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RRSP for young person

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5K views 66 replies 17 participants last post by  MrMatt 
#1 ·
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?
 
#3 ·
The RRSP has some unique advantages though. It's one of the only places you can put money that is protected from creditors, in case you go bankrupt.

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.

The RRSP also has unique recognition and protection in some international tax treaties. When I moved between Canada and the US for work, the RRSP was the easiest account to handle. It was protected under the Tax Treaty. In comparison, non-reg accounts have various problems with ETFs. The TFSA is kind of a disaster. All of those other account types caused me grief. I had to actually shut down my TFSA.
 
#5 ·
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).


The RRSP has some unique advantages though ...
True.


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.
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.


Cheers
 
#16 ·
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.
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.
 
#6 ·
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. 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).
 
#9 ·
... 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).
Maybe ... but then again, I had co-workers over three decades ago who said the same thing.
Comparing the 2004 and 2022 Ontario MTRs .... the 31% MTR they paid taxes on for $38K income now requires over $81.4K to hit.

And that's without considering that if one is out of work for a long time (one co-worker took two years to get back into the same type of work), lower income means one can pull out of the RRSP, if needed.


Cheers
 
#10 ·
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 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.

I was starting out in a lower incremental tax bracket I would always fill my (our) TFSA's first and same the accumulated RSP room for my higher tax bracket years.
 
#25 ·
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 ...
Thinking of my siblings ... this is true.
Most had their salary climb (and tax burden) as the years went on. Near as I can tell, the one brother peaked in university and has had many years of a lot less income.

... 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.
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.

It also helped that the new company made the DB pension optional for up to ten years. I skipped a couple of years to add more than usual RRSP contribution room. It was double lucky as if I'd waited another month, I'd have received no pension at all.


Cheers
 
#20 · (Edited)
I often tend to hedge my bets with these types of decisions. It doesn't have to be one or the other. A prime example of this for me was the decision to pay off debt(mortgage) or invest. At the time many on this forum were preaching kill the mortgage. I found by doing both I gained a few years of knowledge on investing as well as was able to create solid habits. Watching a mortgage balance decrease while seeing a portfolio value increase was more rewarding to me than having a HELOC amount that never diminished while investments grew or killing the mortgage a few years sooner with 0 allocated to my portfolio. I myself still contribute to both RRSP and TFSA and most years use the tax return for TFSA contribution. However, I am much further along in years and have experienced bracket creep.

Some good, but varying, advice has already been provided by others here and the decision is a rather personal one. The general consensus is that the TFSA is the way to go for younger people. Unfortunately, we don't know the future and changes to either program can happen before retirement age with legislative changes. The more important decision has already been made and that is to start saving at a young age.
 
#21 ·
For what it's worth, I take more risks in my RRSPs than I do in my TFSA. Because of that, returns have been better in the RRSP.

The point being, tax is a lever that reduces risk in the RRSP and also reduces gain. If I lose $1, I've only lost about $0.65 spendable. If I gain $1, I've only gained about $0.65 after tax.
 
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#22 ·
Seems to me that it is best if for the RRSP:
1) your marginal tax rate at the time of contribution needs to be higher than when the money is withdrawn.
2) the tax savings from the RRSP contribution need to be invested as well.
Often the tax savings refund is seen as a windfall and spent so it will not be there in future for retirement.
 
#23 ·
Often the tax savings refund is seen as a windfall and spent so it will not be there in future for retirement.
Good point.

TFSA is, at best, equal to RRSP if the refund is wasted. Even there, having a tax refund has allowed a lot of people to buy things they otherwise would struggle to afford and that struggle would undoubtedly impact their ability to save for an RRSP contribution.

Like so many people, I put my tax refund into a TFSA for many years. That worked brilliantly and is probably the ideal situation for an employed person paying high tax, as everyone knows.

My concern with "RRSP for young person" is the thought the young person may not be paying high tax or even get a refund from the contribution. If this is the case, a TFSA is the obvious choice.
 
#26 ·
We had a considerably higher investable net worth in our late 50's than we did in our late 40's. And a much higher DB than I anticipated.

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.

My BIL made the maximum RSP contribution for years. He had no pension. He viewed it as forced retirement savings. For him, at his income level, this worked and has provided him with a very comfortable retirement.

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. I have several relative who poo hoo'd them. Spent every dime and then some. Retired with consumer debt. Not a good situation to be in.
 
#29 · (Edited)
Currently 33 with wife 36 and newborn, now making over $200,000 for our household, yet we barely ever contributed to our RRSPs. But we were making about $120,000 three years ago and about $60,000 six years ago (household).

We bought a property in 2019, where I withdrew $100,000 from my TFSA and $15,000 from my RRSP (employer contribution), combined for the ~5% downpayment and lots of renovations (took $100,000 debt). Wife had no savings at that time.

Currently contributing to TFSAs only (and a bit to the RRSPs due to employer contribution) as we'll use it as a savings account for upcoming expenses in 5+ years.

Once we get access to a HELOC in two years, we'll max both of our TFSAs and only then we'll contribute to our RRSPs.

Each time we'll withdraw from TFSAs, we'll prioritize maximizing them back. Always enjoyed the flexibility of TFSAs. I know when I'll be in my 40s I'll pay even more taxes and the TFSAs will certainly be maxed out so all the money will go to RRSPs at that point.

Planning to retire in my early 50s.
 
#33 ·
I’ve never met an “RRSP is no good” argument that wasn’t rooted in myth and misconception. This thread is no different.

johnny-kar said:
does it make sense for a young person to use RRSP for retirnment, or should he/she stick with TFSA?
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.

On the other hand, young persons with a more realistic view of the future should not avoid RRSP on the basis of myth and misunderstanding … for most people it remains the most tax-efficient mechanism they’ll ever encounter in their lifetimes, for retirement savings use, even if tax rates do rise in the future … but the TFSA offers greater flexibility, to withdraw and recontribute later, and for a young person, that flexibility may take priority, since not ALL savings are meant for retirement … but you DID say “for retirement”, so for any savings that are seriously meant for retirement, the RRSP is often the better choice, even if the young person hasn’t yet reached their peak earning years … the usual advice to “prioritize TFSA” is often a knee-jerk reaction without regard to math … TFSA is never a bad choice, but it’s not always the best choice.

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.
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.

A more accurate statement of “conventional wisdom” would go something like this … investing in RRSP is to allow an individual to retire more comfortably (ie. with a higher after-tax income) than they otherwise would have been able to.

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).
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.

RRSPs can withstand higher tax rates in the future, without negating their benefit. Most people are not border-line cases for whom the slightest deviation from the status quo would crater their RRSP’s usefulness (a la the common but silly “life gets in the way” argument) … for most people, tax rates rising in the future would reduce the degree of advantage of their RRSP, but wouldn’t come anywhere near tipping the scales far enough to negate their advantage altogether … the notion that higher tax rates at withdrawal are an automatic RRSP-killer, is a pernicious myth.

TFSA may still be the better choice for a young person in most cases, but not for the reason you suggest.
 
#34 ·
Eclectic21 said:
I really don't like the RRSP withholding tax (WHT) being referred to as a "penalty".
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.

Granted, for this to act as a behavioral deterrent, as I think was j4b’s point, an individual would have to understand how an RRSP works … and admittedly, that is a bit of a stretch … so it may not be a bad thing (from a deterrent point of view) for people to think of the WHT as a penalty even though its not.

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).
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.

cainvest said:
If you invest and withdraw in the same tax bracket RRSP is equal to TFSA.
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

Yashetor said:
1) your marginal tax rate at the time of contribution needs to be higher than when the money is withdrawn.
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:
2) the tax savings from the RRSP contribution need to be invested as well.
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.

The tax saving (sometimes referred to as the “refund”) is just cash flow. If you want to divert more cash flow into investments, there’s nothing wrong with that, but it is false to suggest that you need to do so, or risk damaging the RRSPs tax efficiency.

Yashetor said:
Often the tax savings refund is seen as a windfall and spent so it will not be there in future for retirement.
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.
 
#35 ·
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
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.
 
#38 · (Edited)
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.
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.

peterk said:
It seems like you're quibbling a lot about terminology. I don't think anyone said anything incorrect.
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:
The tax bracket isn't the marginal rate? Sure it is.
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:
But what if their pension income is large and their unregistered income is large too?
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:
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??
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.

Personally, I would (and do) use realistic rates. I know how much tax we’ll face in the real world and it is nowhere near marginal … and despite many accusations over the years that I must somehow get special treatment from CRA and my various brokers, I really don’t … my situation is actually quite common and average, and it applies similarly to millions of other people … so it would be lunacy to throw out the real world, in favour of some hypothetical rate that is known* to produce impossible results.

* I have seen examples presented in which, because of a stubborn insistence on using MTR, the RRSP withdrawals were "assigned" responsibility for more than all of the tax owing in a particular year … No joke, this happens more often than you’d think … it is a patently absurd and mathematically impossible result … a classic case of GIGO.

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 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:
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.
The first 2 are OK, but the 3rd is a myth … RRSP withdrawals are not taxed at marginal rate … already discussed above, nuff said.
 
#41 ·
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.
So you can show a real world math example of how this is off?
I gather you believe the link below incorrect as well right?
The basic arithmetic of RRSPs and TFSAs
 
#39 · (Edited)
Eclectic21 said:
... for some reason, he made no mention of this view in post #16 or the other forms of penalty
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:
If I can't max out my TFSA, surely making an RRSP contribution to make a TFSA contribution is more tax efficient?
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.

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 … similar to letting them believe that WHT is a “penalty” … but the maneouver has no legitimate financial merit, and is of no value to people who are inherently savers to begin with.

Eclectic21 said:
There's less in the RRSP to be taxed (if one is concerned about future tax rates/size of RRSP assets)
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:
Sure ... the accounts haven't changed characteristics but overall, using the two accounts earlier is better, is it not?
No, it is not … there are only 3 possible scenarios.
  1. RRSP is more tax efficient than TFSA;
  2. TFSA is more tax efficient than RRSP; or
  3. RRSP and TFSA are equally tax efficient.
Among those 3 scenarios, not one of them benefits by splitting your contribution for the year between accounts … in cases 1 and 2, you’d be diminishing your aggregate tax-efficiency, by voluntarily placing a portion of your year’s contribution into the less-tax-efficient account … case 3 would be neutral.

Flexibility aside (though flexibility is a valid consideration in the real world), it is always more tax-efficient to prioritize savings into the most tax efficient account, and ignore the other accounts until you bump up against contribution limits … that is why it is commonly said that flexibility is a wonderful thing, but it can come with a cost.


Circling back to the OP’s original question, “what should young people do?”, I stand by my earlier advice … young people may have other priorities than retirement, competing for their savings, and for those other priorities TFSA is clearly the better choice … but to the extent that they are assigning a portion of their savings to retirement, as the OP specified, then RRSP is a contender and they should NOT make such an important decision on the basis of myth, misconception, and knee-jerk recommendations.
 
#46 ·
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”.
I'm not sure either ... but I know several as well as have seen posts on Financial boards where "penalty" means the WHT.
If whomever is going deeper to what you are referring to, kudos to them.


... If I can't max out my TFSA, surely making an RRSP contribution to make a TFSA contribution is more tax efficient?
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 ...
Sure ... but then again, I'm talking about the efficiency of the contributions about to be made.


... 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.
Not sure why you seem to be making the assumption there is no cash on hand that seems to be leading you in circles.

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?"


... 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.
For this fellow, using the RRSP means $5K plus the tax refund will be invested in registered accounts.
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.


... Among those 3 scenarios, not one of them benefits by splitting your contribution for the year between accounts … case 3 would be neutral.
Let me see if I have this right - in case 3 that is neutral, investing more money is irrelevant?


Cheers
 
#40 · (Edited)
and circling back to some earlier posts …
ian said:
Crystal ball gazing into future salary levels and tax burdens are not always accurate
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 good
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.
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:
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.
Really? What did you think was going to happen?
When I was in my 40s I had every expectation that my portfolio would increase over time. If I didn’t expect that, I wouldn’t have poured as much money into it.
I admit I’m a little baffled as to how this anecdote connects to the thread topic.
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.
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.
MrBlackhill said:
Currently contributing to TFSAs only …
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.
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.
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.
 
#44 ·
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.
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%.

In the rare case that they would want to save more than 50% (which would be awesome) which would then be more than 100% of their income. The remaining pieces would get invested in their current In Trust account (which is already attributed back to me), that money my kids already know will go for University or TSFA when they become 18.

Being my oldest is already 16 and hasn't had time for a job yet, the amounts and time may be pretty small. Maybe for my younger one who has small side hustle. Currently my challenge is it's not worth opening a separate In Trust account for small amount. My kids get $20-30 dollars here and there.
 
#52 ·
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.
 
#54 · (Edited)
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.
I understand what you are saying.

But I don't think your model is appropriate for considering something like the TFSA vs RRSP decision.

If you're considering CCP yes/no, then consider MTR.
In short use the MTR for evaluating the decision you are making.

Should I consider TFSA or RRSP, should I pull another dollar out, should I pull my CPP out early or late.
For every decision, take your baseline, and consider the change at the MTR that exists. Because what really matters is how much money you're left with at the time.

For complex situations, you'll likely have a number of different scenarios.
 
#61 ·
cainvest said:
So you can show a real world math example of how this is off?
Of course … there are millions of ‘em

Roughly 70% of the workforce are NOT members of a RPP … for those millions of real world Canadians, RRIF withdrawals are eligible for the pension income amount tax credit (PITC) from age 65 onward … therefore, beyond age 65, none of them will face MTR on their RRIF withdrawals, even if those withdrawals were arbitrarily and unreasonably treated as “last dollar earned” … there you go, millions of real world examples.

Here’s just one of those millions … ON resident, age 65, retires with $65k income, placing him in the 29.65% MTR bracket … which happens to be the same bracket he occupied while working … his income consists of $15k eligible dividends and $50k RRIF withdrawal … total income tax owing for the year (including OHP) is $8366 … the RRIF withdrawal obviously isn’t the “last dollar earned”, but even if it was, the tax associated with that withdrawal would still only be 16.7% of the amount withdrawn … clearly, the RRSP is not equal to TFSA, despite this individual retiring in the same bracket that he spent his working years in … in this real world case, RRSP is far better than TFSA when retiring in the same bracket, and doesn’t fall to the TFSA’s level until withdrawals drive his income up by several brackets.

Now, if this person was operating under the erroneous assumption that if he retired into the same bracket he was in while working and contributing, the RRSP would be equal to TFSA, he might have made some different life decisions and wound up significantly poorer as a result. That is the danger of making decisions on the basis of myth and misconception … this is not just an academic exercise, myths and misconceptions lead to bad decisions.

cainvest said:
I gather you believe the link below incorrect as well right?
The basic arithmetic of RRSPs and TFSAs
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..

Any article/blog/source/post/statement/interview/youtube video/etc. that states that RRSP/TFSA equivalence hinges on one’s marginal tax rate in retirement is incorrect … its not a matter of “believing” it to be incorrect, it just is … I wouldn’t in a million years refer a newbie to that article.

You say the article uses MTR to keep things simple, but it actually has the opposite effect … a comparison using tax rates IN/OUT is about as simple as it gets, and more importantly, its true … but bringing MTR into the mix at the withdrawal end unnecessarily complicates matters …. it not only makes it less simple, but it also makes it wrong.

cainvest said:
Ones marginal tax rate (in and out) would will be fairly good indicator as to the benefit RRSP gain/loss vs TFSA.
Not really … here’s what an accurate statement might look like, if we were forced to use MTR at both ends …
If your MTR is the same in retirement as when you contributed, then RRSP may or may not be equal to TFSA; and
if your MTR is higher in retirement than when you contributed, then RRSP may or may not be equal to TFSA.

I don’t see much “indication” going on in that statement … it is entirely inconclusive.

cainvest said:
If you want to be more exact, run some tax number examples with your data.
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.

Seem counterproductive to intentionally lead someone away from the truth, only to turn around later, demanding more data, in exchange for leading them back toward it.
 
#64 ·
Why lead them down an incorrect path in the first place?
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.

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.
Well then it's a good thing you're here to correct and expand on this topic. :)
 
#62 ·
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%.
That’s awesome. Great way to expose them to investments without any attribution complications.
 
#63 ·
fireseeker said:
he/she/they
Thanks for weighing in … for future reference, “he” will do, I am only one person, not a team

fireseeker said:
I agree with the assertion that it is more accurate and useful to assume withdrawals are taxed at your average tax rate.
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.

But the most compelling argument against MTR, which is irrefutable actually, is that it can, and frequently does produce results that are impossible … if a retiree has a total tax bill of $8,000 for the year, it would be absurd and irrational to blame the RRSP for $15,000 of that amount … and yet, that is precisely the kind of result that the stubborn use of MTR often generates.

It is fine to have a theory, but when the real world doesn’t conform to that theory, the customary response is to reject the theory as flawed, rather than to insist that what happens in the real world isn’t really happening.

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?
and there are a million more like that …
  • What if you take your RRIF withdrawal on January 2 of each year, making it the first income of the year, then every other payment comes after it in sequence?
  • What if, being a rational human being, you contribute solely to registered accounts until you run out of contribution room, and only then begin investing in non-reg accounts? … that would make your non-reg dividend income “last dollar earned”
  • What if you already had a $million in RRSP before you switched into a job that offered a DBP? Clearly, the DBP would be “last dollar earned” in that case (or at the very least, later in the sequence than RRSP/RRIF) .
All of these tales of “sequence of income” are just as absurd as the insistence that RRSP is always the last dollar earned … they are all figments of imagination, and none of them has a shred of validity.

The worst case of illogic I’ve ever witnessed on this topic, was a few years ago on another forum when one regular said that in most years his RRIF income still left him well below the OAS clawback threshold … but then one year, he had a rather large capital gain from a sale of some recreational property, and in that year, HIS RRIF caused a very painful OAS clawback. I am not shi**ing you, that is a true story.
 
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