7.5% for 3.75 years, which seems like a nice return, the interest doesn't get reinvested in the fund so we would arrange for the interest to be invested in index funds within the TFSAs or the RRSP. Between my husband and I we have about $50k in room in our TFSAs.  The other option is to invest in RRSP's which also have a LOT of room in them. If we invested all or at least some of it in RRSP's I could get a tax credit back ($20k in RRSP would give me about $6k in tax savings) which could then be invested. Hmmm did I just make 6K in that scenario....?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3476
  • Location: France
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #1 on: September 12, 2013, 06:16:11 PM »
Hey, have you read any/much Canadian Couch Potato? Good place to start.

TFSA is accessible which can be a good or a bad thing.

If you want to invest in US stuff, put it into your RRSP.

Do you think you'll need some/any of the money before retirement? If so, put that much at least into your TFSA.

$60k is lots of money!

The $6k you 'make' is just deferring the tax. If you will be in a lower tax bracket when you come to take the money out of the RRSP, you'll win. If you'll end up in a higher bracket, you'll actually lose (so if you're just starting your career and not earning much...). Oh, there is something where you can take $2k out of an RRSP or whatever comes next per year for 5 or 6 years - I forget the details!

Canadian Couch Potato is good. But as to what you do with the cash, you need to figure out when you'll need it!

Brian Romanchuk

  • 5 O'Clock Shadow
  • *
  • Posts: 8
    • Bond Economics Blog
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #2 on: September 12, 2013, 06:50:09 PM »
The tax advantage of the RRSP depends upon what your top tax rate is. As you contribute, you lower your taxable income, and eventually the tax rate. So you should not contribute so much in a year that your tax bracket drops too much. You would then use your TFSA room.

If there's a chance that your future income could be in a higher bracket (you get sales commissions or a bonus),having RRSP room for tax smoothing may be useful.

MorningCoffee

  • 5 O'Clock Shadow
  • *
  • Posts: 98
  • Location: Ottawa, Canada
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #3 on: September 13, 2013, 06:06:47 AM »
To add to the RRSP advantages, you can contribute a lump sum this year, and spread out claiming it over the next few years to maximize tax savings. You would claim enough to lower you to the next tax bracket.

RRSPs are great if you have a higher salary and are in a high tax bracket. Otherwise, they may not be ideal.

TGod

  • Stubble
  • **
  • Posts: 125
  • Location: Vancouver Island
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #4 on: September 13, 2013, 02:12:39 PM »
Thanks guys! I will be in a lower tax bracket upon retirement as I will have fully embraced the MMM lifestyle by that point. I just stared a new position with a new company, so while I hope that my income (between salary and consulting) will continue to go up from its current $75K I don't think it will go stratospheric. My husband's income is also probably frozen around the $58K mark and he has tons of room in his RRSP, though he will have a pension..assuming it's still around when he needs it.

 
Quote
Hey, have you read any/much Canadian Couch Potato? Good place to start.

I have checked out this out and am currently in the process of setting myself up with index funds to get rolling.  I won't need the cash anytime soon, so would be happy to lock it up in an RRSP and let it grow away from my greedy fingers.

Quote
If you want to invest in US stuff, put it into your RRSP

Is this because of the withholding tax if held in the TFSA? I'm still learning!!! I was thinking investing in REIT, Bonds and Canadian funds in my TFSA and Bonds and US stocks in RRSP.  When people refer to a Taxable account, is that just a separate investment account, external to both an RRSP & TFSA where you end up paying capital gains tax on all interest/dividends? I guess this would be used after both my RRSP & TFSA are maxed out?

I think a nice split between my RRSP and my husbands to bring our incomes down to the current $43,561 top limit for the 15% federal tax rate, I'd get around  $6500 in tax savings and my husband would get $4700 back in refunded taxes, we'd still have $22K to invest in TFSA as well as a nice tax refund of $11K to also invest in there as well or put down on the mortgage or again put that in an RRSP as well and claim for the following year.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3476
  • Location: France
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #5 on: September 13, 2013, 03:45:47 PM »
Is this because of the withholding tax if held in the TFSA? I'm still learning!!! I was thinking investing in REIT, Bonds and Canadian funds in my TFSA and Bonds and US stocks in RRSP.  When people refer to a Taxable account, is that just a separate investment account, external to both an RRSP & TFSA where you end up paying capital gains tax on all interest/dividends? I guess this would be used after both my RRSP & TFSA are maxed out?

I think a nice split between my RRSP and my husbands to bring our incomes down to the current $43,561 top limit for the 15% federal tax rate, I'd get around  $6500 in tax savings and my husband would get $4700 back in refunded taxes, we'd still have $22K to invest in TFSA as well as a nice tax refund of $11K to also invest in there as well or put down on the mortgage or again put that in an RRSP as well and claim for the following year.

Withholding tax on US, exactly - worse, entirely unrecoverable (though you can fill in a tax-treaty document, I think it's W8-BEN, and only lose 15%). If held in an unregistered account, the withholding counts as foreign tax paid, so you 'get it back'/it counts against your Canadian return.

Taxable or 'unregistered' where you can put in as much money as you like (yay!) but it is taxed - both dividends and capital gains are taxed. The *best* thing to hold unregistered is Canadian stocks, as they give you a tax credit for more than the dividend! So something like a full TSX index tracker, be it ZCN or XIU or whatever, works well there.

Bonds should not be held unregistered unless you have to. There is a good 'what goes where' article on CCP.

Sounds like you have cash coming out your ears, good for you :) I'm of the opinion that paying down one's mortgage is smart (in Canada) as you just don't know where rates will be - not pay it off, but pay some of it, so that if rates are at 10% when you come to remortgage.. there isn't too much of it left! Hedging your bets is always good!

TGod

  • Stubble
  • **
  • Posts: 125
  • Location: Vancouver Island
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #6 on: September 13, 2013, 04:52:29 PM »
Quote
Sounds like you have cash coming out your ears, good for you

Ha! I wish. This is a one time thing, and considering i'm mid-30's and have little in the way of personal retirements savings, I feel lucky to have the opportunity to do some investing and get on my way. I have the plan to retire in 12 years if we really tighten our belts and stop spending money on more crap.

Quote
TSX index tracker, be it ZCN or XIU or whatever
Huh? I think some research on my part is needed.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3476
  • Location: France
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #7 on: September 13, 2013, 05:37:22 PM »
ZCN.TO follows the S&P TSX Composite index - that is, the 254 largest companies in Canada. The Z means (well.. not 'means' but 'indicates') it's a BMO-run ETF.

XIU.TO is an iShares one, that follows the TSX 60 - that is, the largest 60 companies (overlapping the 254).

Different providers (BMO, iShares, um um um... Oh, Horizons, Vanguard) provide similar products, the only difference being the MER; or sometimes, they track a different index (the Vanguard one tracks the 100 largest, using a FTSE index not an S&P ones - FTSE and S&P are 'index providers' - they just create and maintain an index, in programming they would create the class, and the ETF would be an instance of a class or an object... heh... never mind).

So there are different ETF providers. Just like there are different mutual fund providers (and in bank-run accounts, you can usually only buy that bank's funds - so with my RBC mutual fund TFSA, I can only buy RBC funds). This is not the case with ETFs/brokerages - different type of thing, though the underlying stuff is the same!

For Canadian 'eligible dividends' you get the enhanced dividend tax credit. http://www.taxtips.ca/dtc/enhanceddtc.htm - basically that the *company* paying the divi has already PAID tax on it - corporation tax. So you don't have to. This doesn't apply in an RRSP or TFSA.

Have a look at CCP's model portfolios. You can knock your own up quite easily. He lists different ETFs and mutual funds. For simplicity you can just go with TD eSeries funds - very low MER, for a fund. If you already have RBC stuff going on, their funds aren't *too* (0.7% MER for the trackers - vs 0.35% for TD eSeries). CIBC ones are 1%.

If you go the ETF route, ZCN.TO - well, here - http://www.etfs.bmo.com/bmo-etfs/glance?fundId=72048 - 0.15%

TGod

  • Stubble
  • **
  • Posts: 125
  • Location: Vancouver Island
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #8 on: September 15, 2013, 02:48:44 PM »
Thanks for the quick tutorial daverobev!
I've got an RRSP set up with RBC in straight up mutual funds (yuck!!!) which i'm eager to switch out to index funds. I've considered 1) keeping them in the RBC account, 2) opening an RRSP at TD and put them in eseries or 3) I setting up an RRSP via Global Securities ( I currently have RESPs and a TFSA with them and they are about to offer self-direct RRSPs so I could do Vanguard which is what my advisor there suggested). Haven't figured it out yet, as I've been busy with life, but I think i'm leaning towards TD or self-directed, cause really why pay more than I need to.
Much appreciate all the replies and advice...now just to sell that house!

KMMK

  • Handlebar Stache
  • *****
  • Posts: 1465
  • Age: 43
  • Location: Edmonton, AB, Canada
    • Meena Kestirke Insurance
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #9 on: September 15, 2013, 04:44:21 PM »
Thanks for the quick tutorial daverobev!
I've got an RRSP set up with RBC in straight up mutual funds (yuck!!!) which i'm eager to switch out to index funds. I've considered 1) keeping them in the RBC account, 2) opening an RRSP at TD and put them in eseries or 3) I setting up an RRSP via Global Securities ( I currently have RESPs and a TFSA with them and they are about to offer self-direct RRSPs so I could do Vanguard which is what my advisor there suggested). Haven't figured it out yet, as I've been busy with life, but I think i'm leaning towards TD or self-directed, cause really why pay more than I need to.
Much appreciate all the replies and advice...now just to sell that house!

Just wanted to provide my experience with TD: I would never use TD for my regular banking, but last year did set up a basic online account just to do TD e-series funds. It's been very easy and user friendly. I went into my closest branch to fill out some paperwork to get an account set-up. After that I do everything online. I can transfer money from my regular chequing account by using their bill pay feature. You just submit your TD account number as if it's a bill. There is an annual fee of about $20 or so if you're under $20,000 or $25,000. I don't remember exactly. But it didn't take me long to be over that limit, at least for my RSP. And I really wanted no transaction fees as I tend to do something at least monthly. Now I have a TFSA and a taxable account as well. I definitely recommend this approach for index funds, especially if you are contributing frequently.

MorningCoffee

  • 5 O'Clock Shadow
  • *
  • Posts: 98
  • Location: Ottawa, Canada
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #10 on: September 16, 2013, 06:54:58 AM »
Thanks for the quick tutorial daverobev!
I've got an RRSP set up with RBC in straight up mutual funds (yuck!!!) which i'm eager to switch out to index funds. I've considered 1) keeping them in the RBC account, 2) opening an RRSP at TD and put them in eseries or 3) I setting up an RRSP via Global Securities ( I currently have RESPs and a TFSA with them and they are about to offer self-direct RRSPs so I could do Vanguard which is what my advisor there suggested). Haven't figured it out yet, as I've been busy with life, but I think i'm leaning towards TD or self-directed, cause really why pay more than I need to.
Much appreciate all the replies and advice...now just to sell that house!

Just wanted to provide my experience with TD: I would never use TD for my regular banking, but last year did set up a basic online account just to do TD e-series funds. It's been very easy and user friendly. I went into my closest branch to fill out some paperwork to get an account set-up. After that I do everything online. I can transfer money from my regular chequing account by using their bill pay feature. You just submit your TD account number as if it's a bill. There is an annual fee of about $20 or so if you're under $20,000 or $25,000. I don't remember exactly. But it didn't take me long to be over that limit, at least for my RSP. And I really wanted no transaction fees as I tend to do something at least monthly. Now I have a TFSA and a taxable account as well. I definitely recommend this approach for index funds, especially if you are contributing frequently.

Just to add to Kestra's post - if you set up a pre-payment-plan with TD e-series, they waive the annual fees. It can be as little as $25 per fund and set up anywhere from weekly to annually. more info here: http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp#faqs-glossary

TGod

  • Stubble
  • **
  • Posts: 125
  • Location: Vancouver Island
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #11 on: September 16, 2013, 12:11:16 PM »
Though I'm planning on dumping most of my lumpsum into RRSPs does anybody see an issue with investing non-taxed dollars in an RRSP where I will be taxed on any amount I take out down the road? The chunk I will be investing will be from a house sale, so I won't be paying any tax on it to begin with. Sooo, am I better to invest as much as I can into the TFSA, or should I take advantage of the tax refund generated from the RRSP to invest and worry about paying a lower tax rate on it down the road?

Feedback on my plan below would be appreciated. I intend to move my RRSP and TFSA from RBC over to TD and set up with their e-series index funds based on the following:

TD - self-directed RRSP - US, foreign and Bonds
TD - TFSA - Canadian index funds and Cash
Global Securities - TFSA. I have about $2500 in TG income trust, which is currently just dumping my interest into a high interest savings account. I will keep this account, as I have the option to purchase more this month @ 7.5%. I will just need to figure a better place for my interest to go...index funds of some kind. To confirm I don't even need to consider having a taxable account until I use up all my RRSP and TFSA room?

Good? Bad? Indifferent? :)

MorningCoffee

  • 5 O'Clock Shadow
  • *
  • Posts: 98
  • Location: Ottawa, Canada
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #12 on: September 16, 2013, 12:49:53 PM »
Though I'm planning on dumping most of my lumpsum into RRSPs does anybody see an issue with investing non-taxed dollars in an RRSP where I will be taxed on any amount I take out down the road? The chunk I will be investing will be from a house sale, so I won't be paying any tax on it to begin with. Sooo, am I better to invest as much as I can into the TFSA, or should I take advantage of the tax refund generated from the RRSP to invest and worry about paying a lower tax rate on it down the road?

A dollar is a dollar. In your situation, it doesn't matter if it's from the sale of a house or from your salary. As long as you plan to contribute to your RRSPs, you will get the RRSP tax break, so it's not non-taxed dollars.

Stasher

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 46
  • Location: Vancouver Island
  • Power through Positivity
Re: What to do with profit from house sale - RRSP or TFSA
« Reply #13 on: September 25, 2013, 01:40:28 PM »
This was a perfect post for me, I am looking at the exact same question.
Sell my house and dump all the proceeds (about $120K) into an RRSP (I am at the highest tax bracket) so this should yield me a sizable tax return which I can further dump into a RRSP next year. My TFSA will already be maxed by December although I could max out the wife's for her too.
I felt renting a home when I relocate provides much lower monthly living expenses versus owning and I also dont have to purchase in an overly inflated market currently.