Millennial looking to start investing asks: Should I go with Wealthsimple? | Page 4 | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

No permission to create posts
sp_Feed Topic RSS sp_TopicIcon
Millennial looking to start investing asks: Should I go with Wealthsimple?
July 28, 2018
10:13 am
Top It Up
Member
Members
Forum Posts: 1020
Member Since:
December 17, 2016
sp_UserOfflineSmall Offline

Kidd said

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

From the new leader of the MB Liberals and now newly elected and sworn in provincial MLA, with the party now holding 4 seats in the legislature:

Manitoba Liberal Leader Dougald Lamont says he intends to fight the Progressive Conservative government's cost-cutting agenda and push for public spending to stimulate the economy and reduce the deficit.

The former political staffer and small business owner, armed with a new legislature seat and more clout for his party, also wants a review of taxes and believes people are sometimes willing to pay more if the money is well used.

July 28, 2018
12:55 pm
Kidd
Member
Members
Forum Posts: 244
Member Since:
February 27, 2018
sp_UserOfflineSmall Offline

Top it up.... are you trying to get my goat? sf-surprised

The old liberal government of Ontario tried to spend us out of our deficit. I don't think it worked. I think they were using the "new" math.

July 29, 2018
12:17 pm
AltaRed
Member
Members
Forum Posts: 703
Member Since:
October 27, 2013
sp_UserOfflineSmall Offline

Kidd said
The old liberal government of Ontario tried to spend us out of our deficit. I don't think it worked. I think they were using the "new" math.  

The old political ploy to 'stimulate the economy'. This business cycle has been going on since March 2009 and is almost the longest business cycle in history. The economy is doing perfectly fine and the opposite should be happening, i.e. giving the economy a bit of a headwind* so as not to create inflationary runaway. The Bank of Canada is trying with their micro increases in overnight lending, but it is a tepid effort.

Such politicians should have a 2x4 slapped across the side of the head.

July 29, 2018
2:51 pm
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

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.

The taxes saved on the original contributions (not the tax brackets one was in) is a vital piece of information needed to determine whether or not one is ahead with RRSP's.

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, … 

I don't think it is any riskier than, say, the taxation on capital gains. Taxable capital gains went from zero to ½ in 1972. Later, it went up to 2/3 and then to ¾. Then, it came back down to ½.

July 29, 2018
3:21 pm
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said
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.

The point I was trying to make was that when the average tax rate (not marginal rates) on the RRSP/RRIF withdrawals is a bit higher than the rate of the taxes saved by the RRSP contributions, it can still be worthwhile to have the RRSP. One needs to do the calculations to see what rate the investment gains are actually taxed at.

At the start of retirement, there is a one-time opportunity to withdraw from RRSP's and have it taxed a low rate. One could defer CPP and OAS by a year or two and withdraw from RRSP to make up the difference.

According to StudioTax 2017, an age 65 Ontario resident with only $30,000 of income from RRSP needs to pay $2,721.58 of combined federal and Ontario taxes. That is a tax rate of only 9.07%.

If I change my example (with $11,000 per year of RRSP withdrawals taxed at 30%) to have a $30,000 first withdrawal at age 65, taxed at 9.1%, and the remaining $11,000 per year withdrawals, taxed at 30%, then we have the following:

$30,000.00 9.10% Age 65 withdrawal
$220,000.00 30.00% Age 66 to age 85 annual withdrawals
$39,504.72 53.00% Final withdrawal
$289,504.72 30.97% Total withdrawals

The average tax on the withdrawals drop to 30.97%.

That results in a net tax of $2,816.08 paid on the investment gains of $97,653.30. That is a tax rate of just 2.88% on the investment gains in contrast to the 30% that would have been paid outside the RRSP.

July 29, 2018
4:28 pm
Bill
Member
Members
Forum Posts: 1205
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

AltaRed, I'm certainly no expert but the Bank of Canada is not operated by politicians, or do you just mean it marches to the orders of the governing party?

I don't agree that "creatures of government" always equals risky - I don't see a downside to TFSA's, for example, can't lose with them. Or OAS, free money just because you hit a certain age. I don't consider that a program may be terminated or watered down to be a risk, it's just a bonus that's no longer available. Also RRSP withdrawals can be tax advantageous for many folks; for example, anytime in their lives they later happen to have little or no income, or one can defer OAS and CPP (and maybe even workplace pension) while drawing out registered funds at, as Norman1 point out, very low rates in some cases.

A family member's had well into 6 digits annual income for most of the 12 or so years between 24 - 35, salted it all pretty much away (usually works in remote places anywhere in the world where room and board provided or daily stipend to more than cover costs), plans, Millennial that he is, to "retire" shortly and live a "non-consumer-ist" life, and partly funded via RRSP account balance. Contributions during very high tax rate years resulted in juicy tax refunds, will pay little taxes on withdrawals. If you educate yourself about the pros and cons of something, and apply your findings properly to your own situation, these things can work out nicely - this person is happy with the RRSP gov't program, notwithstanding the fact the program might not be that great for the average Josephine.

July 29, 2018
4:47 pm
Top It Up
Member
Members
Forum Posts: 1020
Member Since:
December 17, 2016
sp_UserOfflineSmall Offline

Again, for me, I'm just not going to concern myself with the end. I have absolutely no idea what my tax breaks were in my RRSP contributing years (I made my last RRSP contribution in the mid-90s and those tax returns have long since been shredded), and I'm unclear why it matters this many years later, the cards have already been dealt.

Bill said

Contributions during very high tax rate years resulted in juicy tax refunds, will pay little taxes on withdrawals.

With maximum yearly RRSP contribution limits pretty hard to hide 6-figure incomes ... the taxman awaits.

July 29, 2018
6:07 pm
AltaRed
Member
Members
Forum Posts: 703
Member Since:
October 27, 2013
sp_UserOfflineSmall Offline

Bill said
AltaRed, I'm certainly no expert but the Bank of Canada is not operated by politicians, or do you just mean it marches to the orders of the governing party?
 

A separate thought entirely although I can see how my comments could be misinterpreted. Bank of Canada is trying to cool off the economy although rate of increases is too slow in my mind.

Politicians are a different animal entirely. Indeed, they are often countering Bank of Canada efforts by always believing the economy needs stimulus and thus increasing deficit spending.

July 29, 2018
6:37 pm
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Kidd said
Upon retiring, i first switched my rsp to a rif. Then i set up an automatic monthly withdrawal. My plan was to move all my rif money over to the useable side of the ledger in 10 years. But... even though my withdraws are a LOT bigger than the investment gains, my rif has not been reduced to levels that i expected.  

Check to make sure that what one thinks is the amount of investment gains is correct.

A common mistake is to calculate investment gain by subtracting book value from the current market value. That understates gains of investments that pay out dividends or other distributions when one has elected to reinvest such distributions. That is because book value includes the reinvested payouts.

July 29, 2018
6:54 pm
Loonie
Member
Members
Forum Posts: 4171
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Norman, I have been making these kinds of withdrawals for the last few years, so I know exactly what is involved and what the implications are. It was too late for me to postpone OAS, but I would not have done it anyway in my situation; and I chose not to postpone CPP because that was the common wisdom among financial advisors at that time. Spouse, who is younger, is doing the opposite, so it will even out.

I don't know what you mean by a one-time opportunity at age 65. As far as I know, there is nothing special about age 65. You can withdraw at any time and you will pay whatever tax is owed that year according to that year's taxable income, tax credits, etc.

There is no real advantage in securing an extremely low average tax rate now only to pay a significantly higher one later due to the increased income from OAS, CPP (36% and 42%). Further, there is no way to know if OAS will even be there in five years when you finally decide to draw on it, so most people decide to take it by 65 or earlier. Even at 10K/yr in withdrawals, you are only looking at withdrawing 50K over the five years. The people who can afford to postpone OAS/CPP in this way will also be the ones who will still have a significant amount left in their RSP at age 70 regardless of the 50K withdrawal. Even 100K withdrawal will still leave them with a significant amount. Statistics show that the overwhelming majority cannot be convinced to postpone their OAS and CPP anyway.
I have advocated before on this forum for looking at average tax rates rather than marginal ones, so as to avoid the hysteria, often promulgated in financial advice columns and by those opposed to almost any kind of taxes, citing marginal rates of 40%+.

However, there is a place for considering marginal rates. I believe that RSP/RIFs is one of them. As you suggest, and as I have tried to pursue, one must compare what was gained from taking out the RSP with what you will lose when you cash it in. To wrap that into all your other sources of income makes no sense to me. It's the (marginal) difference that the RSP makes that counts in determining its value to the taxpayer.

I find your chart confusing. It appears to be based on the idea that an RSP will have a maximum total value of something under 300K including all earnings. I find an average tax rate of almost 31% to be quite high, and it doesn't include all the other losses that accompany higher incomes or a comparison to what the tax saved was on initial deposit, which you agree is essential.

Perhaps we can agree that the end result is unpredictable.

For myself, I will say that what someone approaching retirement or in retirement usually needs and wants more than anything is predictability in income and assets. We want, in other words, to know where we're at and to be able to plan. The entire large industry of financial planners is dedicated to this, and they are more than happy to provide charts showing where you're going to end up according to them. The more funds that you have in government-controlled programmes, and the more programmes you are involved with, the more vulnerable you will be to unpredictability.
There is no question but that spouse and I will be paying out more in the years to come than was saved on the money we put in, and many others have found the same result, to their chagrin. Some of this is due to now being in a higher, not lower, tax bracket; some due to losing some of the age amount etc.

We have not even explored the scenario where people run out of RIF income prematurely, and experience a serious drop in income that they can't afford. This is another risk, as people were somehow led to think that RSPs would be a solution.
For anyone who wants to know more about this, I suggest reading Retirement Income for Life: getting more without saving more, by Frederick Vettese (2018). As an actuary, Vettese is more capable of doing the number crunching than I am. He gives a dramatic example in his first chapter of a couple with 500K in RSPs at retirement and no pension plan, showing they will run out of money by age 80 with conventional financial planning. He also shows how, even at this late date, they could rearrange things and have enough.
This advice will obviously have to change over time as rules, rates and returns change. Let's hope that by the time people who are now
choosing to contribute to RSPs want to retire, that there will still be things they can do to ensure that they have enough money to fund their retirement.

re: Bill's comments. It's quite true that TFSAs are also creatures of government. They appear to be a better bet than RSPs as there were no complications with buying into them. I am hedging my bets by continuing to invest in them, but wish I didn't have the RIFs.
Benefits such as OAS are not a 'Bonus' if you depend on them, as a great many people do. It's nice to be able to be so cavalier if you're wealthy, of course.
It's great that your son has figured out how to take his RSP money and run with it. One of the key features of his strategy is that he begins to take the money out relatively soon after he put it in, thus fewer changes were put in place than if he'd waited 30-40 years. Still, there could be changes in future that he has not anticipated.

I think I've said about all I can say on this matter now.

July 30, 2018
7:04 pm
Bill
Member
Members
Forum Posts: 1205
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

Top It Up, re the tax man awaits, tax has already been paid on all employment income. And you can take out (say) $20K a year from RRSPs and use accumulated tax paid capital (maybe in GICs, I don't know) of another $30K a year and have $50K/year at your disposal and pay relatively little taxes on the $20K taxable income (compared to the large deductions you got when contributed).

July 31, 2018
4:51 am
Top It Up
Member
Members
Forum Posts: 1020
Member Since:
December 17, 2016
sp_UserOfflineSmall Offline

It's early ... are you saying the interest on the GICs backing the $30,000 annual withdrawals isn't taxable?

July 31, 2018
5:22 am
Bill
Member
Members
Forum Posts: 1205
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

No, you're right, any interest earned is taxable, I was just thinking of any capial drawdown. But you're right, if I have $1M earning $30K interest a year there's tax to pay.

July 31, 2018
5:32 am
Top It Up
Member
Members
Forum Posts: 1020
Member Since:
December 17, 2016
sp_UserOfflineSmall Offline

Pheeew, "glad" I haven't been missing out on some tax break. So, depending on where you domicile in this great country of ours, you're still making an annual $8 - $10,000 ante to the general revenue kitty, on that $50K in pocket cash.

July 31, 2018
6:46 pm
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

I don't know what you mean by a one-time opportunity at age 65. As far as I know, there is nothing special about age 65. You can withdraw at any time and you will pay whatever tax is owed that year according to that year's taxable income, tax credits, etc.

The one-time opportunity I meant was the deferral of CPP and OAS. I don't think one can suspend CPP or OAS payments once one has started receiving them.

There is no real advantage in securing an extremely low average tax rate now only to pay a significantly higher one later due to the increased income from OAS, CPP (36% and 42%). Further, there is no way to know if OAS will even be there in five years when you finally decide to draw on it, so most people decide to take it by 65 or earlier.

I wasn't thinking of deferring them for the maximum 5 years. I was just thinking for a year or two. Payout is boosted by 0.6% per month deferred or 7.2% per year deferred. Max OAS+CPP is around $21,000. So, an extra $1,512 per year at most for each year deferred.

… Even 100K withdrawal will still leave them with a significant amount. Statistics show that the overwhelming majority cannot be convinced to postpone their OAS and CPP anyway.

The RRSP can still work out to be advantageous with larger initial withdrawal or larger annual withdrawals if the investment gains are high enough.

I can present the calculations for someone who hit an investment home run, turning $35,000 of RRSP contributions into $1.36 million by age 65. Investment gains make up around 98% of the withdrawals. I'll put together the final numbers in a bit.


However, there is a place for considering marginal rates. I believe that RSP/RIFs is one of them. As you suggest, and as I have tried to pursue, one must compare what was gained from taking out the RSP with what you will lose when you cash it in. To wrap that into all your other sources of income makes no sense to me. It's the (marginal) difference that the RSP makes that counts in determining its value to the taxpayer.

We may be thinking of the same thing. I meant the average of the top brackets spanned by the RRSP withdrawals plus any OAS clawback.


Perhaps we can agree that the end result is unpredictable.

The advantage of RRSP's is very certain for those who will be paying taxes plus clawbacks on the withdrawals at the same or lower rate than the rate of the tax refunds on their contributions.

It is not as predictable for those who will be paying somewhat higher rates on the withdrawals. That's because of an interaction with the percentage of their withdrawals that is investment income.

July 31, 2018
7:44 pm
Loonie
Member
Members
Forum Posts: 4171
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Norman1 said

Loonie said

I don't know what you mean by a one-time opportunity at age 65. As far as I know, there is nothing special about age 65. You can withdraw at any time and you will pay whatever tax is owed that year according to that year's taxable income, tax credits, etc.

The one-time opportunity I meant was the deferral of CPP and OAS. I don't think one can suspend CPP or OAS payments once one has started receiving them.

There is no real advantage in securing an extremely low average tax rate now only to pay a significantly higher one later due to the increased income from OAS, CPP (36% and 42%). Further, there is no way to know if OAS will even be there in five years when you finally decide to draw on it, so most people decide to take it by 65 or earlier.

I wasn't thinking of deferring them for the maximum 5 years. I was just thinking for a year or two. Payout is boosted by 0.6% per month deferred or 7.2% per year deferred. Max OAS+CPP is around $21,000. So, an extra $1,512 per year at most for each year deferred.

… Even 100K withdrawal will still leave them with a significant amount. Statistics show that the overwhelming majority cannot be convinced to postpone their OAS and CPP anyway.

The RRSP can still work out to be advantageous with larger initial withdrawal or larger annual withdrawals if the investment gains are high enough.

I can present the calculations for someone who hit an investment home run, turning $35,000 of RRSP contributions into $1.36 million by age 65. Investment gains make up around 98% of the withdrawals. I'll put together the final numbers in a bit.


However, there is a place for considering marginal rates. I believe that RSP/RIFs is one of them. As you suggest, and as I have tried to pursue, one must compare what was gained from taking out the RSP with what you will lose when you cash it in. To wrap that into all your other sources of income makes no sense to me. It's the (marginal) difference that the RSP makes that counts in determining its value to the taxpayer.

We may be thinking of the same thing. I meant the average of the top brackets spanned by the RRSP withdrawals plus any OAS clawback.


Perhaps we can agree that the end result is unpredictable.

The advantage of RRSP's is very certain for those who will be paying taxes plus clawbacks on the withdrawals at the same or lower rate than the rate of the tax refunds on their contributions.

It is not as predictable for those who will be paying somewhat higher rates on the withdrawals. That's because of an interaction with the percentage of their withdrawals that is investment income.  

For OAS, you can defer at age 65 for up to 5 years and receive consequent later increases., assuming the plan remains unchanged. And you can change your mind within 6 months and decide not to take it yet after all. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/eligibility.html

With CPP, it's not a one-time opportunity. You can decide to take it early, anywhere between 60 and 65, or you can decide at 65 to defer it, with consequent increases or decreases in payout.
With OAS and CPP, you can decide at any time during the deferral period to start receiving the benefit and it can be backdated about a year.

I'm sure you can produce any number of examples showing what you want to show. But all that matters is the results for the individual, not the hypotheticals.
The result is very certain indeed when you know all the details, but that only happens at the end of the road when it's too late to reconsider. And don't forget that the government holds all the cards. Therefore it's not predictable. At the very least, changes in government rules are not predictable; and neither is the tax you will pay at the end in either rates or dollars. With the level of debt that governments are currently carrying, I find it hard to imagine getting a better deal in future.

None of this matters to me personally any more. My situation is now pretty much carved in stone as I am over 70. I will be paying more now than I would have earlier, no question, and having a spouse with RSPs only makes it worse. I can fiddle around with how much to take out each year or whether/when to buy RIF annuiites, but that's the limit of my flexibility. My experience is not hypothetical. I only make these posts to share my experience and to suggest that others take a good hard look at how predictable their future income is before taking on RSPs.

August 5, 2018
7:18 pm
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

For OAS, you can defer at age 65 for up to 5 years and receive consequent later increases., assuming the plan remains unchanged. And you can change your mind within 6 months and decide not to take it yet after all. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/eligibility.html

That's good to know. But, the window is only 6 months.


I'm sure you can produce any number of examples showing what you want to show. But all that matters is the results for the individual, not the hypotheticals.
The result is very certain indeed when you know all the details, but that only happens at the end of the road when it's too late to reconsider. And don't forget that the government holds all the cards. Therefore it's not predictable. At the very least, changes in government rules are not predictable; and neither is the tax you will pay at the end in either rates or dollars. With the level of debt that governments are currently carrying, I find it hard to imagine getting a better deal in future.

That's the risk with long term planning. Tax rules can change over the decades. Before 1972, capital gains were not taxable. Before 1989, there was no clawback on OAS.

One will need to revisit every few years to see if there had been any relevant changes.

I've been moving in the opposite direction. I've been moving more investments into my RRSP. Without a defined benefit pension plan, that is enhanced by employer contributions, it is unlikely my income, when I stop working, will be anywhere near what it is now, while I'm working. Used to believe, in error, that capital gains and dividends were better outside RRSP's. That's actually not the case either.

August 5, 2018
8:49 pm
Loonie
Member
Members
Forum Posts: 4171
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

OK, I'll bite! How are dividends and cap gains not better outside of RSPs?
I would think it's hard to beat the negative tax on low-income dividend-earners (although there may not be very many of them), even with the gross-up.

I'm sure you've figured out what's best for you better than anyone else could.

While it's true that all gov't rules can and will change, I still feel that the registered plans give the gov't more opportunities to tweak and change things according to what they think they can get way with. With non-registered funds there are fewer levers for them to push. If it were up to me, I'd get rid of all of them. I think there are better ways of doing things, but that's another, long, story.

August 6, 2018
10:53 am
Norman1
Member
Members
Forum Posts: 1903
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

There is actually zero net taxation when (a) the average rate of taxes refunded from the RRSP contributions is the same as (b) the average rate of taxes and clawbacks paid later on the withdrawals.

I didn't believe that at first. I had thought that capital gains would be better outside an RRSP because only ½ is taxable then. In contrast, capital gains produced inside an RRSP and later withdrawn would be fully taxable, as flawed examples showed.

RRSP's can also produce negative taxation. When (a) the average rate of taxes refunded from the RRSP contributions is higher than (b) the average rate of taxes and clawbacks paid later on the withdrawals, negative taxation occurs.

Negative taxation on dividends outside an RRSP occurs when both

  1. the federal taxes payable on the eligible dividends is lower than the federal dividend tax credit on them of 15.0198% and
  2. the provincial taxes payable on those dividends is also lower than the provincial dividend tax credit.

The federal taxes negativity is very small with the lowest federal tax bracket being 15%. That allows for a maximum negative federal tax of -0.0198%.

The provincial taxes negativity is not possible in certain provinces, like Manitoba. In Manitoba, the provincial dividend tax credit on eligible dividends is 8% while the lowest income tax bracket is a higher 10.8%. sf-frown In contrast, the Ontario dividend tax credit on eligible dividends is 10% with a lowest Ontario tax bracket of 5.05%. sf-smile

Since the federal and provincial dividend tax credits are non-refundable, one needs other taxable income at the time to benefit fully from the negativity.

August 6, 2018
2:25 pm
Loonie
Member
Members
Forum Posts: 4171
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I have read what you wrote twice and I find that I can't follow it.

This chart gives the impression that, in Ontario 2018, up to taxable income of about 43K, eligible dividends would give combined Fed-Prov tax of -6.86%. I think this probably doesn't include effects of gross-up (which I find hard to figure out), but there seems to be ample room there for claiming a non-refundable tax credit.
https://www.taxtips.ca/taxrates/on.htm
??

No permission to create posts

Please write your comments in the forum.