In light of the fact that tax will only increase, something that I mention previously, does it make sense for a young person to use RRSP for retirnment, or should he/she stick with TFSA?
True.The RRSP has some unique advantages though ...
While I understand the point - I really don't like the RRSP withholding tax (WHT) being referred to as a "penalty".To me, the "penalty" of withdrawing from the RRSP also is a nice incentive to keep the money invested for the very long term. With the TFSA, it's so easy to withdraw money when you need it... there's no penalty and no tax consequences.
That's a good point. Of course, one can (and in some cases should) withdraw from the RRSP in low income years. The withholding tax is no big deal.While I understand the point - I really don't like the RRSP withholding tax (WHT) being referred to as a "penalty".
Too many people I talk to believe the WHT is lost instead of a pre-payment or down payment for the final tax amount determined by the annual tax return. Surprisingly (at least to me), co-workers who understand the WHT on employment income have insisted that the RRSP withdrawal WHT is always lost.
Maybe ... but then again, I had co-workers over three decades ago who said the same thing.... What I am saying is tax is only going to increase significantly in the future, so I don't think is worth the time for young people to use RRSP at all (referring to my old post).
Thinking of my siblings ... this is true.Everyone's situation is different. Crystal ball gazing into future salary levels and tax burdens are not always accurate when constant dollars are taken into account ...
I was lucky enough to have a RRSP contribution room given back by leaving my first DB pension. My co-worker who left about eight months before, left before the program was introduced so he didn't get any RRSP contribution room back.... I did not have a lot of RSP room over the years. I saved most of it until those years when I was taxed at the highest incremental rate.
Good point.Often the tax savings refund is seen as a windfall and spent so it will not be there in future for retirement.
In a zombie apocalypse (you keep referring to your earlier thread), a TFSA would be of no more use than an RRSP … if you truly believe the end-times are coming, then don’t use either of them, just spend every dollar you get as soon as you get it, either to party yourself into oblivion, or to stockpile canned goods, weaponry, and ammunition.johnny-kar said:does it make sense for a young person to use RRSP for retirnment, or should he/she stick with TFSA?
Your understanding is not correct … tax bracket in retirement does not determine RRSP’s effectiveness, and there is no need to retire into a lower tax bracket to benefit from its use … retiring into a lower tax bracket is certainly a possibility, and RRSP can be more beneficial when that happens, but it is not a pre-requisite, and is not what RRSP is meant for … in fact, RRSP can remain beneficial even in the unlikely event that one retires into a higher tax bracket.johnny-kar said:I understand the conventional wisdom that investing in RRSP is to allow withdrawal in the future when your income reduced below the current tax bracket.
I’m going to ignore the notion of an impending zombie apocalypse (referring to your old post). If all we’re talking about is tax rates rising in the future, then yes, it may well be worth it for a young person to use RRSP for retirement.johnny-kar said:What I am saying is tax is only going to increase significantly in the future, so I don't think is worth the time for young people to use RRSP at all (referring to my old post).
Are you sure it was? … you were the first one to mention WHT in this thread … withdrawing from RRSP while you’re still working and in accumulation mode reduces its tax advantage, and permanently reduces tax shelter capacity going forward … each of those qualifies as a “penalty” for drawing from it in your 30s to buy a boat, or drawing from it in your 40s to buy the new Nissan 400Z roadster, when it comes out next year … for those things, the TFSA or non-reg accounts are preferable.Eclectic21 said:I really don't like the RRSP withholding tax (WHT) being referred to as a "penalty".
Investing the “tax refund” is a red herring … that’s just another way of saying “invest more money” … there’s nothing wrong with investing more money, of course, but doing so obviously has no effect on the tax-efficiency of any particular account.Eclectic21 said:A question to consider is what's it worth to be able to invest the tax money?
One option is to take an RRSP tax refund to help with funding the TFSA (assuming one does not have the means to do both).
Cainvest, you must have been having a bad day, cuz that’s not accurate … tax brackets are not particularly useful in determining RRSP outcome … it is the applicable tax RATE at withdrawal that determines RRSP outcome … the brackets have an influence on that, of course, but only a partial influence … it is a simple matter to face a lower tax rate on RRSP withdrawals even if one does retire into a higher tax bracket … withdrawing in the same bracket often results in RRSP trouncing TFSAcainvest said:If you invest and withdraw in the same tax bracket RRSP is equal to TFSA.
That’s a myth … actually its two myths blended into one statement … firstly, RRSPs are not taxed at marginal rates, they are taxed as ordinary income (not the same thing) … and secondly, the applicable tax rate at withdrawal does not need to be lower than MTR at contribution … RRSP can withstand higher tax rates at withdrawal, without negating its benefit … and the longer the holding period, the higher the tax rate it can withstand.Yashetor said:1) your marginal tax rate at the time of contribution needs to be higher than when the money is withdrawn.
That’s another myth … you can do whatever you want with the tax savings from deducting RRSP contribution, and it will have no impact whatsoever on the RRSP’s tax-efficiency.Yashetor said:2) the tax savings from the RRSP contribution need to be invested as well.
People are allowed to have a life prior to retirement … haven’t you ever taken a vacation? … bought your child a bicycle? … gone out for dinner & a show? … whatever you spent on those activities will also “not be there in future for retirement” … there is nothing magical about the tax savings refund, it is just cash flow … treat it exactly the same as you would treat any other cash flow.Yashetor said:Often the tax savings refund is seen as a windfall and spent so it will not be there in future for retirement.
Not a bad day, it's just a general high level statement and it is accurate enough IMO for this purpose. If one wants to see the more detail, they need to provide more detail.Cainvest, you must have been having a bad day, cuz that’s not accurate … tax brackets are not particularly useful in determining RRSP outcome … it is the applicable tax RATE at withdrawal that determines RRSP outcome … the brackets have an influence on that, of course, but only a partial influence … it is a simple matter to face a lower tax rate on RRSP withdrawals even if one does retire into a higher tax bracket … withdrawing in the same bracket often results in RRSP trouncing TFSA
Well, I was giving you the benefit of the doubt, but OK … your high level statement is wrong … the tax bracket you’re in when you withdraw cannot tell you anything definitive about RRSP/TFSA equivalence. It is inconclusive. Period. Full stop. More detail won’t change that.cainvest said:Not a bad day, it's just a general high level statement and it is accurate enough IMO for this purpose. If one wants to see the more detail, they need to provide more detail.
Not quibbling, and it is not just terminology… words have meanings, and there are quite a few incorrect statements in this thread, as there are in every thread ever written dealing with RRSPs … I only pointed out a handful of ‘em, there are more … but if you can’t see them, then …...peterk said:It seems like you're quibbling a lot about terminology. I don't think anyone said anything incorrect.
Right, and that is precisely my point … the tax bracket myth is just an extension of the marginal tax rate myth, they are interchangeable … but RRSP withdrawals are not taxed at marginal rates, they are taxed as ordinary income … again, not just semantics, these have different meanings, and very different repercussions … these myths are at the core of countless bad decisions … MTR is simple, but it is too often wrong.peterk said:The tax bracket isn't the marginal rate? Sure it is.
Nothing unusual about that … having multiple sources of income is the norm in retirement, and is perfectly compatible with my earlier comments … however you appear to be heading down the path of yet another closely related myth … the “ last dollar earned” myth … but that is just a piece of fiction ... it isn’t how taxes are calculated in Canada.peterk said:But what if their pension income is large and their unregistered income is large too?
Yeah, I think that is the stumbling block for many people … unfortunately there are several flaws in that approach, and they all circle back to this premise … tax efficiency can’t be measured on the basis of a single tax year, it is measured over the course of an entire lifetime (including the final return) … lets assume a hypothetical retiree whose retirement plan calls for a target retirement income of $90k, which comes from 3 sources of $30k each … you can’t just “disappear” the RRSP income from their cash flow and measure the tax consequence of that disappearance, in isolation … if you take the RRSP income off the table, you’re faced with 2 choices … either you force the retiree to abandon their planned $90k retirement lifestyle and take a 33% “pay cut” …or you replace that disappeared income with something else … I’ll leave you to ponder the tax consequences of those two choices.peterk said:Something has to be assigned as income at the "marginal rate" if you're to analyze changes, and we're analyzing the RRSP effects here, so they're being approriately talked about at the marginal rate, what else would you do to analyze the RRSP??
The RRSP doesn’t generate any additional cash flow that wouldn’t otherwise be there anyway … whether you contribute $6000 to TFSA or $10000 to RRSP (assuming a 40% tax bracket), you wind up with exactly the same after tax cash flow for the year, to pay your bills and fund your lifestyle. The tax refund is indistinguishable from every other dollar of your free cash flow … there’s nothing special about it that warrants any kind of “’warning”.peterk said:a warning that spending the refund, which you wouldn't otherwise have access to as cash flow if not for the RRSP, is a VALID warning about the RRSP account.
The first 2 are OK, but the 3rd is a myth … RRSP withdrawals are not taxed at marginal rate … already discussed above, nuff said.peterk said:There's 3 aspect of the RRSP. The refund, an initial benefit, the annual tax avoidance for many years before withdrawal, an ongoing benefit; and the final tax paid at marginal rate, a future cost.
So you can show a real world math example of how this is off?Well, I was giving you the benefit of the doubt, but OK … your high level statement is wrong … the tax bracket you’re in when you withdraw cannot tell you anything definitive about RRSP/TFSA equivalence. It is inconclusive. Period. Full stop. More detail won’t change that.
People often go along with off-topic tangents, once they’re started … I actually have no idea whether he was referring to the WHT … I was just pointing out that you were jumping to conclusions, and that there actually are some legitimate downsides to drawing from RRSP prior to retirement, which might validly be considered a “penalty”.Eclectic21 said:... for some reason, he made no mention of this view in post #16 or the other forms of penalty
How could it be? Like I said earlier, there’s nothing wrong with contributing more money, if you can afford to, but doing so has no effect on the tax-efficiency of your previous contributions. Besides, your premise is that you “can’t” max out your TFSA … if you can’t afford to contribute directly to TFSA in the first place, then where are you getting the money to contribute to RRSP to generate a refund to put in TFSA? Seems to me you're going in circles. People can't contribute money they don't have.Eclectic21 said:If I can't max out my TFSA, surely making an RRSP contribution to make a TFSA contribution is more tax efficient?
If one is concerned about size of RRSP assets, their best course of action would be to learn how an RRSP works … the notion of an RRSP that is “too big” is mostly mythology.Eclectic21 said:There's less in the RRSP to be taxed (if one is concerned about future tax rates/size of RRSP assets)
No, it is not … there are only 3 possible scenarios.Eclectic21 said:Sure ... the accounts haven't changed characteristics but overall, using the two accounts earlier is better, is it not?
I'm not sure either ... but I know several as well as have seen posts on Financial boards where "penalty" means the WHT.People often go along with off-topic tangents, once they’re started … I actually have no idea whether he was referring to the WHT … I was just pointing out that you were jumping to conclusions, and that there actually are some legitimate downsides to drawing from RRSP prior to retirement, which might validly be considered a “penalty”.
Sure ... but then again, I'm talking about the efficiency of the contributions about to be made.How could it be? Like I said earlier, there’s nothing wrong with contributing more money, if you can afford to, but doing so has no effect on the tax-efficiency of your previous contributions ...... If I can't max out my TFSA, surely making an RRSP contribution to make a TFSA contribution is more tax efficient?
Not sure why you seem to be making the assumption there is no cash on hand that seems to be leading you in circles.... Besides, your premise is that you “can’t” max out your TFSA … if you can’t afford to contribute directly to TFSA in the first place, then where are you getting the money to contribute to RRSP to generate a refund to put in TFSA? Seems to me you're going in circles. People can't contribute money they don't have.
If helps, I'll quote my co-worker's question verbatium:
"I'm considering making either a TFSA or RRSP contribution but all I've got is $5K.
What the difference?"
For this fellow, using the RRSP means $5K plus the tax refund will be invested in registered accounts.... I agree it can be beneficial as a behavioral tool to induce (trick) people to divert a bit more into savings, who might not save sufficiently if left to their own devices … but the maneouver has no legitimate financial merit, and is of no value to people who are inherently savers to begin with.
Using the TFSA means only $5K will be invested in registered accounts.
If he is accurate that he does not have any more funds, it's not about diverting more but having more AFAICT.
Let me see if I have this right - in case 3 that is neutral, investing more money is irrelevant?... Among those 3 scenarios, not one of them benefits by splitting your contribution for the year between accounts … case 3 would be neutral.
Cheers
That’s true … but they don’t need to be … RRSP is beneficial in such a vast range of circumstances that it can be counterproductive to attempt to pigeon-hole it into only being advantageous if the planets all align … if RRSP contributions are made with some rational forethought, then it can accommodate a huge variety of different life-paths, without derailing … the degree of advantage might (will) shift but as long as it remains advantageous, then all is goodian said:Crystal ball gazing into future salary levels and tax burdens are not always accurate
Any RSP room you earned prior to your mid-30s vanished in a puff of smoke if you didn’t use it … there was no carry-forward back then … and since then, if you invested in a non-reg account while waiting for your income to rise, then the advantage from deducting at a higher incremental rate was eroded … hopefully the balance worked out in your favour, but it is not always a slam dunk … many people who defer the use of RRSP, or who contribute but defer the deductions while they wait for their income to rise, end up poorer (or less wealthy, if you prefer) as a result ... not saying that’s what happened in your case, but it is a caveat that ought to accompany such tales.ian said:I did not have a lot of RSP room over the years. I saved most of it until those years when I was taxed at the highest incremental rate.
Really? What did you think was going to happen?ian said:We had a considerably higher investable net worth in our late 50's than we did in our late 40's.
We have a considerably higher investable net worth in our late 60's than we did in our late 50's.
I would not have fcasted this when I was in my late 40's.
That would be a win if it were true … too bad it isn’t … TFSA and RRSP do not cause people to save, who otherwise would not … and they’re not meant to … they simply make saving more tax-efficient, for those who are inclined to save … your BIL likely would have been fine even without RRSP … not anywhere near as wealthy, but a saver is a saver … its unlikely the absence of RRSP would have turned him into an irresponsible spend-thrift.ian said:If the very least that the TFSA and RSP programs accomplish is make savers out of those who would otherwise not save a dime for retirement it would be a win.
In your circumstances, and from what you’re describing, flexibility and access to cash are your priorities, as they should be … your case is a perfect illustration of what I described upthread, that flexibility is often the priority for young people just getting established, even if that flexibility does come at a cost.MrBlackhill said:Currently contributing to TFSAs only …
Depends what they do with the 50% match … if it is merged with their own contributions in the in-trust account, then it would NOT escape attribution … the component pertaining to your 50% match would still attribute to you … but if you mean you will give them an amount equal to 50% of their contribution, for them to use as pocket money for spending, then yes, that’d work, and actually it’s a pretty good idea.Plugging Along said:We will then offer for any amount that they decide to put aside for investing, we will match (up to 50% of the income). I believe this would make all of the interest and dividends go back to them, then when they turn 18, it becomes theirs.
Our intent was that our kids could save up to 50% of their income and we would match it for investments. They could use our match portion for their spending, and all of theirs for investing in their in trust account. This would be attributed back to them 100%.Depends what they do with the 50% match … if it is merged with their own contributions in the in-trust account, then it would NOT escape attribution … the component pertaining to your 50% match would still attribute to you … but if you mean you will give them an amount equal to 50% of their contribution, for them to use as pocket money for spending, then yes, that’d work, and actually it’s a pretty good idea.
I understand what you are saying.Here is another way to think about it @MrMatt.
CPP income is optional. The government does not force you to take it.
Let's say you're drawing $60,000 a year from your RRIF. Then, at age 70, you add on CPP payments.
What tax rate do you notionally apply to the CPP income?
If the answer is 30.5% then, logically, your RRIF income is not being taxed at your MTR.
If the answer is your average tax rate then, logically, your RRIF income is also being taxed at your average rate.
Of course … there are millions of ‘emcainvest said:So you can show a real world math example of how this is off?
It’s not the worst article I’ve ever seen, and there are some valid points in it … but all of that is overshadowed by the author’s insistence that marginal tax rates are the key to RRSP/TFSA comparison … she states, quite unambiguously, that ”It all comes down to marginal tax rates now and in the future..cainvest said:I gather you believe the link below incorrect as well right?
The basic arithmetic of RRSPs and TFSAs
Not really … here’s what an accurate statement might look like, if we were forced to use MTR at both ends …cainvest said:Ones marginal tax rate (in and out) would will be fairly good indicator as to the benefit RRSP gain/loss vs TFSA.
Why lead them down an incorrect path in the first place? If you start out with accurate info, there’d be no need to steer back toward something “more exact” later … it’d already be there.cainvest said:If you want to be more exact, run some tax number examples with your data.
It may seem wrong to lead them with such a simple MTR in/out comparison but, to be honest, if I read your first two paragraghs to some people I'd get the deer in headlights look long before I finished.Why lead them down an incorrect path in the first place?
Well then it's a good thing you're here to correct and expand on this topic.If you start out with accurate info, there’d be no need to steer back toward something “more exact” later … it’d already be there.
That’s awesome. Great way to expose them to investments without any attribution complications.Plugging Along said:Our intent was that our kids could save up to 50% of their income and we would match it for investments. They could use our match portion for their spending, and all of theirs for investing in their in trust account. This would be attributed back to them 100%.
Thanks for weighing in … for future reference, “he” will do, I am only one person, not a teamfireseeker said:he/she/they
I think of it as “an” average rate, as opposed to “the” average rate. There are certain tax credits that are specific to a particular stream of income, for example the dividend tax credit (DTC) or the pension income tax credit (PITC). I don’t object to applying those credits solely against the taxes owing on the corresponding components of income … so the DTC would not be shared around among non-dividend streams, and the PITC would not be shared around among non-eligible income streams.fireseeker said:I agree with the assertion that it is more accurate and useful to assume withdrawals are taxed at your average tax rate.
and there are a million more like that …fireseeker said:Let's say you're drawing $60,000 a year from your RRIF. Then, at age 70, you add on CPP payments.
What tax rate do you notionally apply to the CPP income?