Forced to pay installments despite net refund as a couple | Page 2 | Income tax filing | Discussion forum

MattS said
There’s needless downloading of aggravation onto a taxpayer. My frustration is growing with the amount of tax I pay increasingly I get nothing back out of our system anywhere I go. This was the latest example.  

If you are paying a lot of tax, and my "a lot" is way more than what most people consider "a lot", then just tell urself u do good and better than most.

If you are truly successful, you wont get OAS, GIS, or any other possible govt handout. Again just be grateful you dont need it.

zgic said

Thanks @mordko.
But paying off mortgage might come first for some and then start putting in RRSP?
I am just thinking if RRSP is the last resort for the savings $ or 1st or 2nd or what number? where it stands in terms of the various vehicles available today?
It know it will be different for each individual but as a general rule nowadays?  

Paying off your mortgage = tax free fixed income investment. I would certainly prioritize this vs HISA or bonds.

In general, if you have decades to retirement, I would prioritize stocks in RRSP over mortgage overpayment. If you are within 10 years, then mortgage. That's because fixed income is a low risk investment if you have short time horizon but equity is better in terms of risk/return ratio over the long term.

But it's not an either or.

RetirEd said
Is it still possible to put one's mortgage in an RRSP and pay it off into the RRSP, making the interest payments become part of the tax-free investment?  

It is still not tax free as you will be charged during withdrawals.
But outside is completely tax free.

savemoresaveoften said
Max out TFSA, pay off any debt incl mortgage should be higher priority compare to RRSP in my mind.
RRSP withdrawal is 100% taxable, including any capital gain made. So unless one truly think their post retirement income tax bracket is much lower, CRA will get u now or later.
RRSP also make sense if u r in a high marginal tax bracket during ur career, and already max out all kinds of venue to reduce tax.  

“CRA will get u now or later”. Yes but deferral is valuable. TFSA makes you pay tax up front. If tax rate is identical when working and in retirement then after tax wealth is the same whether you put money in TFSA or RRSP. That is assuming you invest RRSP refund (eg to pay off mortgage or put in tfsa).

In many cases marginal tax rates in retirements are going to be lower. RRSP helps manage risk of investment returns being lower than hoped - you share this risk with CRA. TFSA does not do that. RRSP does not lose you withholding tax on US investment. TFSA does. RRSP allows income splitting with spouse when you convert to RRIF. On the other hand TFSA does not impact OAS.

My suspicion is that in most circumstances RRSP works out better than TFSA for professionals but (as always) it depends. Also, TFSA contribution limits are comparatively small, so ones TFSA wealth tends to be a smaller portion of retirement investments.

And based on history paying off mortgage vs RRSP investment has always been poor choice for young people - since RRSPs came into force. And it makes logical sense as explained above.

Ideally it's not an either or. RRSP allows to put away more and you can invest saved tax into a TFSA.

savemoresaveoften said
Max out TFSA, pay off any debt incl mortgage should be higher priority compare to RRSP in my mind.
RRSP withdrawal is 100% taxable, including any capital gain made. So unless one truly think their post retirement income tax bracket is much lower, CRA will get u now or later.
RRSP also make sense if u r in a high marginal tax bracket during ur career, and already max out all kinds of venue to reduce tax.  

I agree @savemoresaveoften 100%.
I have exhausted all my options including RESP, TFSA, Mortgage and now was wondering what more options I am left with.
Now that I have to pay 15K tax installments for 2025, the only option I think I am left with is RRSP, whereby I could reduce my income and pay less tax, knowing that RRSP withdrawal is 100% taxable and that CRA will get me now or later, as you rightly pointed out.
I am not sure if I can use any other avenue for this scenario that I am in for 2025.

Your error is in your #3. You are not putting the same in. TFSA is after tax dollars. The amount going into RRSP is actually your MTR tax rate higher, e.g. 30% more since the deduction gives you cash tax back for that tax year. You have effectively put in 130% to the RRSP that is after tax equal to 100% of amount into TFSA.

RRSP and TFSA end up in exactly the same place if tax rates remain the same at time of RRSP withdrawal as they did when one deducted the contribution. That has been proven time and time again.

AltaRed said

RRSP and TFSA end up in exactly the same place if tax rates remain the same at time of RRSP withdrawal as they did when one deducted the contribution. That has been proven time and time again.

Earlier discussion has examples of the correct calculations. No reinvestment of the tax refund from claiming the RRSP deduction is needed. Just correct accounting of the reduced out-of-pocket cost of the RRSP contributions.

A copy of similar calculations from federal Budget 2008 confirms the calculations.

While one may only need $7k (assume $10k contribution less $3k tax refund) to contribute to RRSP vs a true $10k after money to contribute to TFSA, this is what I see as the difference in return over time:

U have $10k compounding return inside RRSP tax free until withdrawal, same as TFSA. However both TFSA dividend income and capital gain are tax free while RRSP capital gain will be tax as 100% at withdrawal, also zero dividend tax credit. A big factor esp if one wants to grow their investment via equities and not fixed income.

Also a RRSP withdrawal will/may affect your OAS, GIS, and other government handout. TFSA does not.

Both points being mentioned made it extremely hard to guesstimate with any accuracy, and to add on top life expectancy vs actual ultimately trumps any financial / tax savings model !

savemoresaveoften said
While one may only need $7k (assume $10k contribution less $3k tax refund) to contribute to RRSP vs a true $10k after money to contribute to TFSA, this is what I see as the difference in return over time:

U have $10k compounding return inside RRSP tax free until withdrawal, same as TFSA. However both TFSA dividend income and capital gain are tax free while RRSP capital gain will be tax as 100% at withdrawal, also zero dividend tax credit. A big factor esp if one wants to grow their investment via equities and not fixed income.
…

No, you do not have $10,000 invested in the RRSP.

You contributed $10,000. But, you received a $3,000 tax refund from claiming the RRSP contribution deduction. You are out of pocket only $7,000. The remaining $3,000 is not out of your pocket.

If it takes $1 million of withdrawals over time to wind up the RRSP and one had to pay 30% = $300,000 of taxes and clawbacks on all those withdrawals, then one would have received $700,000 out of the RRSP after taxes. That works out to a tax rate of 0% on the 100X growth of the original $7,000 out-of-pocket cost of the RRSP.

The calculations are not that difficult. One needs the lifetime average tax rate of the RRSP contribution deductions claimed and the lifetime average rate the RRSP contributions will be taxed at, including any GIS and OAS clawbacks.

savemoresaveoften said

I meant "invested" as in you have $10k earning a return for u inside the RRSP. I did mentioned net contribution is $7k net of tax refund.

The calculations are not difficult. The difficult part I point out is the "input" used to make the comparison meaningful. No one has the crystal ball to know with accuracy the lifetime avg tax rate before and after retirement. The keyword is "lifetime".  

If you are going to be really wealthy in retirement then prioritizing TFSA might have been more tax efficient.

If you are expecting to be in a lower tax bracket during retirement than during working years (true for most people) then RRSP is more tax efficient.

But people who will be wealthy in retirements should in theory have enough to fill up both rrsp and tfsa.

No crystal ball, that's true. Would you rather risk having to pay more tax if you end up a rich retiree or having less retirement savings in case you end up a poorer retiree?

In the former case prioritize RRSP. In the latter - tfsa. RRSP provides an element of insurance for poor investment returns. If you end up with a smaller pot, then your tax rate on that pot is going to be lower, so CRA shares your pain and then some.

If you are really concerned about OAS clawback then stop adding to your rrsp once you get to a “danger zone”. Clawback should fall on you out of the blue, you will get lots of warning. And you get some tax advantages in retirement if you have an RRIF.

Last but not least… TFSA costs you withholding tax on US assets. RRSP does not. Its not much annually but can add up. Say you have $100K in tfsa with 6% annual returns and 0.2% lost to tax annually. Over 30 years it will cost you $30K (5% of portfolio).