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Millennial looking to start investing asks: Should I go with Wealthsimple?
July 25, 2018
8:50 pm
AltaRed
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christinad said
Interesting discussion. I have a pension so a small amount of rrsp room and i can max out my tfsa and rrsp. I am a bit skeptical my income will be $45000 or lower (i make 60000 now so that would be the lower bracket) Does that mean i should invest in a non registered account instead of the rrsp? I struggle with this. Just a comment that at least they invented tfsas and we have that option now.  

As Bill suggested, it depends on how long the money will remain in the RRSP before having to draw down via RRIF, what your tax bracket is today versus when you retire, and what you invest in IF you put it into a non-reg account instead.

When I got to be about 60 years of age, I decided NOT to fill out my remaining RRSP room that came from my Pension Adjustment from the last year of working (I retired on my 57th birthday). I reckoned that I was not going to be in a lower income tax bracket when I had to start RRIFing, AND maybe more importantly, I wanted my investments in dividend paying stocks. Hmmmm..... why would I invest that money in an RRSP taxed at full tax rates upon withdrawal when capital gains are taxed at 50% rate in a non-reg account.

So as I turn 70 (soon) , I have unused RRSP room I will not use. Meanwhile I have over 12 years of capital gains in the stocks I invested in, in my non-reg account. Thank you very...very much.

You just have to do what you think best, and it will either work out...or it won't.

July 25, 2018
8:50 pm
Bill
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Very true, Top It Up, marketers in all industries are always trying to part us from our money. (That makes forums like this one very useful, lots of ideas here that are not readily found elsewhere.) And I've increasingly taken on the attitude that if something needs to be advertised heavily there's a good chance I'm better off without it.

I've got a great pension too, I think we're both in the situation that we didn't need an RRSP. But to be fair, in my 20s & 30s, there was no guarantee I'd end up with a good pension, so hindsight is 20/20. Also we are probably in the minority - I'm guessing most Canadians make significantly less in retirement than in their peak earning years, likely at the end of their working days. (We could get into another discussion about the increasing divide between the aristocracy that has public sector pensions vs those with private sector ones!) So the promotion of RRSPs, the encouragement to save for retirement, by governments is not so sinister - I'm sure a lot of folks of modest means who don't want to rely on gov't benefits (that makes me happy!) are quite happy they have theirs when the time comes.

July 26, 2018
1:31 am
Loonie
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christinad, there is, as others have said, and as you probably realize, no simple answer to your question.
If your income is going to hover around the upper end of the lower tax bracket, you would probably do well to ensure that it stays there, which means avoiding RSPs.
However, there are other factors. If you're young, then you can postpone this decision until things are clearer.
Make sure you are comparing apples and apples, i.e. looking at taxable income now and in the future.
If you are averse to investing in stocks, then you will not benefit as much from putting our money in non-registered assets. But, if you are willing to do so, then that might be a good answer for you because of the preferential tax treatment of capital gains and Cdn dividends.
Might you yet inherit money? That could bump up your savings and retirement sources, making the RSP less necessary or desirable as an inheritance will also earn taxable income.
How secure is your job and your pension? Is your pension defined-benefit or defined-contribution? Is it indexed - fully or partially? Do you read the annual statements to see how well it is doing? An RSP could be very useful if the job or the pension fail.
Do you own property? That too can be a source of retirement income if you sell and rent.
I think you said in previous posts that you are a single person? If so, you miss out on some of the pension splitting that is available to married RIF-holders and RPP recipients. If you are single, I would see this as a negative point for RSPs.
Do you have a good disability insurance plan? This is more important than an RSP in your earning years, especially if you are self-supporting. A car accident can wipe out your earning power and make the RSP question irrelevant. If you have such a plan, do you know its terms in detail? It's worth knowing, as those details will surely matter if you ever need to use it. Buy extra if necessary; and remember to cancel it when it expires (usually age 65) as the insurance company will be happy to keep taking your money (this happened to someone I know).
At what age will you retire? If you retire early, you will have some time in which you can take early withdrawals if you can foresee a larger-than-expected income ahead.
Are you in good health? This affects longevity and thus the need for RSP.
I don't usually recommend this but you might want to look into a long term care insurance policy and/or one for catastrophic illness. They are expensive, too expensive, and that's the problem. LTD may look after the catastrophic illness , so the long term care might be more important. Still, if you have no one else to lean on, you might find it useful. Something to consider. Read policies very carefully, before you need or buy them.
I'm sure there are other relevant considerations, but those are the ones I can think of at the moment. I lean towards thinking RSPs may not be best choice for you. But remember too that tax brackets can change and probably will.
You might benefit from an analysis of your whole situation by a fee-only financial planner who has expertise in retirement INCOME planning. Many don't know much about the income end of it.
I hope that helps a bit.

July 26, 2018
6:32 am
Top It Up
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The ongoing allure for many with respect to RRSPs and TFSAs is that RRSPs have an upfront tax benefit of 18% of yearly earned income to a maximum of $26,230 while TFSAs offer an after-tax shelter of $5,550 per year. So, if you're a "youngster" on the rise with "disposable" income, no sharp pencil required to figure out where you want to put your cash NOW.

July 26, 2018
7:19 am
christinad
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Thanks for the replies. Lots to think about. The other thing i'm thinking is i would invest in gics in an unregistered account instead ofvthe rrsp which doesn't have favorible tax treatment which isn't great as i've been reading .I'd have to invest in something like mawer tax effective balanced and i'm not sure i want do that. I'm actually leaning to investing in rrsps but revisiting the decision when i'm 55 with the help of a financial planner as some have suggested. I doubt i'd be in a higher tax bracket in retirement. However i could put money towards my mortgage instead of rrsp as well. I am not looking forward to tax at death but i could also melt down rrsp early as i've read about here.

The missing piece of the puzzle for people may be i'm 45 and having money sitting in a taxable account until retirement may be too long.

July 26, 2018
9:58 am
Londonguy
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Top It Up said
Here is a typical RRSP bolster column from a financial institution - imagine, a 2018 article using language like (assuming you earn a 7% return each year) - I mean, with language like that, who wouldn't want an RRSP!

The hidden costs of early RRSP withdrawals

https://www.sunlife.ca/ca/Learn+and+Plan/Money/Retirement+savings/The+hidden+costs+of+early+RRSP+withdrawals?vgnLocale=en_CA  

That kind of stuff really rankles me, too, especially the scaremongering language about withdrawals being subject to withholding tax. The statement is obviously designed to imply that WHT is some kind of extra tax in and of itself, which it is not. The reference is deliberately misleading, which tells you everything you need to know about who's making the statement, and my advice is to RUN not walk in the opposite direction

July 26, 2018
12:10 pm
Bill
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I agree, it's misleading, and maybe there are some reps in the industry that actually think WHT re RSP withdrawals is an extra tax.

In their defence, they do state "The amount of the withdrawal is also included in your taxable income for the year, so if your marginal tax rate is higher than the withholding tax rate, you’ll have to pay additional tax at year-end on the funds you’ve withdrawn." So they do point out that you may not owe any further income taxes on this income. It would help if they indicated the T4RSP slip (Box 30, I believe) will show the withholding taxes that can be claimed as a credit on your return for the year.

July 26, 2018
1:31 pm
Loonie
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christinad said
Thanks for the replies. Lots to think about. The other thing i'm thinking is i would invest in gics in an unregistered account instead ofvthe rrsp which doesn't have favorible tax treatment which isn't great as i've been reading .I'd have to invest in something like mawer tax effective balanced and i'm not sure i want do that. I'm actually leaning to investing in rrsps but revisiting the decision when i'm 55 with the help of a financial planner as some have suggested. I doubt i'd be in a higher tax bracket in retirement. However i could put money towards my mortgage instead of rrsp as well. I am not looking forward to tax at death but i could also melt down rrsp early as i've read about here.

The missing piece of the puzzle for people may be i'm 45 and having money sitting in a taxable account until retirement may be too long.  

Yes, it seems you may have reason to consider RSPs somewhat more favourably, especially if you are unwilling to buy into the stock market.
I wouldn't necessarily wait to 55 to make your decision. Now is a good time. In your case, it might be wise to visit a financial planner sooner rather than later. It will take you a while to find someone suitable anyway. They can spin out for you the likely result of your various options. They will almost certainly recommend a mixture of fixed term and stock market and will show you scary charts showing how you will end up in the poorhouse unless you buy stocks. So, you need to be prepared for that and be ready to insist on your unwillingness to buy stocks, if that continues to be your position.

If you decide to go with RSPs, you should do some calculating to ensure that, once you start investing in them, and given the amount of contribution room you intend to use, that it is still worth your while in terms of the deduction that you can claim. If you leave it all until age 55 and you are catching up with your contribution room, you could end up in a very low tax bracket pre-retirement, which would defeat the later purpose entirely. This is an important consideration.

Getting rid of debt (mortgage) will be more beneficial if you are only going to invest in GICs. Mortgage rates will typically be higher than returns on GICs, and you are using after-tax income to pay the mortgage. At least it leaves you more secure against any unforeseen events.

If you're only 45, you can still do very well with TFSAs. In 20 years, you should have at least 200K and no tax liability, although inflation will eat away at that, as it will with any kind of investment.

If you were to invest non-reg'd outside of GICs, you might also consider Cdn dividend-bearing blue chip stocks through a low-cost mutual fund that you can buy at a bank branch. Some people will be surprised to hear me say this, but you might consider investing a small amount non-registered, in such a fund and see how it works out for you and how comfortable you are with owning it. Sometimes you have to try these things to know. i believe TD and BMO offer suitable funds, but someone else can probably comment on that more knowledgeably.

July 26, 2018
4:37 pm
christinad
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I hope I didn't give the impression that I am not invested in the stock market at all because that is not the case. I invest in mutual funds and etfs in my rrsp and tfsa (Hence the growth in the RSSP) but I don't want to invest in these in a taxable account. Part of it is uncertainty over how to track them for tax purposes and part of it is i'm not sure how long I would hold the mutual fund or etf and I thought it made more sense to have it in a taxable account if you kept it long term. You are right I should go to a financial planner sooner but I just feel like things are too uncertain with my future right now and there is not much point. I'd rather wait until things are solidified a bit. Maybe 50.

July 26, 2018
6:57 pm
Norman1
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Loonie said
To make Norman's scenario work, you must live to at least 85. About half won't. Those who don't won't get as good a deal. Those who live longer will get a better deal. The person who lives to 95 will usually win with an RSP. Good luck to all of you!

The example does not include the impact on the Age Amount credit, wihch kicks in separately from tax brackets. It also can't take into account any income-tested benefits which might be affected.

GIS clawbacks, OAS clawbacks, medical expense credits, and so on can be incorporated into the taxes on the withdrawals.

The essential calculations actually don't depend on time. The three essential factors are

  1. average rate of tax saved by the RRSP contributions,
  2. average rate of tax, including clawbacks and credits, on the RRSP/RRIF withdrawals, and
  3. the percent of the withdrawals that is investment gains as opposed to original principal.

When #1 and #2 are equal, one gets the equivalent of a TFSA.

When #1 is more than #2, one gets better than a TFSA! sf-smile

When #2 is more than #1, then taxes are paid. The net tax rate depends on #3.

Age at death only matters to the extent it affects #2 and #3. Later death means (a) lower average rate of tax on withdrawals because less of a final withdrawal taxed at 53% and (b) more investment gains from longer period of investment.

I agree that RRSP's won't be an advantage in every case. But, such disadvantageous cases require more than just #2 (tax/clawback rates paid on the withdrawals) being higher than #1 (rate of taxes saved from RRSP contribution deductions).

July 26, 2018
7:11 pm
Norman1
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Kidd said
Before i put this topic to bed, here's a hmm... (these are my real percentages)

I decided to open my old tax files using studio tax. Doing a what if... What if i did not withdraw any money from my rif. I found the results confusing.

Scenario 1.

Line 150 total income (including rif withdrawal) = A
Line 435 total payable = B
Percentage of (A) paid to the taxman = 23.66%

Scenario 2.

Line 150 total income (no rif money) = C
Line 435 total payable = D
Percentage of (C) paid to the taxman = 20.25%

Okay

A - C = RIF money (E)
B - D = tax paid on E
Percentage of (E) paid to the taxman = 33.43%  

That is normal.

Scenarios #1 and #2 reflect your average tax rate. Scenario #3 reflects the average of the tax brackets your RIF withdrawals span.

Keep in mind that the Canadian tax system taxes income at the rate of the bracket each portion of income is in. Income is not taxed at the highest bracket with income.

For 2018, the first two federal tax brackets are

15% $0 to $46,605
20.5% over 46,605, up to $93,208.

If one has an income of $47,000, one doesn't pay

20.5% x $47,000 = $9,635

of federal tax. Instead one pays

15% x $46,605 + 20.5% x ($47,000 - $46,605) = $7,071.73

July 26, 2018
7:56 pm
Loonie
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My recollection is that, during the 1970s/80s, when I began investing in RSPs, there were more federal tax brackets than there are now in the under-100K category. Can anyone verify if this is correct, and what taxation rates applied then?
I know I could look it up in my old papers, but that requires a lot of work and perhaps someone else has it available more conveniently?

July 26, 2018
8:13 pm
Loonie
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christinad said
I hope I didn't give the impression that I am not invested in the stock market at all because that is not the case. I invest in mutual funds and etfs in my rrsp and tfsa (Hence the growth in the RSSP) but I don't want to invest in these in a taxable account. Part of it is uncertainty over how to track them for tax purposes and part of it is i'm not sure how long I would hold the mutual fund or etf and I thought it made more sense to have it in a taxable account if you kept it long term. You are right I should go to a financial planner sooner but I just feel like things are too uncertain with my future right now and there is not much point. I'd rather wait until things are solidified a bit. Maybe 50.  

You did not say above that you were invested in RSP or mutual funds or ETFs. You said you had RSP room and that you could afford to contribute. So, no, i did not understand that you already had non-GIC investments or RSPs.

I don't understand why you would think that you would hold funds for shorter time if in taxable account if you see it as an alternative to RSP. Wouldn't the duration be the same if the purpose is the same?

Someone else here can help you more with the record-keeping (AltaRed?), but I don't think you should let that stop you from getting the advantage of the lower taxation rate from dividends and cap gains. Lots of other people manage it. All I know about it is that you need to keep your original investment records. You could always ask an accountant, with a view to hiring them to do your returns. Hopefully they would give you the necessary info in an initial meeting at no charge to see if you're a good fit for each other, in order that you will be able to provide them with the information they need at tax time. It would probably be worth it.

I can understand your feeling that you don't want to see a financial planner yet if your life is in flux. On the other hand, a good one should be able to help you see where you should be aiming to get to.

July 26, 2018
8:14 pm
Norman1
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Loonie said
My recollection is that, during the 1970s/80s, when I began investing in RSPs, there were more federal tax brackets than there are now in the under-100K category. Can anyone verify if this is correct, and waht taxation rate applied then?

Response in new thread.

July 26, 2018
9:47 pm
christinad
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I appreciate you trying to help Loonie and i have reread some of your posts. I am feeling more confused now as i contemplate 2 scenarios. Scenario 1: i sail to retirement with a job where i make the same or more money with a pension. In this scenario i would think decreasing the amount in rrsp as between pension and rrsp i would have too much income. In scenario 2 i experience extended unemployment or under employment and my ability to put money in my rrsp is reduced. So in this scenario does it matter if i max out rrsp now? I'm assuming i need to find some middle ground between the 2 scenarios. Although money in a taxable account would be easier to access so there's that benefit.

July 27, 2018
12:25 am
Loonie
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christinad said
I appreciate you trying to help Loonie and i have reread some of your posts. I am feeling more confused now as i contemplate 2 scenarios. Scenario 1: i sail to retirement with a job where i make the same or more money with a pension. In this scenario i would think decreasing the amount in rrsp as between pension and rrsp i would have too much income. In scenario 2 i experience extended unemployment or under employment and my ability to put money in my rrsp is reduced. So in this scenario does it matter if i max out rrsp now? I'm assuming i need to find some middle ground between the 2 scenarios. Although money in a taxable account would be easier to access so there's that benefit.  

I wouldn't want you to rely on anything I say because I am not an expert, only a person trying to figure things out like you are.
However, this is how it looks to me, FWIW...

If scenario 2 were to happen, there would possibly be an advantage in having socked away money in the RSP, if you could take it out during period of underemployment at a lower rate of taxation - remembering that it is about tax deferral and paying the lowest tax. You would have to do some calculating though to see if that was beneficial compared to leaving it until retirement. It would depend on how much you have at that time.
It's not really that difficult to access funds in an RSP as opposed to outside of an RSP. However, it is more difficult to access GICs, wherever they are, as you have to wait for them to mature; and there is the matter of timing for stock market investments. If you should lose your job due to a recession, the markets might be down. The main differences are that financial institutions will often charge a fee for withdrawals from RSPs, the difference in taxation, and the fact that you can't re-contribute whatever you take out of the RSP.

I'm wondering if you have some particular reason to think this might happen or is it just your generally cautious nature?

Assuming you don't have a particular reason to think things will go wrong for you, then I would be inclined to go with scenario 1, where you would have excess in your RSP if you continued to contribute. If you assume this, then you might want to pay down your mortgage instead of putting more into the RSP right now. With that done, you are in a better position to weather Scenario 2, should it occur. The combination of underemployment and debt can be nasty. Then, when things improve for you, you will be able to reconsider if you want to put more into the RSP.

I have a certain personal bias towards getting rid of the mortgage, which you may not share. In good times, one can leverage the fact that one doesn't have it paid off by putting cash elsewhere and still gaining from increases in property values. But this is not reliable and I would prefer to leave it for a second, income, property, and get the primary residence paid off. You are of an age where I think you really would be wise to get it paid off soon, say by the time you're 50, if not before. You don't want to carry that debt into an unexpectedly early retirement or into a period in your life when you may be more vulnerable to health problems.

July 27, 2018
12:48 am
Loonie
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Norman1 said

Loonie said
My recollection is that, during the 1970s/80s, when I began investing in RSPs, there were more federal tax brackets than there are now in the under-100K category. Can anyone verify if this is correct, and waht taxation rate applied then?

Response in new thread.  

Thanks. I have posted some more notes there which show some significant changes in tax brackets that can occur over time. It makes it very hard to plan anything in regards to RSPs. The government of the day can foil your best-laid plans, and often will.
I would bet that most of us don't even know what tax we saved on our original contributions, which makes it hard to compare to post-retirement rates. The rates were probably different in different years, just to make it more complicated.
For me at least, it reinforces my feeling that RSPs, being creatures of government, are risky. You really have no way of knowing what tax rate you will pay on withdrawals down the road. The same can be said for any source of income, of course, but RSPs make us more vulnerable because of the big bump in income that they create. An RIF of 300,000 will add a minimum of almost 17,500 to your income at 5.82% mandatory withdrawal at age 75, for example; and I'm sure a number of people here have significantly more than that.

I'm not entirely sure what point you were trying to make in #50 above, Norman. I don't disagree except to say that the losses due to the age credit etc and income-tested benefits will be greater if your income is bumped up by RIF withdrawals because you will reach thresholds sooner.
The tone of your post suggests you believe RSPs are the superior way to go, but, as you agree in the end, it really depends on how the numbers work out for you. And that, I would argue, is unpredictable with many caveats. Some people have actually manage to LOSE money on their RSP investments, never mind the taxes! And some others do not make enough to justify the undertaking.

July 27, 2018
8:54 am
Bill
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Don't forget this strategy: vote for parties that raise your tax rate while you're contributing, maximize your deductions, then vote for tax-cutting parties while you're withdrawing.

July 27, 2018
9:22 am
AltaRed
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Loonie said
Someone else here can help you more with the record-keeping (AltaRed?), but I don't think you should let that stop you from getting the advantage of the lower taxation rate from dividends and cap gains. Lots of other people manage it. All I know about it is that you need to keep your original investment records.  

Managing one's Adjusted Cost Base (ACB) for bond/equity investments in non-registered accounts seems daunting for neophytes to the subject but the basics are pretty simple. It is a matter of keeping track of the 'cost' of each purchase one makes, whether an original purchase, or the re-invested dividends/distributions of recurring income AND keeping a copy of those purchase records as 'proof' to CRA of your costs should they ask for those records on any capital sale.

A really good template for keeping track of ACB is https://www.adjustedcostbase.ca/ and many of the links in the Blog section for the basics are worth reading. For the most part, mutual fund companies are really good at providing you with your Book Values (meaning ACB) with their annual statements. Brokerages are pretty good too with keeping accurate Book Values for most stocks and mutual funds and even ETFs.

There is one quirk on ETFs (phantom re-invested distributions) that some brokerages don't get right, but there is a link in that blog about this issue. I suspect the vast majority of ETF investors don't get the phantom re-invested distribution issue correct in their records but generally the error is not much, and the error is in CRA's favour, meaning no one is going to get into trouble with CRA about missing this concept.

July 27, 2018
10:43 am
christinad
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Thanks Altared, i will check out adjustedcostbase.ca as i am sure i will have to invest in a taxable income eventually. Thanks Loonie i think that is a good strategy to use rrsp in low income years. What i've also read is your rrsp grows more slowly if you have more fixed income there which would be an added benefit. The only downsides would be losing the rrsp room and the nuisance of witholding taxes. I have also wanted to invest more in equities in my tfsa and will be doing that as i switch some fixed income to rrsps. To be honest right now my mortgage won't be paid off until i'm 60 so there is definitely room there. Sorry if i hijacked the thread as it was an interesting discussion and a reminder of the drawbacks of rrsps.

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