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Millennial looking to start investing asks: Should I go with Wealthsimple?
July 16, 2018
8:41 am
Top It Up
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From the Globe and Mail -

Millennial looking to start investing asks: Should I go with Wealthsimple?

"What are peoples’ thoughts on Wealthsimple? I’m at the point where I need to start investing in my future and I want to open an RRSP and TFSA account. I’m drawn to it because, as a low-income person, I appreciate that there aren’t any fees or minimums – until you hit $100,000 as far as I understand."

https://www.theglobeandmail.com/investing/personal-finance/gen-y-money/article-millennial-looking-to-start-investing-asks-should-i-go-with/

July 16, 2018
9:50 am
Kidd
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MY OPINION.

my rrsp is the worst investment that i've ever made. If you are going to receive a pension from your employer, question the need of a rrsp. You are only deferring the tax (paying it later) and hoping to be in a lower tax bracket.

1) canada as a whole, has never been known to lower their tax rates. If the feds lowers their rate, the province will increase theirs. A few years ago Ontario added a health care tax as an example. Yet, Ontario's debt continues to soar.

2) the government's of canada encourage rrsps. Has the government of canada ever, EVER had your best interest at heart? NO, they haven't. In the future they will claw back cpp payments because you have a rrsp. They claw back ei payments now, so why wouldn't they claw back cpp in the future?

3) BANKS love rrsps. This alone should be a warning sign to everyone. A Canadian banks sole purpose of existence is to bleed the economy dry, that's it, that's all they do. RBC drains, 1 billion dollars every 30 days out of our pockets. YES, ONE BILLION DOLLARS every 30 days.

July 16, 2018
10:08 am
Top It Up
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Kidd said

my rrsp is the worst investment that i've ever made. ... You are only deferring the tax (paying it later) and hoping to be in a lower tax bracket. 

I couldn't agree more. The problem for me was I couldn't have predicted where I'd end up financially today from when I first invested in an RRSP close to 40 years ago.

And on the flip-side of that coin, I have friends whose retirement income is from OAS, CPP, and their RRSP - they have no other savings. They literally started drawing from their RRSP the day after they retired, which is great, because that is exactly what it was intended for.

July 16, 2018
1:47 pm
Loonie
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1. What kind of "low income" millenial has the money to invest in both TFSA and RSPs? Must have no student loans and be living in mum and dad's basement and squirreling it all away. This kind of person will not likely ever benefit from an RSP as they will work all the angles and end up with a good income in retirement and will be fully taxed on it, including their RSPs, at a higher rate; plus they will lose out on the Age Credit and likely also have OAS clawed back to some degree.

2. RSPs are only really suitable for people whose income in retirement will be significantly lower than during earning years and for whom this is predictable. Few such people exist, and even fewer can predict that this will be their situation down the road.

3. Most people would be better off to fill up their TFSA, buy a property, save any extra funds outside RSP, and postpone even considering an RSP until middle age. At that point they will have a better idea of whether they would really benefit from one. RSPs are only a tax deferral system, but are advertised as much more. Once you really understand that, the decision is easier.

4. Nothing is completely predictable when it comes to taxation. Rules change over time. It's best not to get involved with longterm government programmes such as RSPs because the gov't will always control how they operate.
TFSAs are better. It would be difficult , politically, for any government to suddenly decide to tax them, although they may decrease, limit, or discontinue new contributions at some point. Fill 'em up while you can! Never contribute to an RSP if you have TFSA room available.

That's my opinion!

July 16, 2018
5:41 pm
Jon
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I agree that TFSA need to be top up before RRSP. However, RRSP do have advantage in investing in US as it is recognize by IRS as a retirement saving account which waive the tax on dividend.

I still think RRSP can have a greater use if people is moving from high tax province to low tax province. Alternately, a even more radical approaches is to permanently move to a reasonably safe developing country with OK medical system to avoid paying the provencial part of income tax. I an incline to believe one can do that by declaring yourself as non - resident of Canada, but Norman, the in house expert, can check this if he want.

Policy change is always a concern, no doubt about that. That's why no cooperations can compete with government in terms of power as government set up the underlying regulatory regime.

July 21, 2018
9:48 am
Norman1
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Jon said

I still think RRSP can have a greater use if people is moving from high tax province to low tax province. Alternately, a even more radical approaches is to permanently move to a reasonably safe developing country with OK medical system to avoid paying the provencial part of income tax. I an incline to believe one can do that by declaring yourself as non - resident of Canada, but Norman, the in house expert, can check this if he want.

I had a look and found it doesn't quite work out as one expects.

A non-resident may not pay anything that is actually labeled as a "provincial income tax". But, non-residents have a special 48% surtax on their basic federal tax. sf-surprised

See line 55 of the Schedule 1 in the T1 General return for non-residents and deemed residents:

Surtax for non-residents and deemed residents of Canada: calculate 48% of the amount on line 54.

One actually doesn't need to pay lower taxes on the withdrawals to be ahead with RRSP's. One can still be ahead if the taxes plus any clawbacks on withdrawals are a bit more.

I did calculations earlier where $400,000 of RRSP contributions were deducted at an average of 32½% and the $1.3 million of withdrawals were taxed at a higher average of 40%.

The net effect was tax-free return of the original contributions and 16.05% tax on the gains. That's half of the 32½% tax rate during the time of the contributions. So, the gains ended up being taxed as if they were capital gains for the contributor.

July 22, 2018
9:17 am
Bill
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Jon, that's a good idea about being in a lower prov tax rate province when you withdraw your RRSP/RRIF funds but that's nearly impossible to plan with any certainty maybe over years ahead what with gov't policy changes, etc. If the possibility is there when the time comes that's a nice bonus. And note you can't just declare yourself to be a non-resident of Canada, you have to take some concrete actions to meet the criteria for non-residency.

July 23, 2018
11:55 am
AltaRed
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Kidd is off-base. There is no, and will not be in the future, gov't clawing back of CPP payments. It's an earned pension just like a corporate/civil service DB pension. Perhaps Kidd is referring to means tested OAS which is rightfully clawed back (OAS being social welfare intended to supplement low(er) income taxpayers) at fairly high income levels.

RRSPs are an incentive for people to save for retirement (deferment of taxes) and help keep more retirees off the public 'social welfare' teat (OAS, GIC, etc). They don't work as well as they should IF a retiree ends up in a higher marginal tax bracket during RRIF years than the MTR they were in when they made (and deducted) the RRSP contributions. TFSAs are indeed the better choice when at lower income (tax) levels but they are a more recent savings vehicle.

July 23, 2018
2:04 pm
Bill
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Totally agree, AltaRed, CPP is financed via contributions and the invested funds' income, but I also believe all bets are off if gov't finances become dire enough. And the trend for federal and provincial debt seems to be for increasing levels in the years ahead, I believe, so at some point some extreme changes to various gov't programs may be imposed. (I don't really get it, we're told our economy and employment levels are humming along very well but all levels of gov't debt seem to be increasing constantly - ? Is it that all this debt is just paying for the large, relatively well-paid public sector class whose spending in turn stimulates the economy?) So to me no-one can really guarantee anything either way, in the future anything is possible.

July 23, 2018
2:12 pm
Loonie
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CPP payments won't get clawed back per se. However, the payout schemes from them can change, and have changed in the past. Thus, the pension you draw from them could be reduced. It's already been reduced for the Survivor Benefit for those born after 1934. Daryl Diamond, in his most recent edition of book on retirement income planning, notes that this change is a cause for concern as it is the first time benefits have been reduced.

A very large number of people will not end up in a lower tax bracket when they are drawing on their RSPs because the tax brackets are very wide (and could get wider). This needs to be looked at in real numbers to appreciate the implications.
Federally, the brackets currently increase at $46,605 and $93,208, which probably covers most people. Ask yourself how sure you are that you will remain in one bracket while working and transition to a lower one after you retire. If you have 90K taxable income now and 50K in retirement, it's all in the same tax bracket, plus you will lose some of the Age Amount in retirement starting around 37K or so at 65yrs. Some income from dividends and cap gains will require some tweaking, but depends on individual.
If you can see that the handwriting on the wall is not in your favour, put your savings somewhere else and begin cashing out RSPs before age 65 if you have stopped working, regardless of whether you "need" the money. It's only a tax-deferral plan, remember?

July 23, 2018
4:26 pm
Top It Up
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Loonie said

... begin cashing out RSPs before age 65 if you have stopped working, regardless of whether you "need" the money. It's only a tax-deferral plan, remember?  

Yeah, no ... I'm not going to let that spoil my day, I'm going to leave that RRSP right where it is ... I'll take the minimum required RIF draws beginning at age 71 and let the estate deal with the residual.

July 23, 2018
6:56 pm
Kidd
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Loonie is correct about the cpp payments being reduced. Collecting cpp before the age of 65. The percentage reduction has recently increased. Before it was advisable to start collecting cpp at the age of 60. Then the government of canada changed the rules. Now you need to figure in your life expectancy, to see if it is worth taking such a large reduction?

When the mass of the baby boomers reach 65, cpp will take one hell of a big hit and i have no doubt the federal government of canada will look at what assets you have, and then claw back their cpp at tax time. It will be based on your yearly income, plus what you have in your RSP. Currently baby boomers age from 54 to 72. 1946 to 1964.

30 years of working in the auto industry, i can tell you first hand how the unemployment insurance program failed every auto worker in canada. The EI claw backs were based on... your income, and the number of times you had collected ei. In the end... a very large percentage of ei had to repaid at tax time.

July 23, 2018
7:04 pm
Kidd
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Top It Up said

Yeah, no ... I'm not going to let that spoil my day, I'm going to leave that RRSP right where it is ... I'll take the minimum required RIF draws beginning at age 71 and let the estate deal with the residual.  

Your estate will pay... ballpark 52%. So you saved 30% putting money into a rsp only to pay 52% when your estate is forced to cash it out all at once.

Added edit below

2018 - combined fed / ontario tax brackets.

https://www.taxtips.ca/taxrates/on.htm

Over $220,000 = 53.53%

July 23, 2018
7:40 pm
Bill
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"Before it was advisable to start collecting cpp at the age of 60." Not true. The decision on when to start taking cpp has always depended on a number of things, some of which are unknown beforehand, different for everyone depending on their priorities and situation.

If I save 30% but my estate (i.e. somebody other than me, and after my death) loses 52%, well then by my reckoning I come out ahead.

July 23, 2018
7:53 pm
Kidd
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Pensions and annuities have adjustments made to them at the age of 65. My pension payment is reduced at 65, cpp and oas are supposed to offset this reduction. From the age of 60 to 65 is was advisable to start cpp, because you were basically double dipping for those 5 years.

Whenever the taxman wins.... we all lose.

July 23, 2018
8:14 pm
Bill
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When the taxman wins he doesn't get to keep it, it goes into the Treasury to be distributed into our society, to us.

July 23, 2018
8:42 pm
Kidd
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So.... 100% tax rate would be ideal?

My opinion... the more money they have, the more they waste.

July 23, 2018
11:17 pm
Loonie
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Everybody is entitled to interpret their pre- and post-death scenarios as they wish.

In my view, money is not worth anything to me unless (a) I own it; and (b) I can choose to get something for it as a medium of exchange. RSP/RIFs are problematic at best.

I don't own all the money in my RSP/RIF because the government owns that 30% or whatever it happens to be. The balance in the account is not an accurate reflection of assets because there is effectively a lien on it. And if I or surviving spouse die while it's still there, it would never have been any use to me at all.

Seen from this perspective, ALL the money that's still in the RIF at my death is a loss to me, not just the 52% or whatever that my estate pays.

The financial industry has always supported the illusion that people have more money than they really do, courtesy of RSPs. They emphasize "investable assets", i.e. the amount they can make money off; and it looks pretty on your statement. A more honest calculation would include at least an estimate for the portion that you don't own, as a liability.

There is some wiggle room around this, but not many options; and most people won't plan for it.

July 24, 2018
4:46 am
Bill
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Whenever I calculate my net worth I count only 50% of my rrsp balance.

July 24, 2018
5:15 am
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Bill said
Whenever I calculate my net worth I count only 50% of my rrsp balance.  

That's funny, I just started doing that a couple of years back ... it's all about perspective, ain't it.

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