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What type of RRSP commitment should someone consider when they have a Defined Pension Plan with the Government or the Ontario Teachers Plan? I know you could never have enough money in an RRSP as it is a tax shelter but if you are in a Defined Pension plan do you really need to regularly contribute to an RRSP?
 

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Depends on when you want to retire and how much you want to retire on.

I know people who live on under $1500 per month in retirement, whereas some need much much more. If you identify how much you'll need, and how much your DPP will pay out, then you'll know if you need to top-up your retirement income by saving/contributing to your RRSPs now.
 

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I'm within 5 years of retirement and my response to you is as absolute "yes!" - especially if you end up single like I did due to divorce.

I'm in a DBP and over the years have only been allowed to contribute $2000-2500 to an RSP. I've contributed my maximum every year since I was 23 years old and still I only have a paltry sum in the RRSP. Plus I've saved outside my RSP & still need to save more before I can retire. I've determined that I need a total of $300,000 saved in both registered and non-registered funds in order to have a pre-tax income of $55,000 per year indexed to inflation of 3%. Without these extra funds I wouldn't even be able to consider retiring at the age of 59.

My pension is NOT guaranteed indexed to inflation so I need to take this into consideration. My personal funds will have to cover inflation as well as home repairs and renovations and the occassional fun extra like travel. My pension will only cover my basic living expenses.

Of course, it you happen to be married, stay together forever and both of you have 35 year indexed DBPs then you'll have lots of money when you retire. However, life does not always unfold as we expect. (Mine sure didn't.)

Since you'll only be able to invest a limited amount into an RSP anyway, you may as well do it. It's always better to have too much money than not enough. When I started investing I had no idea what curves life would throw at me and I'm very glad now that I started early.

My co-workers who haven't saved a dime will be working until at least 65 and even then won't be able to live the retirement life they've dreamed about. Now that they're older and wiser they always tell me that they wished they'd paid more attention when they were younger and put money into RSPs as I have done.
 

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that is the problem with defined plans, the number just have to add up, and you have no choice (well cat food might be a choice, though KD is cheaper) but to work to the bitter end.

as well, there is no tidy nest egg to cover spousal death, mishap, inheritance, etc
 

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I have a DB pension and I max out both my RSP and TFSA. I hear all the time at work "ya don't need rSP's with our pension you'll get taxed to death".
I don't buy it. Sure my expenses will be less in retirement (no mortgage, rsp/tfsa contributions) but I always say I would rather have a tax problem than a money problem.
My goal is to retire with 100% of my take home pay, indexed to inflation.
 

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What type of RRSP commitment should someone consider when they have a Defined Pension Plan with the Government or the Ontario Teachers Plan? I know you could never have enough money in an RRSP as it is a tax shelter but if you are in a Defined Pension plan do you really need to regularly contribute to an RRSP?
Money Sense magazine had a good article this month on RRSPs. This is one of the questions and answers:

Q. I have a pension. Do I need an RRSP too?

A. For most people the answer is yes – although if you have a good pension at work you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement income through your pension at work.

There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000 with is roughly the kind of income that a million dollar portfolio would generate


I know my pension administrators have a pension estimator that I look at once and awhile. If I feel that I can't live on what they estimate I will have to contribute to RRSPs or make unregistered investments.
 

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MoneyMusing: for low-income Canadians, surprisingly, marginal effective tax rates can hit more than 100% in certain income brackets.

Two recent C.D. Howe Institute reports have documented this phenomenon: the most recent one on TFSAs and RRSPs, and here's another one.
 

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I'm waiting to see that ultimate article titled..... "I made $x and had to pay $x in taxes.... what went wrong?"

There is no average tax rate, marginal tax rate, effective tax rate, or marginal effective tax rate. There is tax.... you know, the thing you fill out once a year... your T1.

Innumeracy, you gotta love it!
 

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What I am saying is that those entities are derived numbers.... you can calculate/display them AFTER you do your annual taxes (T1).

I have never seen a tax return or tax program which starts out with... "please enter your 'effective marginal tax rate' and has your tax payable for the year drop out.
 

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Thanks for the links MoneyGal.

I'll have to take some time to go over these, but I still can't see where, like steve41 says, I make $x and give $x to the government.

I can however see the inherent disadvantage in a tax deferred savings plan vs. TFSA and in the long run paying more taxes. Table 1 of the e-brief shows you paying $1061 in taxes on the $1000 you invested, but you've earned money ($1,163) in interest that you haven't yet paid taxes on so the amount of money you earned still exceeds the taxes you've paid.

As I mentioned I didn't read the documents yet, but I plan to since I am interested in the situation where you're better off asking for change on the street than showering and going to work.
 

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The other issue to keep in mind is that final tax payment -on death- you are exposed to (the one which your estate sees). The decision to go TFSA or RRSP is drastically effected by estate concerns. If you die prematurely, it would have been better (for your estate) if you had chosen the TFSA.... if you live to a relatively old age, it would have been better if you stuck to the RRSP.

Tax, and your T1 (actually ALL the T1s you complete over the next 20-30-50 years) is a vastly important calculation as it interacts with your various investments (reg/nonreg/tfsa/equity/realestate) over time. Approximating them with a single marginal or average tax rate is just wrong.
 

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Hmmm. Steve41, I think I agree with you - I concur that the average/effective/marginal tax rate can only be calculated after your T1/T2 is complete. However, ... these are "real" rates, in the sense that they really affect your after-tax (obvs) income.

I'm not suggesting that average/effective/marginal rates are very useful for forward-looking projections. MoneyMusing said he/she was not aware of any situations resulting in negative income tax - and my link was to a couple of studies which point out that at low income rates, you can have effective (i.e., "actual") tax rates which approach or even reach 100%.

This isn't a planning tool - just an example of a factual situation meeting a certain parameter. Or are you responding to a different point entirely? :confused:
 

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I am simply objecting to a study which talks about 100% tax rates and is published in the media without properly explaining it. The general public is confused enough about investing/retirement/taxation without this type of strange reporting.

I used to report (after calculation) the marginal tax rate as described... add $1 to the income and re-calculate tax... it was fine before things got strange (the provinces started TONI with different bracket thresholds, various clawbacks etc....) I gave it up because it served no useful planning purpose. I now calculate marginal tax rate as the sum of the fed and provincial tax brackets for that year's income. My users prefer to see it this way since it is a much better-behaved metric.
 

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I have a DB pension and I max out both my RSP and TFSA. I hear all the time at work "ya don't need rSP's with our pension you'll get taxed to death".
I don't buy it. Sure my expenses will be less in retirement (no mortgage, rsp/tfsa contributions) but I always say I would rather have a tax problem than a money problem.
My goal is to retire with 100% of my take home pay, indexed to inflation.
The same take home pay? If you are in retirement and no longer contributing to your "retirement fund" you won't need the same take home pay.

You may be missing out of some living now?????
 

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I read Moneygals link to the CD Howe report, and it made a lot of sense to me. I don't think it was confusing. If people are confused then I suspect it's the media's fault, not the fault of the CD Howe report.

If you read the fine print of the report, marginal effective tax rate takes into account the clawback of social benefits like GIS and OAS. If we're talking about labour income only then marginal tax rates are fine, but retirement income, as stated in the report, is often taxed at a higher rate than labour income due to clawbacks. It's messy to take into account clawbacks, but people aren't getting a complete picture of their retirement income if they ignore the effects of clawbacks. If you look at charts in the report of METR (marginal effective tax rates, i.e. marginal rates including the effect of clawbacks) rates reach up to ~ 85% in Quebec under $20,000 and up to 100% in Ontario. If you are a low income Canadian in one of those provinces making ~ $20,000-25,000, and you've saved up some money to invest close to retirement, then the TFSA is far superior to the RRSP. That's what the report is saying, and it's incredibly important for Canadians in that situation to know that.
 

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I challenge anyone to show me where tax in retirement is higher than tax pre retirement. It just doesn't happen. What many fail to realize is that:

1. that tax brackets are indexed to inflation
2. it's not the tax you pay, it is the PV of those taxes
3. tax for a senior is subject to fairly hefty breaks

Just the first point alone is notable. Whereas tax on $50K now is just over $11K, in 60 years at 3% inflation, the tax will be just $1K

The tax break you get now from the RRSP deduction is more than offset by the tax you pay on withdrawal down the road.

Tax pre retirement is simply much higher than tax post retirement
 

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Let me qualify that prior statement.... For a 'normal' financial plan which involves saving for retirement and subsequently living from the proceeds in a way which causes the proceeds to deplete as one reaches old age, this is generally the case. For someone making a major league salary and building up to a large estate, taxes in retirement could be higher.
 
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