An extra benefit you can get from contributing to RRSP earlier | RRSPs and RRIFs | 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
An extra benefit you can get from contributing to RRSP earlier
August 29, 2014
3:49 pm
Loonie
Member
Members
Forum Posts: 9180
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

RRSP contributions are one of the few things that are still deductible from your income for CRA purposes. Almost everything else has been reduced to a non-refundable tax credit, which is only applied against tax owing and can have numerous hitches.

Accordingly, you may request an adjustment in the income tax deducted by your employer from your paycheque for the remainder of the year in question as soon as you have made your contribution. The sooner you contribute, the sooner your deductions can be reduced.

All you have to do is visit your Human Resources Dept and request Form T1213 "Request to Reduce Tax Deductions at Source for Years______". Your paycheque will then be adjusted by them.

This may save you some interest and/or give you cash in hand much earlier than having to wait for your income tax refund in May or June of the following year, which you can then invest elsewhere earlier or pay down your mortgage or use as needed.

For an example of how this worked out, see https://www.highinterestsavings.ca/forum/gic/2-25-variable-mortgage-and-gics/, posts #8 through #12.

August 29, 2014
5:34 pm
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Thanx for the tip. Maxed out my contributions for the last few years on March 2nd. Wish I'd have known about this. Downloaded the form from CRA and will take it in to HR next week.

August 29, 2014
9:28 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie and Rick, if you want to stretch out this earlier benefit of RRSP's even more you could put the income tax refunds from your paycheck in an RRSP for more tax refunds or in a TFSA and compound interest income tax free plus possibly avoiding getting into a higher income tax bracket in both cases.

August 29, 2014
10:09 pm
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Thanx Jack...RSPs and TFSAs are both maxed out

August 29, 2014
10:26 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Rick, I don't know about your particulars but RESP's for children or grandchildren is another possible tax reduction move that could be used for an earlier RRSP tax refund or deduction. Also, don't forget the 20% to maximum $500 a year in free money from the Canadian government, CESG.

Paying of high interest debt and credit card debt is also a big money saver with this money coming in every week, two weeks from your paycheck cutting alot of interest and finance charges.

Paying off the mortgage will have a much smaller benefit of 2.50% to 3.50% if you got low mortgage rates in recent years but is always feels good to get rid of debt as soon as possible.

For those that are not RRSP maxed out. There are many strategies to increase RRSP tax refunds, deductions that come in sooner. Another good one is a spousal RRSP so income can be split later down the road and taxed at a lower tax rate. Just make sure you follow the rules carefully.

August 30, 2014
8:57 am
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Jack. All good advice. I'm in the "sweet spot" for savings right now. Mortgage paid off, kids gone (no grand kids ....yet!), wife and I both working full time. RSPs and TFSAs both maxed out. I can count on one hand the times I've had to carry over a balance on my credit cards during my life. If we had emergency/unexpected spending we paid it off out of the savings rather than pay ridiculous interest credit card companies charge. A lot of people don't know how the interest is calculated when you don't pay off the full amount on your monthly balance, I think it's criminal they way they do it. I'm sure they hate me as a customer.... I get all the rewards and always pay off more than I charge every month. We have a little pool of cash in a HISA that varies between 1000 and 15000 during the year to cover things like car/home insurance, property tax, emergencies, vacations etc. Like the commercial says, it's not how much you make, it's how much you save. Wish I had started saving in my 20's instead of my thirties...I'd probably be retired right now. Not a big fan of RESP's and glad we didn't get them for our kids when they introduced them. They are too restrictive on their use and if you don't need them for education, you are kind of screwed on interest and taxes. Turns out the school board paid for our kids' 1st year of trade school and they both graduated grade 12 with tickets and went straight to work. Good deal if you can get it. Cost of upgrading was minimal and not worth what we would have saved in an RESP over 10 or 15 years. But that was our situation. Actual results may vary depending on individual circumstances.
So as of now, the plan is 4 years, 3months and 1 day more of work then out to pasture and enjoy the fruits of 43 years of labor.

August 30, 2014
5:28 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Rick, good to hear that you and your wife, family are doing much better financially. I hear what you saying about credit cards and their sky high interest rates of 10% to 30% plus all types of fees. This is especially true today with 2.25% to 3.50% mortgage rates.

When you thought there were not worse companies charging more than 30%, payday loan companies are charging 300% to 800% in interest per year but it is called finance charges, fees etc. to skirt usury laws.

RESP's are not for everyone but worse things could happen then being stuck with RESP money with no kids getting any education, training etc. that qualifies under RESP rules and facing penalties and paybacks of CESG.

Student loans are a big problem in Canada, U.S. for sure. We have learned early on that starting to save early no matter what amount is always a good move.

September 4, 2014
11:02 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Another great tip that I heard for years now that can add thousands to tens of thousands of dollars is contributing early to your RRSP's at the beginning of the year instead of the end of the year. For last minute procrastinators at RRSP season time February 28 to March-1 depending on the year, it is even more money being lost probably in the thousands on top of what examples given below.

For example, a couple contributing $10,000 a year compounding at 4.00% at the beginning of the year instead of at the end of the year over 30 years would have $560,849 versus $583,323. In 35 years they would have $765,983 versus $736,522.

This is $22,474 or $29,461 more money in their RRSP's. It is something they are doing anyways so get the most out of it as you can. For those that have the higher incomes, financial resources, financial literacy and discipline, doubling this is very possible, so $44,948 or $58,922.

Obviously, if you can get over 30, 35 years a 5%, 6% etc. higher annual interest rate, bond rate or annual rate of return, this could easily add up to $100,000 or more to their RRSP's.

Remember, this does not include RRSP income tax refunds reinvested in other RRSP's or TFSA's. I would suspect that TFSA's would result in much more money as well if contributed in the beginning of the year.

RESP's would benefit too but not by as much because of lower maximum amounts that can be contributed and the compounding of interest, dividends, rates of return would only be available for 18 maybe 19 years at the most.

September 4, 2014
11:17 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Now about RRIF's, if tax rules allow, withdrawing at the end of the year instead at the beginning of the year will accrue more interest which will mean there would be more years of RRIF income. Since there are CRA required minimum withdrawals, I did not calculate this so I don't know how much exactly more RRIF income would result.

I would make a good educated guess of 1 extra year of income over a 20 to 22 year period starting at age 65 to 71 years old. This means that on a $100,000 RRIF balance at current highest 3.00% RRIF GIC rates, this would add about a one time $6,000 in extra RRIF income.

September 5, 2014
12:47 am
Loonie
Member
Members
Forum Posts: 9180
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Yes, the tax rules allow you to specify any time during the year when you want to take your RIF withdrawals. You need to discuss this with your bank and make sure it is in writing.

While it's true that you can grow your RRSP and get more out of your RIF in these ways, it can be a much more complicated calculation, depending on your circumstances, and is not always to your advantage.
Some other things to consider are:
Will your marginal tax rate be higher or lower when you draw the income than it is when you make the contribution? (if it's going to be higher, then you need to reconsider whether you should continue to make contributions, and it would not necessarily be to your advantage to do it earlier in the year, as it may be that the main thing you want at this time is the tax deduction, not the higher value in the tax-deferred investment). You can always do it another year if it makes better sense then.
How will it affect potential clawbacks, reduction of age credit etc? These have different threshholds than income tax rates. See the thread I started elsewhere on clawbacks for a list.
Are you a single person or a couple? For a single person, there is no place to hide from the tax man in terms of splitting income. Similarly, when one spouse dies, the other gets the whole whopping amount of the RSP/RIF from both partners from which they must make mandatory withdrawals.
Much depends on future income from all sources.
How much non-registered income are you likely to have in retirement, and in what form? It will be added to your income along with any pension plan from work etc., thus giving you a more comprehensive picture of your tax liabilities.

I went through a process of trying to figure all this out a while ago. It was very time-consuming. It's hard to be sure you have considered all the likely eventualities. My advice from this experience is that one should plan ahead for withdrawals just as carefully as one plans ahead for contributions. Ideally, you should look at that at the same time, and keep revising your plan as time passes. The rules may change but we have no way of know what they will be, so we have to go with what we know.

I began setting up RIFs and withdrawing from them several years before it was required because it suits my tax bracket to do so; and also I could see that if I died first, it would immediately bump up my spouse up to another tax bracket.

September 5, 2014
1:26 am
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I understand what you are saying but the problem today with most Canadians is not being in a high income tax bracket but having a decent amount of savings, investments and income.

Today, a single senior can earn with a RRIF income included, $19,000 a year without paying any income taxes in most provinces and in the few that there are income taxes due, it is a few hundred dollars only.

Loonie, you made all good points but a 65 year old single person today can make $40,000 a year and pay about $4,600 a year in total annual income taxes. This is a total tax rate of 11.5% on the whole $40,000.

In order for a 65 year old single person to earn $40,000 a year assuming $17,000 was from C.P.P., O.A.S, they would need $354,000 in a RRIF invested in 3.00% GIC's paying $23,000 a year for the next 20 years and 1 month. This will be fully depleted by then.

I calculated this will meet CRA required minimum RRIF withdrawals. Loonie, I can see income taxes being a real problem with $2,000 or $3,000 a month pensions added to a $40,000 annual income or RRSP's and RRIF's in the $500,000 to $750,000 range especially if only one spouse has these amounts or a single person has these amounts.

September 5, 2014
1:38 am
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Also, Loonie, with TFSA's now introduced since 2009, this income is income tax free and clawback free which will help keep RRSP but preferably RRIF income taxed at much lower income tax rates because of reduced income that will not included from TFSA's.

I know personally of a friend of my father that retired at 55 because he made a great income and GIC interest rates were at 7% to 9% for many years with him putting 23 years of maximum RRSP contributions for himself and 13 spousal RRSP contributions for his wife.

Their RRSP's were worth $900,000 and they had no mortgage, debts and a paid for modest house. They also had $300,000 in non-registered investments. What they did is withdraw their RRSP's in a 2 to 1 ratio until 69 years old when RRIF's were required and their RRSP balance was much less at $500,000.

They kept the rest in non-registered accounts and later in TFSA's. Loonie, I can see why it made sense for them. They saved at least $165,000 in total income taxes if both lived 20 years from RRIF withdrawals.

If one spouse did decease sooner by say 5 or 10 years, it could easily cost $300,000 to $330,000 in total income taxes due to one spouse being in a much higher income tax bracket or the last surviving spouse passing away being hit with a 40% to 50% income tax rate upon death which for CRA is a disposition of the RRIF, all of it cashed out by default and counted in 1 year's final income tax return.

September 9, 2014
9:35 pm
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Submitted paperwork to CRA and company payroll. See how long it takes to kick in. Middle of September already....hope I can see some difference in my paycheck before the end of the year or it was a waste of time. Definitely refile after my 2015 RSP contributions.

September 9, 2014
10:32 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Rick, it should not take more than 1 to 2 weeks but the sooner you can do it, the better chance you will get that weekly or bi-weekly money coming in sooner from your paycheck. If it does take a little longer, it will always be better than waiting until May-2015 for a income tax refund.

Just make sure that you take off the right amount so you will not owe money to the CRA when April-30-2015 comes around.

September 10, 2014
12:57 am
Loonie
Member
Members
Forum Posts: 9180
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

My recollection is that the timing is up to your HR dept. - whether they move quickly or slowly, but it's been eons since I did this. It really ought to show on your next paycheque, whenever that is.

September 10, 2014
5:14 pm
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Payroll said that they have to wait for CRA to contact/confirm. I don't think my HR has done this before, seems like first time for them. Payday this week and cheque definitely won't reflect any changes this time. Let you know when it takes effect.

September 10, 2014
7:35 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Rick, it looks like your employer does not know that CRA will drag their feet because they want to continue to get an interest free loan from you. This is what income taxes being overpaid to the CRA really is.

Maybe you should ask for a copy and fax, email to CRA so they will eventually get around doing it. I did not ask my employer how they sent the T1213 form to CRA because about in 1 week everything was done.

September 10, 2014
10:55 pm
Loonie
Member
Members
Forum Posts: 9180
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

The form does say that it has to be sent to CRA for confirmation and that it takes 4 to 6 weeks.
However, when I did it years ago, and as Jack has confirmed, the employer will often just go ahead.

Even if you have to wait, which you shouldn't have to do, you will still be several months ahead with getting your money back. All to the good!

September 11, 2014
6:23 pm
Rick
Member
Members
Forum Posts: 1110
Member Since:
February 17, 2013
sp_UserOfflineSmall Offline

Mailed the applications to CRA myself for both me and my wife. Application requires proof of contribution and I didn't want to give that personal info to the company. Both companies have copies of the application on file.

September 11, 2014
7:48 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Rick, it sounds good. It is good that you are thinking about protecting your personal information and privacy to a certain degree.

The only problem with sending it by mail is there is no confirmation but most of the time there should be no real problems with CRA.

No permission to create posts

Please write your comments in the forum.