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Discussion Starter #1
Just wondering if there is anyone out there that isn't going to use RRSP's in their retirement plan.

I am considering the Derek Foster retirement plan, where I would pay the mortgage off, save and use income generating investments for retirement income. Right now I have been putting money into an RRSP account, but I thinking with the Derek Foster route, I should just pay off the mortgage, save and invest in dividend paying stocks. Would it make sense to use both strategies?
 

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Using both strategies makes sense. For investments whose return will compose primarily of eligible dividends and capital gains (held for a long time), holding outside an RRSP can make sense, since this income could be subject to a higher tax rate when withdrawn from the RRSP. I can't imagine it making sense, however, to hold fixed income retirement savings in a non-registered account. Paying tax on the interest year-after-year would put a serious dent in your return.
 

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A very valid question. RRSP's have a lot of problems that are not well understood. Any capital gain or dividend received by the RRSP is taxed as income when eventually withdrawn. All withdrawals from an RRSP are income for tax purposes and will make you subject to clawback of Old Age Security and other income tested programs, making the effective marginal tax rate in retirement very high.

The new TSFA account has none of those issues, so I suggest using it to the fullest before using an RRSP - and I totally agree that paying off the mortgage should be first priority.
 

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This is not an easy analysis. When you examine the RRSP against the alternatives (dividends, capital gains, TFSA) you will find that the TFSA and the RRSP are essentially the same... the RRSP is very close to being tax-neutral. When you factor in estate implications (what happens to your estate if you should die early) or emergency cash needs, then there is a good case for maxing your TFSA first.

The fact remains... effective tax rates in retirement are never higher than during your working years.

(I am sure I will get flack over the word 'never' but I am comfortable using it.)
 

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Anyone know where I saw that chart of marginal tax rates for seniors (GIS/OAS clawbacks factored in)? I went searching and couldn't find it.
 

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Be careful!

The strategy Foster advocated was to use an investment loan to provide a tax deduction rather than contributing to an RRSP. To implement the strategy, you must be comfortable with leverage.

Pro
Securities paying dividends and yielding capital gains are taxed favourably outside an RRSP while the same securities are taxed like interest upon withdrawl from an RRSP. Also, capital losses can be claimed against capital gains outside an RRSP.

Con
As mentioned, grossing up dividends may affect eligibility for social benefits. Also, if your portfolio becomes (hopefully) large enough then you may run into problems with alternative minimum tax. Foster's credibility has taken some awful hits recently. I've always been a little bit sceptical. I haven't seen anywhere a cmplete list of what he's held and when. He has made some awful decisions recently. See here for a critique www.canadiancapitalist.com/what-went-wrong-with-the-derek-foster-strategy/

He billed himself as Canada's "youngest retiree," yet he hawked books and articles. I don't know if he uses the money from these ventures to support himself, or if he can actually live on his prior accumulated savings. There's always been a whiff of snake oil to him, at least to me. So be careful from whom you accept advice - including posts on the internet :).
 

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I'm 32, but have never made an RRSP contribution. I've been a member of the federal public service's defined benefit pension plan for the past 9 years. I've made contributions to that, and it impacts the amount of contributions I may make to an rrsp.

Typically, my max contribution amount is about 3500 every year. So, I guess you can say that my pension plan is considered an RRSP?

Anyway, I haven't bothered with an RRSP so far. Instead, I've focused on paying off my student loan (done last year yeah!), and pre-paying my mortgage. In the future, I may make contributions. I haven't really decided yet.

So, in short, because of my pension I haven't really seen the need to make regular RRSP contributions.
 

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I don't see the need for a someone with a federal govt pension to save much early on. Much better off paying debt. Maybe once you're higher income and your house is paid it would make sense to make contributions.
 

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I just used my SDRSP to shift income between years. Optimally you would contribute in about February after a good income year, and enjoy your tax refund in the ensuing bad income year. If things still look bad in December you can take the money out again, and pay 20% withholding tax. It is a pretty handy way to shift $10,000 or so.

You can also use RSPs to shift your current income to your spouse's future income. A good idea if that means improving the marginal tax rate.
 

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The effective rate for capital gains when marginal tax rate is 38% is 19%. After early retirement, one may withdraw 50000/year from RRSP to pay 19% taxes (assuming no other income - before 65 and no capital gains).
It makes perfect sense to make maximum RRSP contributions (in addition to maximizing TFSA) before non-registered investing. Paying mortgage before rrsp/tfsa does not make sense as the rate of return for an average investment is higher than mortgage rate. However one needs to be mortgage free before early retirement in order to avoid the need to use rrsp withdrawals for mortgage (or any other debt) payment.
So the order of investment is very simple:
- maximize rrsp and tfsa every year before early retirement
- use the rest to pay off mortgage
- when/if mortgage is paid off, invest in an unregistered account
Retire when the mortgage is paid off and the savings will last forever at 5% withdrawal (for example if you want 30000/year at retirement you need about 600000).
 

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Discussion Starter #13
The effective rate for capital gains when marginal tax rate is 38% is 19%. After early retirement, one may withdraw 50000/year from RRSP to pay 19% taxes (assuming no other income - before 65 and no capital gains).
I thought that investmensts inside RRSP accounts are sheltered from capital gains, but subject to income tax upon withdraw?
 

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Discussion Starter #14
Am I right to assume the following for RRSP?

Advantage

1. tax deferred compounding effect (if refund re-contributed)
2. Contribute with high marginal tax rate, withdraw at low marginal tax rate

Disadvantages

1. Paying tax upon withdraw
2. Paying tax on the growth that occured inside the RRSP upon withdraw
3. Full withdraw and entire amount taxed upon death when passing to heirs

Once you use all your RRSP income, it becomes depleated. If you hold good dividend paying stocks, you can keep the capital and just live off the dividend income.
 

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Discussion Starter #15
The strategy Foster advocated was to use an investment loan to provide a tax deduction
I don't think he borrowed money. I think in the book it said he just save $200 a month or something. Either way, there are some questionable things that he didn't disclose in his book, regarding how he reached his net worth by saving $200 a month.
 

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I don't think he borrowed money. I think in the book it said he just save $200 a month or something. Either way, there are some questionable things that he didn't disclose in his book, regarding how he reached his net worth by saving $200 a month.
He doesn't mention borrowing to invest in his book. However, he admitted later that he did some big leveraged bets which were a big part of his success.

It kind of took away from the book because in the book he made it sound like he just saved $200/month and then retired. Which isn't what he really did.
 

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I am not planning on retiring with a RRSP. I will rely on rental income and dividend income. I plan on making more in 20 years then I currently am so I dont see the benifits of the RRSP being worth it.
 

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Discussion Starter #18
I am not planning on retiring with a RRSP. I will rely on rental income and dividend income. I plan on making more in 20 years then I currently am so I dont see the benifits of the RRSP being worth it.
Only problem during retirement, rental properties are still a job. Not my idea of retirement!

At least with dividend income, they don't call you with repairs to fix!
 

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*ducks* What the heck is dividend income? Can someone provide me with a simple, brief explanation? No links please, just a high level overview, then I can ask questions from that. Maybe I should start a new thread for this.

FWIW, I agree with jungle in that rental properties are a JOB, a hassle and a huge responsibility. Not what I want to be doing during retirement, either.
 

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From Wikipedia:

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.
 
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