Thanks for your reply! I certainly see where you were going there with rrsp’s being better if reinvesting the refund, and I do mostly agree. The variable being tax at retirement, and how much of a difference it is from when it was invested. A basic strategy I was planning on using was to reinvest the RRSP refund into the TFSA. What are your thoughts on that?

But one question I still have, what should I hold in each of these accounts to make them more efficient? In broad diversification terms of course, is it better to hold interest income inside the RRSP, over capital gains? In my mind, being very aggressive inside the TFSA is better approach in the long term, capital gains being the target. I guess I think this way because I always thought that the Gov didn’t consider the way the funds are invested in these accounts, and only based the taxation on amount withdrawn and tax bracket. Did I miss a big piece of the pie thinking that way?

where x = your pre-tax amount to invest, 1/y = your tax rate, and z = your investment growth rate / year, s = your total amount at retirment after t years.

rrsp: (x * z * t ) * y = s
tfsa: (x * y) * z * t = s

in the rrsp case, the funds grow first, then you subtract tax, in the tfsa case the tax is deducted first then you grow it. as others have posted, it’s hard to predict what your tax rate is going to be at retirment so it’s merely speculation as to whether it’ll be the same, lower or greater (everyone who invests in the rrsp would be hoping for lower, and everyone who invests in the tfsa would be hoping for higher).

reinvesting the ‘refund’ (the tax that you’re not paying now but will pay later) is the key thing here. it’s like an interest free loan from the government that you get to invest however you choose. however, it’s important to know that the refund you get now you still have to pay back later when you retire so it’s simply not enough to just take the refund and hide it under your bed. in that case you’ll still break even with the tfsa.

therefore you have to take this money and invest it and earn interest on it. that interest is yours to keep. this is why you have to start early: to maximize this amount of interest. using simple savings account calculations, if you get a ‘refund’ of 100/month, and you invest that immediately each month over 40 years at 2%, you end up with 25 500 in earned interest (and 50 000 in unpaid tax money that you have to give back). if you waited until you were 45 to invest 100/month with a 24000 initial deposit (the refund you get for all of your unused rrsp contributions at this point now that you decided to start contributing), you’d end up with 17 000 in earned interest and if you waited till you were 55, you’d have a only 10 000 in earned interest.

these calculations are pretty conservative (2% interest rate, 1200 refund/year) and even in this case you end up with 25 500 extra vs the tfsa. that’s like retiring and getting a brand new car or an all expenses paid cruise every year for 5 years.

Being only 22 myself, and being in a low tax bracket now, I’ll be taking the TFSA approach first, and waiting a few years until my income hits 80k+ a year before I start maxing out contribs to an RRSP.

So here’s my question being fairly new to the field:
(Note: I am VERY aggressive in investing/risk tolerance.)

In which savings vehicle should I hold My various elements of my (now) small portfolio?

I have/will have Stocks, an open RRSP and TFSA, and am looking into precious metal/ gobal equity/small cap funds. I also enjoy playing with the commodity markets, but that’s more of a hobby.

Also, My company has a pretty good defined contribution pension plan.

Thoughts on a strategy for maximising growth in the long term?

p.s. I saw someone touch on this in an earlier post, but it seemed to be based on someone in a moderate risk class.

Couldnt stashing away $5000/year till I figure out the RRSP thing backfire? The whole idea of RRSP i thought was about compounding interest and time working toghether.

If i wait too long to invest into and RRSP and then i lose out on compounding interest and time dont I?

The goal at retirement is for you and your wife to have equal income… this means you are minimizing taxes. One person earning 90k pays way more than twice the tax of two people earning 45k.

So, in general, your RRSP balance should be equal at retirement.

Now say your wife has a nice juicy government pension, and you don’t. In that case you should have a larger RRSP to compensate your lack of pension and help keep income equal.

Again, you are young and have a lot of career ahead of you.. who knows what kind of pension either of you will wind up with in 30+ years from now. Prioritizing the TFSA lets you defer this kind of planning until things become clearer many years down the road.

Any benefits/disadvantages?

Thanks….my last question!!!

Gain and loss depends entirely upon the portfolio. You can go broke just as easily in an RRSP as an unregistered account.

RRSPs do not merge when you get married.

As for the portfolio, if you ask 10 different people you will get 10 different opinions. I will share mine:

- If you are saving for retirement, I would go very heavy on equities. Maybe even 100%. That might be aggressive, but in any case, most people would agree that going heavy on GICs at your stage in life would be a mistake. However, if you want to use some of these saving in the near term, say to make a nice down-payment on a house, then I would hold that portion as bonds, moneyfund, or GICs.

- I would max out TFSA before RRSP for multiple reasons:

1. It is easy to move TFSA funds to an RRSP but the reverse is not true. Going TFSA now lets you defer the TFSA vs RRSP decision.

2. Going with TFSA will let you easily use the money for a house. (On the other hand, you could easily waste it on something stupid. If you are vulnerable to this then maybe RRSP is better).

3. As your career progresses, you will make more money, move into higher tax brackets and will get better deductions for RRSP contributions. Use the TFSA now, and then switch to RRSP in 30 years when it gets you more bang for the buck.

That clears it up a bit. Is it possible to lose money from an RRSP contribution? Or does this depend on the type of portfolio i have created. Without knowing too much about RRSP’s i would say that I would want 80% in safe guaranteeed investments and 20% in equties? How do conservative people normally do it? Or since i am young should i increase my risk?

Once I get married I am wondering if we should do our own RRSP contributions or combine them. What the benefits and negatives? I am really torn on this one!

Also going back to my estimate of needing retirement income of $45 000.00/per year. How do people decide how much to withdraw from RRSP if $45 000 is the amount they are looking for. Do they look at how much governmetn incentives they are getting and look for the rest of the amount from their RRSP’s?

Schedule the payments or get your employer to put X% of your paycheque into a 2nd account from which you do nothing but pay off debt.

When you’re debt is paid off and you’re in a higher tax bracket then start contributing to your RRSP.

If you plan on living for a while after you retire then forget TFSAs. (http://www.taxtips.ca/calculator/tfsavsrrsp.htm)

You can have stocks, mutual funds and even gold bricks in an RRSP. They move up and down with the market but you’re making money on dollars that would otherwise be going to the taxman. Capital and returns are taxed as income when you withdraw.

A registered account refers to a TFSA, RRSP, RESP, etc. It is called “registered”, because it is registered with the government to get special tax treatment.

A non-registered account is not registered with the government and gets taxed normally. Your chequing and savings accounts are “non-registered”.

Registered or non-registered refers to the tax treatment, not the actual investments contained within. For example, you could hold Microsoft stock in a TFSA, RRSP, RESP, and a non-registered investment account. You could hold cold hard cash in all of the above too.

You cannot directly transfer money from an RRSP to a TFSA. You pay tax on the money when you remove it from the RRSP. CRA rule of thumb: if you discover some wonderful loophole, you are mistaken about something or it is illegal. :)

Can someone very briefly explain how RRSP’s work in terms of building wealth for retirement.

I understand its tax deferred till I access the funds after I retire but have some questions:

1. If i open up a RRSP- is it as simple as depositing some money in to it every month or as much as i can up to my limit for that year and letting it grow.

2. I do not understand what some of your talking about Registered Funds and Non-Registered Funds and how they are different.

3. Is the money i put into a RRSP guaranteed to grow or can i loose all my money if the market goes down? Or does this have something to do with if I choose registered funds versus non- registered funds? I am getting the feeling that registered funds are guaranteed investments at a particular interest rate compounded over the years and Non- registered is investing your RRSP in stocks, equities etc..where you take a risk with your money but better returns but you also risk losing your money – including your principal?

4. I plan on using a RRSP as well as TFSA. RRSP as my main source of retirement income and TFSA as both a short term long term investment.

- Correct me if I am wrong but can you transfer money from your RRSP into a TFSA after retirement and withdraw money tax free? I am estimating that about $45 000 income is all i need to live comfortably including CPP/OAS and all other income i get from government. This is assuming that i have my house paid off etc… So assuming I have a sizable RRSP built up, I assume that would only take out about $20 000 year or so from that and the rest will be made of the governmetn incentives? I always assumed that if i can live on $45 000 that i took that directly out of my savings.

Sorry for all the questions! Any help and advice on how i should approach this would be appreciated!

My original plan was to not touch the RRSP until the non-registered funds were gone, but when I saw what the eventual taxation was on my RRSP income, I figured there had to be a better way. Setting up a dividend stream with the non-registered funds and slowly nipping at the RRSP balance while in lower tax brackets makes the money go MUCH further. You can easily collect $60,000 in income that way an pay <10% tax. That is a far cry from my current tax bracket, and is plenty of funds. If you can manage on $40,000 then you can pay virtually no tax.

I am SO planning to be in a lower tax bracket when I retire….

TFSA contribution accumulation starts at your 18th birthday or 2009, whichever is later.

Employer TFSA, interesting idea..

Dan.

Then you can catch up later if you want.

Is this a loophole or sorts? If it isn’t then shouldn’t I be able to get consideration for all the years since I turned 18 and carry all those years of unused contribution forward?

Have you heard of any companies starting a TFSA match? I suppose that because of the limit that would be hard to do. But maybe they could get away with less because of the ability to withdraw it now.