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Putting all my chips into an RRSP
February 27, 2017
4:07 pm
Tony
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AT 63 years old and still working seasonal, plus receiving a retirement pension and CPP I am being hit with a large tax bill each spring. I have a moderate RRSP about 200k. Was wondering if it would be wise to take the bulk of my TFSA and roll them into an RRSP? I do have about 50k of RRSP contribution room for 2017. Will not need the TFSA until I am ready for a RIF.

February 27, 2017
4:33 pm
Top It Up
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I guess I would have to use the old adage "if I knew back then what I know now" I would never have gotten involved in an RRSP to begin with. The trap I'm in now is, I don't need the RRSP to fund my retirement plans and I hate like hell the tax I'll soon have to start paying when I'm forced to draw through a RIF.

Personally, I wouldn't touch the TFSA to further fund your RRSP.

February 27, 2017
5:46 pm
Loonie
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Wise words from Top It Up. I feel somewhat similarly and am closer to 72 than you are.

It's actually a very complicated calculation, and if I knew who to send you to, to figure it out, I would!

Here are some of the considerations that have occurred to me. There may be others that are equally important.

First, do you have a spouse, and if so, what is their financial situation?

Consider perhaps just putting enough into RSP to maximize a certain tax bracket. If you put the whole 50K in at once, you may bring your tax bracket down too low, to the point where, when you take the money out later, it will cost you more than what you are saving now. Best usually to spread it over a few years. Depends on your income. Always remember that RSPs are only a tax deferral system. They only work well if the tax you pay later is less than what you would pay when you bought in. A lot of people are going to find themselves in the same situation either way - or even be paying more tax later.

Remember that when you turn 65, you will start to face a clawback on the "Age Credit" if income too high. On the other hand, you are not getting any Age credit now. You will also start getting OAS, which will add to your income and is taxable. When do you plan to start drawing on that? (Remember that if you postpone OAS to age 70, you can get up to 36% more annually.

Much depends on more details about your situation, which you may not wish to reveal, understandably
However, you can think about them.

Don't put more money into the RSP than you have income that you can deduct it from. Check on which kinds of income can be deducted from for this purpose.

Are you in a situation where, if you put more into RSP, you will face OAS clawback later when you take it out? That costs much more than the Age credit clawback. you probably don't want to go there.

How much are you earning now from seasonal work? Do you expect that to continue at the present rate? When do you expect to quit working entirely? Will there be some years between now and 72 when you can draw out this extra 50K or more from RSP and pay less tax on it than you would now? If not, you will probably never benefit from putting more in RSP.

You need to do the math, projecting out your taxable income from here forward, annually, based on what you know, with the two scenarios of RSP 50K or not. Don't just look at the tax you are paying now in isolation from what you might be paying in the future.

Are there any other foreseeable big changes in your financial situation? e.g. might you receive an inheritance? Are you carrying life insurance that you will drop in the next 10 years or so? Do you pay into disability insurance, which usually ends at 65.

What is your RSP invested in, and what sort of returns do you expect from it?

What is your own estate plan? Do you have someone that you want to leave your money to? If you have a spouse, and that person also has an RSP, the total asset in RSP after one partner dies can be quite substantial. It all gets taxed at marginal rate when the last of you dies, which can be very high and eat into your estate.

If interested, you might take a look at Daryl Diamond's book on retirement income planning. I have found it helpful.

What I did, to help myself with this predicament, is to set up a chart which lists every year from now to 100 years. Then I plotted the major changes that I anticipate in our financial situation - things over which I have no control but will change our income or available funds - so that I could see how total assets would change. Then I looked at income sources, when they would kick in, how much, whether splittable with spouse etc., to see the various combinations that were possible for me. And finally I looked at resultig taxable income and compared that to bracket threshholds.

I can't say I did this perfectly, but it gives me a rough idea. My conclusion was that although I have more RSP room, I won't use it.

Lastly, remember that government policies can and do change. The Liberal talked earlier about overhauling the entire income system for the elderly, but nothing has come of it yet. On average, with this in mind, I would stay away from RSPs. You should take advantage of anything that works for you while it is still available.

February 27, 2017
6:30 pm
julio
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Tony,

1) follow Top It Up and Loonie's advice in not contributing to a RRSP. I remember back in the eighties, the government at that time was floating an idea of indirectly taxing (by dis-entitling) RRSP withdrawals higher then even regular income. Vaguely I remember 70%. The proposal did not go through.

2) "being hit by a large tax bill" is relative. MTR is not.

3) When and if Canada's finances get into deeper trouble, I see pre-budget consultations come out with a question like "In these troubled times, should those who amassed larger amounts of money, as a result of generous tax breaks, in the name of "fairness", be taxed at a ..." . Notice, there is no savings habit mentioned.

4) Take OAS at 65 not only because when you see your doctor for a check-up she maybe rolls her eyes, but because OAS is a social program without any entitlement to it, unlike CPP. So, again, in the name of "fairness", I the see the thresholds lowered.

February 27, 2017
7:07 pm
Rick
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I pretty much agree with Loonie. I would take money out of my RSP's and stick it into TFSA's rather than the other way around. You're taking after tax, tax-free money and putting into a taxable RSP (when you withdraw) for tax gains now? Granted, the government of the day may totally change the rules by the time it's time to withdraw. About 8 years ago I took out a 60K mortgage to top up my rsp's. That's when I found out there is a max you can declare in a tax year before there is no financial benefit (refund) to contributing the max in one year. For me it was bout 20K, so, along with my regular contributions, it took me three years to deposit it all into RSPs for maximum benefit. I am in a similar situation to yours, will be retiring within the next 18 months, and my opinion is that the TFSA money will be the last money I ever spend. It doesn't count as "income" while RSP/RIF payments do. At least last time I checked. Max that sucker out and sit on it until I HAVE to use it or I die...Whichever comes first. Good luck whatever you decide.

PS.... aren't you having taxes deducted from your pensions now? Why the big tax bill every year?

February 27, 2017
7:13 pm
Rick
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Tony said
Will not need the TFSA until I am ready for a RIF.  

Is that possible? I thought you could only convert RSP funds into RIF's?

February 28, 2017
6:26 am
Bill
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Rick, I think Tony was thinking of putting his TFSA funds into his RRSP and from there into a RRIF. I believe RRIFs can just be funded by RRSPs, not that anyone would ever want to put funds from a TFSA to a RRIF anyway - can't see anyone rolling tax-free money into a RRIF and then paying taxes on the withdrawals.

February 28, 2017
7:12 am
Tony
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Thanks guys, all posts are helping me understand more. I forgot that I do receive EI as well in the off season therefore am subject to a 30% clawback on that , hence the bigger tax bill. Cannot escape the taxes or death but enjoying my time trying to avoid both. Thanks again.

February 28, 2017
8:00 am
Loonie
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Is it possible that your taxes aren't really exhorbitant, but it's just that you are having to pay a lot at once, which makes it seem worse?

Take a look at your Average Tax Rate and don't focus on the Marginal Tax Rate, in order to get a clearer sense of what your taxes are overall. The problem you have presented that you are dealing with right now is not one of Marginal Rate because you're not asking about adding more to your income now.
So, take the amount of tax you pay in total (not just the spring bill) and divide it by your total income (some would say net or taxable income, but I think total income makes sense.) Then multiply this by 100 to get your Average Tax Rate. This tells you how much you are paying annually on your income. It can actually be fairly reasonable if, for example, you earn up to about 50K, which is enough for most people to live on.
Perhaps the issue is just that because you have several sources of income, they are not all deducting the appropriate amount of tax during the year as they don't know what your total income will be.
If you end up owing more than 3K on a regular basis, CRA will make you start quarterly payments to them, which is a nuisance and sometimes more expensive due to lost interest or if you forget a payment. It's a smoother ride if you adjust deductions at source in my opinion. See if anyhting can be done from that angle and maybe you won't be so tempted to cash your TFSA!

The only reason I can think of where you might still want to put more in the RSP is if your pension plan is not good or is at risk or is not fully adjusted for inflation. It is probably a significant portion of your retirement income. If it's not a good or reliable plan, and you're planning on living to 90 or so, then you might want the larger RSP in order to compensate for its deficiencies and for future inflation.

February 28, 2017
9:42 am
Bill
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Just fyi, even if your additional taxes at tax time are less than $3K you can still put money into your CRA account any time. I have to make instalments now but before I did I sometimes would just transfer $1K or $2K from my chequing account to my CRA account (maybe at another time in the year when I was more flush with cash) and then it was nice to have that credit sitting there next tax time. CRA is happy to take your money any time, it'll sit there until you file your tax return and apply it against any taxes owing then.

February 28, 2017
10:03 am
Top It Up
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Bill said

Just fyi ... you can still put money into your CRA account any time ... it'll sit there until you file your tax return and apply it against any taxes owing then.  

NO WAY ... I wouldn't give CRA a plug nickel ahead of whenever it is you have to. I've been on quarterly payments for what seems a lifetime and, I'd rather not be.

March 1, 2017
7:42 am
Norman1
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Tony said
Thanks guys, all posts are helping me understand more. I forgot that I do receive EI as well in the off season therefore am subject to a 30% clawback on that , hence the bigger tax bill. Cannot escape the taxes or death but enjoying my time trying to avoid both. Thanks again.  

It could be worthwhile withdrawing from TFSA and contributing to RRSP enough to bring your net income below the $63,500 EI repayment threshold.

With 30% EI repayment and above $63,500 income, the marginal tax rate is at least 30% + 20.5% federal + 9.15% provincial (for Ontario resident) = 59.65%.

It will be worthwhile if the RRSP withdrawals of the principal and the earnings in the future will be taxed (including any OAS clawback) at less or the same as the tax savings from the RRSP contribution.

March 1, 2017
7:49 am
Top It Up
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Norman1 said

It will be worthwhile if the RRSP withdrawals of the principal and the earnings in the future will be taxed (including any OAS clawback) at less or the same as the tax savings from the RRSP contribution.  

I think that's an incredibly hard calculation to determine. If your RRSP has doubled or tripled your contribution, your tax obligation, going forward, could far and away exceed your "at the time" tax savings.

March 1, 2017
6:46 pm
Norman1
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The calculation is not that hard if one uses the average tax on the contributions and withdrawals. As well, the taxes are not always that much.

I did one calculation in this earlier post.

There was $400,000 in RRSP contributions that were deducted from 25% to 40%, averaging 32½%. Winding down the RRSP took $1.3 million worth of withdrawals that are taxed at a higher 40% on average.

One ends up with the original contributions back tax free and paying about 16% net in taxes on the growth. That 16% is about half of the average 32½% tax rate during the period of contributions. So, one ends up paying the capital gains tax rate on the growth.

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