[wuinvestor]

Hello

I wanted to get peoples' opinion on a strategy my wife and I were thinking about. Invest throughout the year in a TFSA (invested in ETFs using a similar model to the couch potato 2017 ETF sample portfolio) and then before tax season, withdraw the TFSA funds and put them into an RRSP (invested in mutual funds) to bring down our taxable income. The idea is to get whatever growth we can for the year in the TFSA.

We would then use the refund to make extra payments to the mortgage or put it back into the RRSP.

Any thoughts on this? Any opinions are welcome.

Thanks a lot,

Ryan

 

[Dilbert]

Sounds good, I would check with your brokerage to see if you can transfer them "in kind" so you don't have to sell and repurchase. Why would you want MF's anyway?

 

[OnlyMyOpinion]

I'd say its not worth the hassle, just save and put it in the TSFA and if you have extra then into your RRSP. If your future incomes grow, you can max out your RRSP's at that time, with bigger tax reduction (deferral) to boot.
Why the distinction between etf's in one and mutual funds in the other?
P.S. I'm a fan of maximizing both TSFA and RRSP.

 

[wuinvestor]

Wow - thanks for the feedback so fast!

@Dilbert
I was set up with a mutual fund in my RRSP way back when was a student and never changed it - it's the RBC Select Growth Portfolio. With the fund in 2014 I had a good 8% return, then down in 2015 to to 6.7%, and further down in 2016 to 5.27%. Of course I'd be open to changing this. Do you think I should switch to ETFs in my RRSP instead (is this possible - the only options I see in my RBC account for RRSP contributions is MFs, GICs, and Saving Deposits)?


@OnlyMyOpininon
I have A LOT of contribution room in my TFSA (no way I'd be maxing it out for the next few years). As well as contributing to my TFSA, I wanted to benefit from the lower taxable income by contributing to the RRSP (I've recently moved up into a higher tax bracket) - this seems like a no-brainer to me so I'm curious as to why you wouldn't recommend it? Or maybe I should do both? How should I divide it?

I'm open to changing my investment style. I'm looking to put away about $500.00 per month into investments for at least the next year and increase it after that. Our goal is to save for retirement but also want some cash on hand - thus socking it away in the TFSA and then moving it to the RRSP right before tax season. My wife and I are both in our early 30s.

Thanks,

Ryan

 

[Eclectic12]

... I'm looking to put away about $500.00 per month into investments for at least the next year and increase it after that. Our goal is to save for retirement but also want some cash on hand - thus socking it away in the TFSA and then moving it to the RRSP right before tax season ...

For me, it is the risk. The most you are going to get is the year or so in the TFSA before the RRSP contribution is made. If you make the RRSP contribution, it grows tax deferred anyway. Then there's the question of what happens if the TFSA investments are in a loss position when you go to make the RRSP contributions.

If the idea is to transfer the investment itself ... will your broker allow it to be a direct TFSA to RRSP transfer? If not, another issue is that the TFSA withdrawal will make it taxable for the transfer day(s).

Another route would be to make the RRSP contribution then use the tax refund to fund the TFSA contribution. That way, regardless of what the TFSA investment does, the RRSP contribution/refund have already happened. If the TFSA investment pays income (ex. dividends, mixed income) that can be withdrawn then contributed to the RRSP.


Cheers

 

[TomB19]

I think it's a great idea. Now that TFSAs can be well upward of 50K+, you could save in the TFSA, divert a few thousand per year to the RRSP for the tax benefit, and eventually end up with a full TFSA that should be able to fund the RRSP contributions without further funding. Of course, you would fund the TFSA fully. To not would be a waste of a wonderful benefit.

 

[Oldroe]

Is your wife in a lower tax bracket and is it spousal RRSP.

 

[wuinvestor]

Is your wife in a lower tax bracket and is it spousal RRSP.

Yes my wife is in a lower tax bracket than me. We have separate RRSPs going right now - didn't plan on combining them actually. She isn't using her TFSA account right now because we have so much room in mine that splitting it up doesn't seem to make sense (unless I'm missing something?)

 

[CalgaryPotato]

A few thoughts. You'd have to do the math to figure out how much benefit you are getting out of this strategy. But most math I've seen show that putting money into an RRSP or a TFSA over the long term, works out basically the same for most situations. So developing an overly complicated plan to try and squeeze the last drop of juice out of the lemon, probably isn't worth it.

But then here you are trying to make this tiny little bit of extra money in this way, yet you are paying into a high fee mutual fund, because you have been in it for a few years. That is a really poor reason for an investment choice. You seem to understand the value of ETFs. You should probably just stick to those in both your TFSA & RRSP.

Also you are in a high tax bracket, and your goal is to contribute $6K/year into your investments. You really should be trying to up that number. Obviously you are still young, but if you already have a good salary, and a second salary on top of that. I don't know the particulars of your situation, but if you don't figure out how to live within your means now, it isn't magically going to happen down the line.

 

[zylon]

I hear many oldsters say that they would have been better off just paying their income tax and forgetting about RRSP contributions and rebates.

Myself, my marginal tax rate will certainly be higher when I start withdrawing RRSP than it was when I diligently made contributions. I quit doing that about 20 years ago.

Every situation has to be examined on it's own merits.

http://www.marksdailyapple.com/mond...simplicity-of-physical-activity-for-oldsters/

 

[Nerd Investor]

I hear many oldsters say that they would have been better off just paying their income tax and forgetting about RRSP contributions and rebates.

Myself, my marginal tax rate will certainly be higher when I start withdrawing RRSP than it was when I diligently made contributions. I quit doing that about 20 years ago.

Every situation has to be examined on it's own merits.

http://www.marksdailyapple.com/mond...simplicity-of-physical-activity-for-oldsters/

I have heard this as well, but it is almost never true.

 

[CalgaryPotato]

I have heard this as well, but it is almost never true.

For people now, the TFSA might be a better choice. But I agree it rarely works out that someone lost by using an RRSP vs. an unregistered.

Main reasons would be if they invested into the RRSP heavily in the years right before starting to withdraw and or went with an overly conservative portfolio. Then things like tax rate difference and OAS clawback would be worse than the gains of tax deferred growth.

 

[GreatLaker]

I hear many oldsters say that they would have been better off just paying their income tax and forgetting about RRSP contributions and rebates.

Myself, my marginal tax rate will certainly be higher when I start withdrawing RRSP than it was when I diligently made contributions. I quit doing that about 20 years ago.

Every situation has to be examined on it's own merits.

I have heard this as well, but it is almost never true.

I maxed out my RRSP most years. I expect my tax rates to easily be less in retirement than working. A lot of my working years were in the 43% tax bracket (Ont). From retirement to age 71 I expect to be in the 20% tax bracket, due to a lot of income coming from dividends. Then starting the year I turn 72 mandatory RRIF withdrawals will push me into the 31% tax bracket. And some judicious withdrawals from RRSP before age 72 will enable me to manage taxes paid and minimize or eliminate OAS clawback.

The only way to effectively evaluate it is to project RRSP value forward to retirement years based on contributions and expected rate of return. Then project inflation adjusted OAS clawback threshold and mandatory RRIF withdrawals to estimate tax rates during retirement.

Everyone's situation is unique, but guessing is not an effective way to address it.

 

[Eclectic12]

I think it's a great idea. Now that TFSAs can be well upward of 50K+, you could save in the TFSA, divert a few thousand per year to the RRSP for the tax benefit, and eventually end up with a full TFSA that should be able to fund the RRSP contributions without further funding ...

Where the OP has enough $$ to fully fund the TFSA and is only skimming off the income paid ... it would make the issues of FMV irrelevant.

From what the OP wrote, he seems to want to make a short term gain on the $$$ earmarked for the RRSP ... which raises the issue of FMV when it's time to make the RRSP contribution. At $500 a month x twelve months - that's $6K. It seems a lot of work, with a lot of risk for a small amount.

As I say earlier, if instead the RRSP contribution is made where the refund is contributed - there's no issue for the FMV of the TFSA investments, where over time - income paid into the TFSA can be used to add to the RRSP contributions (or reduce the cash flow needed to fund the RRSP).



Cheers

 

[Eclectic12]

Yes my wife is in a lower tax bracket than me. We have separate RRSPs going right now - didn't plan on combining them actually.

??? ... a spousal RRSP is a separate RRSP form her personal RRSP (unless one combines them later).

For the spousal RRSP, both can contribute where your contributions will be deducted from your higher income. The challenge is that both of you have to make no spousal RRSP contributions for three years to make sure none of the withdrawal $$ are attributed back to your higher income.
http://gailvazoxlade.com/blog/archives/4563
http://www.theglobeandmail.com/glob...awing-money-from-spousal-rrsps/article536063/


Some will choose to merge the personal RRSP with the spousal RRSP to simplify things but the result is the merged RRSP is a spousal RRSP, with the need to pay attention to the contributions leading up to the withdrawal. IMO, it is easier to stick with the two RRSPs where one RRSP has no attribution rules to worry about ... but that's me.
http://www.taxtips.ca/rrsp/combinespousalrrsp.htm

She isn't using her TFSA account right now because we have so much room in mine that splitting it up doesn't seem to make sense (unless I'm missing something?)

Makes sense to me.


Cheers

 

[TomB19]

I have heard this as well, but it is almost never true.

I suspect the people who feel this way do not understand how compound interest works.

We're in our 50s and we still make RRSP contributions.

I've also read on this site that the dollar matched pension isn't a great benefit so there is some incorrect advice being presented.

The best thing I've done financially, is spend 4 hours every Saturday morning, modeling scenarios and ideas. From real estate to investments to tax to retirement scenarios. I've got tons of spreadsheets that I may or may not open again. The value was in creating them and seeing how money flows through situations and time.

 

[Eclectic12]

A few thoughts. You'd have to do the math to figure out how much benefit you are getting out of this strategy.

+1 where the OP plans on short term in the TFSA then withdrawing at an unknown FMV to fund the RRSP.

... But most math I've seen show that putting money into an RRSP or a TFSA over the long term, works out basically the same for most situations.

YMMV .... my co-worker changed jobs a couple of times, leaving the DB pensions of old company, which is limiting his eventual DB pension. He has estimated he will be four or five tax brackets lower in retirement. Add in that his wife is currently making half of what he is ... then the spousal RRSP contributions likely mean he will receive a top end refund for the working income spousal RRSP contributions while in retirement, she will be paying bottom end tax on the withdrawal $$$.

It's not clear the levels the OP is at, just that it looks like a spousal RRSP may mean a long term tax savings (depending on what the future tax rates at withdrawal are).

... So developing an overly complicated plan to try and squeeze the last drop of juice out of the lemon, probably isn't worth it.
But then here you are trying to make this tiny little bit of extra money in this way, yet you are paying into a high fee mutual fund, because you have been in it for a few years ...

Definitely seems to be some areas where more of a long term benefit can be had versus the risk/what looks like low reward of putting RRSP funds into a TFSA for a short time.


Cheers

 

[OnlyMyOpinion]

Zylon - I think most complaints are about paying too much tax in retirement - not about having too much income. Taxes are a fact of life, and yes RRIF income is taxable.
I think that not contributing to an RRSP during your working years is a very risky proposition. There are ways to deal with looming taxes from your RRSP>RRIF at age 72 if becomes clear that is going to be a problem.

Wuinvestor - I suggested max'ing the TSFA out first simply becasue it is more flexible in terms of money in-out, without tax implications (remember though that while capital gains are not taxed, capital losses in a TSFA are also not claimable). And because you can top up your RRSP in the future when you may be in a higher tax bracket and it is more beneficial. It is a bit of a double-edged sword though because saving sooner is better.
My suggestion was to try over the years to maximize both TSFA and RRSP. I wouldn't touch the RRSP until retirement, but money from the TSFA could be used for those occasional spending needs (car, house, etc.).

Rather than TSFA>RRSP, I would contribute to your RRSP's, and then use the tax savings to contribute to your TSFA. Then use the TSFA savings to pay off/reduce your mortgage on its anniversary date. You would want conservative, shorter term investments in it though. Once your mortgage is paid off, your free cash flow and ability to save will be much higher.

The idea of the spousal RRSP is to keep your future RRSP/retirement incomes balanced. You contribute to a spousal RRSP in her name and you get the tax deduction, but the RRSP is hers (note that she can't touch it for 3 yrs after a contribution without the money being attributed back to you as income).

 

[Eclectic12]

I hear many oldsters say that they would have been better off just paying their income tax and forgetting about RRSP contributions and rebates ... Every situation has to be examined on it's own merits ...

... I have heard this as well, but it is almost never true.

I'm more middle ground ... most I have talked to, when they discuss the details haven't evaluated their retirement situation at all or superficially. Without checking with reasonable accuracy, some are convinced they have been messed up, despite the numbers saying otherwise.

I have talked to a few, particularly professionals or business owners who definitely would have been affected ... so it seems to me to be more common than "almost never".


Cheers

 

[My Own Advisor]

Seems like a lot of effort....calling, moving money; around, keeping track of your TFSA contribution limits, etc.

Why not just focus on, over time, maxing out both TFSA and RRSP as they are vs. shuffling money around?

1) Max out TFSA, then, if $$ left, contribute to RRSP.
2) Work to contribute to RRSP and every year, use RRSP-generated tax refund to contribute to TFSA.

There is beauty in simplicity!