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Discussion Starter #1
I think I need to be convinced to save in my RRSP.

I have no debt, I have a good job, I'm in my mid-20's, and just graduated from University a couple of years ago. I have accumulated a large savings of over $20,000 that is just sitting in a Savings Account (albeit it's in a People's Trust account, which is paying the highest interest rate in Canada), so I have enough to plop a lump sum in my RRSP account.

My RRSP only has about $3,000 in GIC's. Other than that, I do not contribute in it at all. Is this bad? My reason for not contributing is that I feel it is pointless since I do not want to use my after-tax dollars to contribute to my RRSP, and then when I take it out, I'll have to pay tax again on that amount. I feel like I'm getting double-taxed on it.

However, I do make full contributions to my TFSA, and I send monthly contributions to my DRIP portfolio.

Any insight as to whether or not I'm taking the right approach?
 

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Discussion Starter #4
But in my case, if I were to contribute, wouldn't I be using after-tax dollars to contribute? Since I'd just be writing a cheque to deposit it from my Savings Account.
 

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Discussion Starter #7
so you're probably in a fairly high tax bracket.
Seems you are looking a serious gift horse in the mouth.
Nope, not in a high tax bracket at all. By "good", I meant that I love what I'm doing, and surrounded by great people.

Never heard of the idiom you used; looked it up, still confused :eek:..
 

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I'm in my mid-20's, [...] I have accumulated a large savings of over $20,000 that is just sitting in a Savings Account ?

Others have responded about the tax benefits of the RRSP.

I'm more concerned about the investment vehicle: why are you in cash? Do you have a planned use for this money in the near term? If you do, then that's a better reason not to stick it in an RRSP. If you don't, why isn't it invested? You should look at what your risk tolerance is, taking your age into consideration, and think about putting some of this money into equities and bonds (I'd recommend TD's e-series account, especially for this amount of money).

Either way you go (cash or bonds/equities), you should take advantage of the TFSA too.
 

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Discussion Starter #9
Hi Potato, thanks for the response.

I'm actually heavily invested in the Couch Potato strategy (using the TD e-series funds), and I also DRIP 10-12 companies using Derek Foster's method.

The reason I have such a big savings is because I didn't want to dump a "lump sum" into the e-series. Rather, I make monthly contributions that are taken from this Savings Account (using Dollar-Cost-Averaging).

I've read that making lump sums can be a bit risky, so I decided to continue making monthly contributions instead.
 

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Hi CheckingIn,
It will be easier if you gave us a better picture of your situation. From your initial post, it seemed that all your savings were in cash (20k) + a 3k GIC in RRSP.

Now you say you are heavily invested in E-Series + 10-12 stocks? OK..

Did you max out your TFSA?

The best scenario with RRSP is contribute while in high tax bracket, take some out while in a low one. But if you run the math, especially if you're young, you WILL get ahead even if contribution and money out are done on the same tax bracket, because you delay taxes for a long time.

Also, if you think your income will significantly increase in the next few years, you might want to consider contributing right now and take the associated deduction in the future, when you hit a higher tax bracket.
 

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But in my case, if I were to contribute, wouldn't I be using after-tax dollars to contribute? Since I'd just be writing a cheque to deposit it from my Savings Account.
Yes, you might be contributing to your RSP with after-tax $$. BUT, when you do contribute, you get a $ for $ deduction from your total income, and you pay no tax on that amount. In other words, it is just like pre-tax dollars.
 

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Discussion Starter #13
Yes, you might be contributing to your RSP with after-tax $$. BUT, when you do contribute, you get a $ for $ deduction from your total income, and you pay no tax on that amount. In other words, it is just like pre-tax dollars.
Oh, I never thought of it that way.. It sounds very intuitive, yet I haven't wrapped my head around that. Thanks!
 

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Discussion Starter #15
Hi CheckingIn,
It will be easier if you gave us a better picture of your situation. From your initial post, it seemed that all your savings were in cash (20k) + a 3k GIC in RRSP.

Now you say you are heavily invested in E-Series + 10-12 stocks? OK..

Did you max out your TFSA?

The best scenario with RRSP is contribute while in high tax bracket, take some out while in a low one. But if you run the math, especially if you're young, you WILL get ahead even if contribution and money out are done on the same tax bracket, because you delay taxes for a long time.

Also, if you think your income will significantly increase in the next few years, you might want to consider contributing right now and take the associated deduction in the future, when you hit a higher tax bracket.
Hello balexis, thanks for taking the time to respond.

Here is a breakdown of my asset allocation:

Equities (41%)
- Couch Potato (approx. 1/3 of the Equities)
- DRIP (approx. 2/3 of the Equities)

Fixed Income (18%)
- GIC's (approx. 4/5 of the Fixed Income)
- Bond Index (approx. 1/5 of the Fixed Income)

Cash (41%)
- Savings Account​

As you can see, I do have a big "Cash" allocation. That is decreasing, as I put more and more monthly contributions into my Equities. I didn't want to do a "lump sum" straight into the Equities.

And yup, I've definitely maxed out my TFSA :)
 

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CheckingIn ... you’re off to an amazing start ... well ahead of where I was at your age.

As others have pointed out, your view of RRSPs was incorrect because you were ignoring the distinction between before-tax dollars and after-tax dollars ... don’t feel bad, many people with far more experience than you still have trouble making that distinction ... there are some rather obscure situations in which you could actually face double-taxation on contributions to RRSP, but the ordinary day-to-day use of the RRSP within your contribution limits is not among them ... your feeling that you would be double-taxed is not caused by any actual double-taxation ... it is caused by your incorrect analysis.

Potato makes a good point ... the RRSP works exceptionally well for most people, for its intended use, and it works somewhat less well, for most people, for “other” uses ... therefore, you have to take into account YOUR intentions for this money ... do you intend to buy a car/yacht/vacation/ski chalet/etc/etc? ... none of these intended uses really forms a good argument for the use of RRSP, although there can be exceptions ... if your intended use is to generate an income stream in retirement, then the RRSP is, for most people, an excellent vehicle.

Having said that, that doesn’t necessarily mean that you should immediately begin contributing to RRSP ... the RRSP works most efficiently when your tax break on contribution is as high as possible (on average, over your lifetime) and your tax burden on withdrawal is as low as possible (also on average, over your lifetime) ... there are various strategies that can be employed to optimize those tax effects, depending on your personal circumstances and your expectations about the future ... sometimes, simply maxing your RRSP every year, without fail, is the optimal approach ... at other times, some deviation from that pattern may offer opportunities to optimize your average tax break ... but you should realize that optimization is not strictly necessary, in order for the RRSP to outperform the alternative ... it is often not a matter of “whether” the RRSP outperforms, but “by how much” it outperforms.

My advice is continue to learn, but be careful WHAT you learn ... there is a lot of misleading (or worse) information floating about in cyberspace on the subject of RRSPs ... not just in cyberspace, for that matter, but also in newspaper & magazine articles, books, and even in the advice you might get from “professionals” ... read a lot, use valid logic to separate the wheat from the chaffe, and you will form your own understanding.

To get you started, I’ll address some of the comments appearing in other responses upthread ...

Of course you have to contribute the tax refund to complete the transaction.
This is a myth ... the tax-effectiveness of an RRSP does NOT depend on the further investment of the “refund” ... it makes no difference* what you do with the tax refund, the RRSPs relative performance versus an equivalent investment in some non-RRSP scenario does not change.

* ... it does make a difference, of course, to your overall financial picture, in that investing “more money” will usually (though not always) produce a bigger nest egg than investing “less money” ... but that is a separate discussion and has no bearing on RRSPs.

...if you run the math, especially if you're young, you WILL get ahead even if contribution and money out are done on the same tax bracket, because you delay taxes for a long time.
This is true, but the emphasis on “brackets” can be a little misleading ... on withdrawal, it is the tax burden attributable to the withdrawal that matters, not your tax bracket ... although it is not the norm to retire with a higher income, it is quite a simple matter to demonstrate on paper how it is possible to retire into a higher tax bracket, with a higher income, yet face lower taxes on RRSP withdrawals ... it is the relative tax rates that matter, not the tax brackets, per se.
 

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Discussion Starter #19
cardhu, thanks so much for taking the time to respond! I really appreciate it :)

your view of RRSPs was incorrect because you were ignoring the distinction between before-tax dollars and after-tax dollars
I think you are spot-on about my lack of understanding of using after-tax dollars. I had always thought that the only way to take advantage of the RRSP is if you make the contribution (before taxes) off your pay-cheque through your employer. Thus, I thought that when I make a contribution using funds in my Savings Account, it would be taxed again (when I take it out), thus the double taxation that I was referring to.

if your intended use is to generate an income stream in retirement, then the RRSP is, for most people, an excellent vehicle.
I would say I fall into this category. I think after making a contribution, I would "forget" about it, and just let it accumulate.

My advice is continue to learn, but be careful WHAT you learn
Thanks, I think I'm definitely going to do more reading..

but you should realize that optimization is not strictly necessary, in order for the RRSP to outperform the alternative
Good point

Again, great post! :) Learned a lot within this thread.
 

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At about age 45, you need to look at your future contributions relative to your anticipated retirement age. For many people who anticipate earning over 32k in retirement from all sources, it is often tax efficient to draw down your RRSP in the early years (ages 55-64 i.e. early retirement) prior to taking CPP and then suspend w/d so that you maximize your Age Exemption and/or your OAS between 65 and 72.
 
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