Million Dollar Journey

1. 1. Mike

   Why can’t the new graduate start a non-registered investment to ‘take advantage of the compounding’. Once they get into higher tax brackets they can use this $$ to make contributions.

   Feb 6th, 2007 @ 7:31 am

2. 2. FrugalTrader

   Mike: Great question. A new graduate, with a new job, say $35k - 45k / year, can certain start a non-reg portfolio. However, it would be more efficient for the new grad to contribute to the RRSP and pay down debt, IMO. Even at $35k /year, the new grad will be subject to capital gains and dividend taxes (except BC). Why not start the portfolio in a tax efficient manner? Not only that, the new grad can withdraw from the rrsp towards the down payment of their first home.

   If the new grad doesn’t have much contribution room, max out the RRSP, and use any money left over to pay down debt. Non-reg portfolio should be used last, UNLESS, the new grad expects to stay in a low tax bracket for his career (unlikely).

   FT

   Feb 6th, 2007 @ 7:43 am

3. 3. canadian dollars

   The only problem I have with keeping all your investments in an RRSP is when it’s time for you to purchase a home, one can only withdraw up to 20K otherwise one will be subject to RRSP withdrawl fees.

   I’m trying to save up to purchase a home in about 5 years and want to maximize my savings but don’t want to over contribute to my RRSP if I can’t use it all for my downpayment. Just my two cents :)

   http://canadiandollars.blogspot.com

   Feb 6th, 2007 @ 2:11 pm

4. 4. FrugalTrader

   Hi CD,

   Why not max out your contributions to keep some growth in your RRSP when you withdraw a portion of the funds for the down payment?

   FT

   Feb 6th, 2007 @ 5:12 pm

5. 5. Mike

   I think that maybe not everyone has enough $$ to max out their rrsp and save for a house. I’m not saying one is better than the other but sometimes you have to make a choice and go with it (for a while).

   As far as the new graduate goes - I would suggest that depending on how much $$ they make, if they put $$ into an rrsp - they could be looking at withdrawing the money later at a higher tax bracket. Now if they make $35k or more then maybe that shouldn’t be a big factor - I was thinking more of my own history where I made around $27k to $32 for the first three years (about 12 years ago) - at that time I would have been better off just paying any dividends/cap gains (at a low rate) on a non-reg account and then used the money to make contributions once I started making more $$ OR buy a house.

   Feb 6th, 2007 @ 6:49 pm

6. 6. canadian dollars

   the only problem with maxing out my contribution (which I can do) is that I’ll be contributing a lot to my RRSP but then my downpayment for a house won’t be very much.

   As I am living in the Greater Toronto Area, I am looking at probably purchasing a 400K+ home. I would like to put down a decent down payment. Unfortunately maximizing my RRSP won’t allow me to do that. I’ll need to explore more options.

   Feb 6th, 2007 @ 7:06 pm

7. 7. Mike

   CD - I have a $225k rsp and a $220k mortgage - guess which one keeps me up at night? I’ll give you a clue - it’s not the rrsp or lack-thereof. If I could make both disappear and then start over with the rsp I would do it in a second.

   My advice to you is make sure you have enough in the rrsp for the home buyers but everything else keep outside and make the downpayment as big as possible - just make sure you can handle the mortgage (which I didn’t!).

   Mike

   Feb 6th, 2007 @ 7:21 pm

8. 8. Kevin

   Hi,

   I’m a little concerned about the last point (permanent low income earners). Who are these people and why would they resign themselves to being low income earners for their entire careers? Why would they *plan* on having a low income at retirement so that they can take advantage of government benefits?

   A caveat — I’m from South of the border (Seattle, WA), so I might be viewing this from a different angle. Is this a common “strategy” up North?

   –Kevin

   Feb 7th, 2007 @ 5:11 pm

9. 9. Soultrance

   Hey There,

   I’m 22 right now, have been contributing to an RRSP for just over 1 year through the company I work for. They offer the ability to have RRSP funds taken out automatically and stuck into an RRSP. Right now, all I’ve been able to afford it $100 a month, as I only make $40k/year, so I’m only managed to build up $1200 in my RRSP and my max contribution is something like $9k.

   My question is, is it worth trying to take out a loan to max out my RRSP’s. How does that kind of thing work and what would I be in store for? Also, do you happen to know what tax bracket I fall into?

   Thanks!

   Feb 7th, 2007 @ 5:23 pm

10. 10. FrugalTrader

    Kevin: When I saw permanent low income earners, I don’t mean that people intentionally do this. This is more of a consequence of lack of education etc. This is an issue in both Canada AND the United States.

    Soultrance: If I were in your situation, I wouldn’t even consider getting an RRSP loan UNLESS your refund would pay off the loan completely. Note that RRSP loans are non tax deductible. You’re a young fella, if you have consumer debt, pay that down ASAP, then worry about the RRSP.

    FT

    Feb 7th, 2007 @ 6:01 pm

11. 11. Kevin

    Thanks for the response. I definitely agree that this is a problem on both sides of the border. :-) I just bugs me a bit that taxes from our 401ks (US) and RRSPs (Canada) will be going to fund folks with this “plan” (or lack of a plan).

    –Kevin

    Feb 7th, 2007 @ 6:10 pm

12. 12. Soultrance

    Thanks for the info.

    My main problem is my debt, at the moment. It’s not consumer debt though. I’ve got about $4,800 sitting on a credit line and roughly $10,000 sitting in student loans. The credit line I make payments on with every pay check. Since my budget is limited, I only usually put $50 per check/$100 per month on to the principal, and cover the cost of interest separately.

    My student loan, however, I’ve been paying down the same amount for 3 or 4 years and have barely knocked $2k off the loan. Right now 54% of my SL payments go to principal, the remaining 46% goes to interest, which seems rather ridiculous to me.

    Thanks again for the help. If you can make any suggestions regarding the 2 debt points I made above, please let me know.

    Thanks!

    Feb 7th, 2007 @ 8:52 pm

13. 13. canadian dollars

    FT: Could you do a future article about when one should/shouldn’t contribute to a spousal RRSP? Just curious. I enjoy reading your blog. Thanks.

    Feb 11th, 2007 @ 6:53 pm

14. 14. FrugalTrader

    CD,

    Sure can! Keep an eye out for early next week.

    FT

    Feb 12th, 2007 @ 6:49 am

15. 16. Zaine

    Mike,

    $225k rsp and $220k mortgage? What about putting the mortgage inside your RRSP?

    http://www.garth.ca/columns/030119.shtml

    ZVP

    Mar 6th, 2007 @ 3:06 pm

16. 17. Mike

    Thanks for the link Zaine, I’ll check it out.

    I’ll admit though, if it’s too much work then I probably won’t bother.

    Mar 6th, 2007 @ 7:06 pm

17. 18. FrugalTrader

    Mike, I’ve done some research on placing your mortgage inside your RRSP before, and the fees involved are prohibitive. Most of the big banks have the information online.

    Mar 7th, 2007 @ 7:24 am

18. 21. DrewP

    Okay, so… what are the next best investments after you max out your RRSP’s and all carry forward amounts? Should I just start non-registered investments? Explore tax shelters? What do you suggest?

    Oct 16th, 2007 @ 1:32 am

19. 22. FrugalTrader

    Hey DrewP, there are a couple options if you’ve already maxed out your RRSP. You could start a taxable investment account, or you could go the tax free route and pay down debt/mortgage. Depending on the interest rate on your debt and providing that it’s non deductible, you can almost never go wrong paying it down.

    Oct 16th, 2007 @ 8:45 am

20. 23. leslie foote

    Haven’t contributed ever to an rrsp…How many years back can you go to make up for all those years I didn’t contribute??or have I lost the entitlement afforded to me for past years and didn’t take advantage of..

    Nov 18th, 2007 @ 6:23 pm

21. 24. FrugalTrader

    Hey Leslie, unused contribution room can be carried forward indefinitely.

    Nov 18th, 2007 @ 9:18 pm

22. 28. Glenn

    I’d like some feedback on the Pro’s & Con’s of dipping into an RRSP to paydown line of credit debt. Interest rate on the line is at 6% but since the market is down and my funds have not performed well we are thinking that we’d be better to cash in and pay of the debt even if we have to pay tax on it rather than loose any more to the down turn in the market. any thoughts?

    Jan 28th, 2008 @ 4:34 pm

23. 29. FrugalTrader

    Glen, you’ll have to consider that when you withdraw from an RRSP, it’s added onto your income for the year and taxed at your marginal rate. On top of that, you will forever lose that contribution room. If it were me, I wouldn’t withdraw from the RRSP, but stop RRSP contributions, increase savings, and pour it all into the LOC.

    Jan 28th, 2008 @ 4:53 pm

24. 30. jen

    Hi,

    I have $15k US student debt (~5.5% interest), $140k Can mortgage, no RRSP and take home ~$32k Can/year. Where is my money best spent? Paying down debt? Paying more on my mortgage (even though we’ll likely sell w/in the next 2-5 years)? Spreading $ all around w/regular payments to each, including an RRSP.

    W/re: to low wage earners, I plan on taking time off to travel periodically throughout my career. This may affect my income bracket significantly. Should I avoid an RRSP?

    Thanks. An answer prior to the RRSP deadline this year would be appreciated.

    Feb 1st, 2008 @ 12:57 am

25. 31. FrugalTrader

    Jen, depending on which province you’re from, it may be more efficient to pay down your student debt and mortgage first. Then after they are paid off, take the same debt servicing money to aggressively contribute to the RRSP. However, you should consult a financial professional for your particular situation.

    Feb 1st, 2008 @ 12:14 pm

26. 32. Michelle Dawn

    “Low income earners who expect to stay in the same tax bracket for their career should NOT contribute to an RRSP.”

    That IS interesting. I haven’t heard anyone say that before!

    Feb 7th, 2008 @ 9:04 am

27. 33. FrugalTrader

    Michelle, the reason being is that people with low income qualify for low income government benefits like GIS during retirement. RRSP’s are counted as income, thus reducing GIS benefits. That along with equal tax brackets while working and during retirement make RRSP’s not desirable for that situation.

    Feb 7th, 2008 @ 9:10 am

28. 35. Carlos

    Hello,

    While I am making contributions to my RRSP every year, I found out that is better to declare it (and get the tax refund)every two years. Let me explain, I have a limit per year of $11660, so if a claim at the end of the year what i have contributed ($11660) I will get a refund of $3642 which is 31.23%. But if i wait another year to claim this, then at the end of this second year I will be able to claim $23321 and that will give me a calculated refund of $7994 which is an extra $4352.53 on my second $11660, this is equivalent to a 37.33% return on my second claimed of $11660.
    Now if you factor the fact that by waiting that extra year the Child tax benefit and GST calculation will change for better more than proportionally (I have three kids so is kind of a big deal) it all turns out to be an extra $16000 in a 18 years horizon by following the every other year strategy when you combine the extra tax refund ( %37.33 vs 31.23%= +$8000/18year) and the additional Child tax benefit (+$4000/18years).
    Does anybody agreed with the reasoning and is anybody else doing this? Does it make sense?

    Mar 20th, 2008 @ 5:06 pm

29. 36. kyler

    Mike:

    A friend ran this by me and I don’t have the financial acumen to sort it out.

    I am within a few years of retiring. My wife and I are lucky to be teachers (Ont) and hence access to a sweet pension. We also have about 140K each in RRSPs.

    Since our pension is pretty sweet, i imagine our marg tax rate will be up there, and pulling out our RRs will see a huge chunk of them go to the taxman.

    Would it be feasible to retire but delay the pension for 2 -3 years and instead use the RRs up as income ?

    Apr 16th, 2008 @ 11:32 pm

30. 37. JR

    Kyler, I think that I can add something here to respond to that, giving you a broad brush based on the limited information that you have provided

    Your ages are one important factor, the date when officially take retirement & with you both being teachers it supposes that you will do this before 65, if not, then why are you waiting.

    Other considerations such as your lifestyle and any changes that you plan at retirement and thereafter can and will affect the reasons for an early or the wait till 65 date … will the monthly expenses increase or decrease, are you planning an around the world trip … these things form pat of the retirement money planning and pensions question

    Would you be going into retirement with any debt, if so, then clear it off before the retirement date.

    On the money, no matter when you take the teachers pensions, even if you delay it, the years that its not taken will give you more when you do start to draw on it.

    At retirement pre 65, 60, 55 whatever that date is you could start eating into the RRSP’s early as a bridge to 65. How much do you need and how long will the RRSP’s last .. only you can answer that one

    Assume two things (simple maths) pick the retirement year, calculate how long it would take to use up the RRSP’s before 65. Do not draw CPP early, then at 65 you and your spouse would have approximately in todays money a combined CPP & OAS of about $2300 … is that enough?

    At some point 1, 2, 3 years into full retirement post 65 you can then start collecting the teachers pension

    There are other factors such as lifestyle changes, children, grandkids, relocation, health and how long you will live

    Have you thought about one of you retiring a few years before the other?

    Are you planning to leave an inheritance, if so then the RRSP stay intact, dont touch and leave those to whoever as benificary, then at 65 start drawing the teachers pension along with the government pension

    Hope this helps

    Apr 17th, 2008 @ 12:19 am

31. 38. FrugalTrader

    Kyle, do add to what JR said, does your teachers pension include CPP when you retire as most provincial pensions do?

    But yes, you are right, with a good pension, all RRSP withdrawals will be taxed at a higher rate. If it is possible to delay the pension income, then using the RRSP portfolio to live on for a few years would be a tax efficient means of drawing down the account.

    Apr 17th, 2008 @ 5:16 am

32. 39. kyler

    Thanks guys for the advice. Here might be some key data:

    – set to retire @ 58, same year as wife. Savers, no debts. Daughter will have finished degree. No round world trip but some travel ( eg month in florida in winter ?) … inheritance will be house, health for both of us strong ( knock on wood). May get some inheritance from folks ( modest 5 figures ) to serve as emerg fund.

    So, to spend RRSP early ( thereby keeping a bit more from gov’t) or hold ?

    Apr 17th, 2008 @ 9:08 am

33. 40. JR

    Kyler:

    Only you can say when you will pull the plug.

    Once you’ve made the mental decision to do it, then IMO the earliest date that you can op-out … just do it. .

    It does not appear in your case there a need to keep wealth building for retirement.

    I have taken some assumptions using the following example:

    How much will you need (I shall pick the number for you) its $36k per year … $3000/mth (leave out inflation increases)

    You said each you have banked $140k in RRSP’s ($280k total). The RRSP money is invested in basic growith @ 5% per year . Should you begin today to withdraw a total of $36k per year from the RRSP (each draws 18K minmizes tax) the balance in the combined RRSP continues to grow at 5%, then the RRSP fund would be depleted in 7.5 years.

    Based on those numbers, knowing the RRSP’s will be over and done in 7.5 years, you now have some idea of the earliest retirement date. You said that you have other available resources to chew into, in your case, the assumption again is that its a combination of life savings and the RRSP would carry you through to 65 before you start thinking about collecting the pensions available to you.

    At this stage do you really need to continue on working and keep building the RRSP’s (me thinks not)

    That said, again based on assumptions, is that you have both retired earlier than expected, have used life savings and RRSP to carry you through till 65 when the other guaranteed income (pensions) should be adequate to sustain you for the rest of your lives

    At 65, you have a couple of choices

    1. Collecting or delay collecting government pensions
    2. Collecting or delay collecting the teachers pension

    Would you need both at 65 or only one of them. Will the pensions be enough to keep you going through to 85 or 100 years of age?

    I always to folks, “remember the government will encourage you to collect as much income from investments and pensions as possible so they get their biggest tax bang from you”

    My suggestion would be for you & your spouse to calculate how much money you will need at the earliest retirement date to chew up the RRSP’s and any savings prior to collecting Teachers & government pensions, as well as calculate any expenditures along the way, to also factor in what-if’s.

    Post retirement, in this case 65, how much will you need?

    Will you need a combination of the teachers pensions and government pensions at 65, would it be only one or both of them .. only you can answer that

    Other factors.

    Now, assuming at some point in the retirement years the need arises along the way for a big expenditure, such as paying for your daughters wedding, or you always wanted that classic car, a yacht maybe, the condo in florida … then unless there is a considerable amount of other money that is taxable (stocks, bonds, interest bearing certificates etc) and you’ve not mentioned any investments here or their value, it would be the time to look at other options such as the downsizing idea in selling the family home to pay for the big needs.

    If part of your plan is not to downsize and take equity out of the family home, then of course, use the taxable investments that you have for any purpose that there is a need for those additinal expenitures.

    Do not go into any bad debt in your retirement years.

    The idea in retirement is just that … retire for the fun of it, not because you need to, or someone made you do it. Plan to do it with as little stress as possible and without worrying about money and having to pay tax (sorry minimal tax)

    Has any thought been given to how you will spend your time in the golden years?

    Closing comment:

    Do not (I say this all the time) leave yourself short just for the sake of leaving it to someone else, especially the taxman

    Apr 17th, 2008 @ 12:27 pm

34. 41. Four Pillars

    I personally don’t see anyway around paying taxes on the rrsp money - once you get to a point where you are eligible for a pension, then delaying it will just cost you money.

    Best advice I have is to spread out the withdrawals to reduce the taxes (a bit). Don’t forget, you never paid taxes on that money so it’s not like you are really losing anything.

    I have to say that rrsps are not a very good deal for teachers or anyone else with a good defined benefit pension.

    Mike

    Apr 17th, 2008 @ 2:57 pm

35. 42. JR

    Four Pillars, exactly …

    If Kyler is at the point in life to retire early the tax would be negligible on any RRSP melt down of $18K per year each of them.

    The example I used was based on the $280k they have in combined RRSP’s now, it would take approximately 7.5 years to get it to zero and my rough estimate the tax would be nothing to cry about

    Per year each individual draws $18k - less personal deduction … how much tax would they pay on the balance … ALMOST ZERO

    So go for it Kyler 58 or sooner is the best approach, based on the information that you’ve provided.

    For those that do not have luxurious company pensions, who may need be more than whats available from the fed’s. Those that live in any major city in Canada living off of CPP & OAS with GIS top up, wont take you very far … below the poverty line in fact.

    And should you have RRSP’s that would provide you with supplemental income in your retirement, the fed’s have that one figured, simply by just taxing the hell out of you for withdrawing from the RRSP at the same time taking away any supplements (GIS or Allowances)

    Apr 17th, 2008 @ 3:56 pm

36. 43. JR

    So meltdown the RRSP early, pay off debt or use the RRSP against interest on loans and if you have enough time plonk it in one of those new fancy TFSA (said somewhere else)

    If you are at least 10-years away from retirement consider melting down any RRSP’s, get rid of all of that bad debt and retire early.

    At 65 try to make sure the fed’s cannot get their hands on your hard earned and saved money by way of undeserving taxes and also try to maximize on the pension and supplement offerings available from them

    Apr 17th, 2008 @ 4:15 pm

37. 44. ChrisB

    I’ve got a question on RRSP’s myself. I’m 22 and have no experience in investing. I paid off all my debt shortly after college, I make 52k/yr and have 18k in savings… I’m trying to learn more about finance and investing, the thing that seems to make most sense to me is to put in at least 20k into RRSP’s for when I do buy a house, that would help a bit with the down payment.

    Does this seem like a good idea, or is there some other types of investments I should look into instead? And if investing into the RRSP is a good idea, once I hit the 20k mark, should I continue, or look to other non-registered investments?

    Thanks!

    Apr 21st, 2008 @ 8:31 pm

38. 45. FrugalTrader

    ChrisB, congrats on the big savings at such a young age, you are off to a fine start. Your plan sounds like it makes sense providing that you pay back the HBP aggressively after you use it. Do you have $18k in contribution room?

    Apr 21st, 2008 @ 8:42 pm

39. 46. ChrisB

    Thanks! I believe so, I’ve only ever gotten a 1k RRSP a year or two ago, so assuming I get to use all the credits from previous years, yes? I’m not really sure.

    I’ve been reading more and more on financial blogs, a lot on this one :D I’m still confused as to what investments might be good for me, but I’m hoping with a lot more reading I’ll begin understanding the terms and ideas behind them.

    I’m open to any suggestions ;)

    Apr 21st, 2008 @ 9:27 pm

40. 47. FrugalTrader

    Chris, I would suggest that you do some research on indexing with a more aggressive stance as you have a longer time line.

    This might be helpful:
    http://www.milliondollarjourney.com/just-starting-out-with-rrsps.htm

    Apr 21st, 2008 @ 9:37 pm

41. 48. ChrisB

    Thanks, I actually just read that about 30 min ago, very good article.

    Last questions:

    Am I correct that your previous unused rrsp contribution room moves forward?

    If it does and I put in 10k later this year, would that result in a tax return of (my tax bracket) * 20,000 ? Which I could invest back into the rrsp.

    Apr 21st, 2008 @ 9:50 pm

42. 49. FrugalTrader

    Chris, yes you are correct, any unused contribution room will carry forward. Your calculation is “close”, but not completely accurate. You see, if you contribute a large sum like $20k, you’ll most likely drop tax brackets. You can only multiply your RRSP contribution by the amount of your tax bracket. Once you drop tax brackets due to your contribution, the remainder of your contribution will need to be multiplied by the new tax rate. An ex:
    http://www.milliondollarjourney.com/reader-mail-rrsp-loan-yes-or-no.htm

    Apr 21st, 2008 @ 10:16 pm

43. 50. RJ

    I am young and just learning about RRSPs….

    When I read about people considering RRSP contributions, I mostly notice that they are talking about their current tax brackets compared to the future….but I want to know why dont they consider at least contributing just to go to a lower tax bracket.

    For example if you are making about $38,000 (taxed @ 22%), shouldn’t you definitely contribute $1,000 to reduce your income to about $37,000 (taxed at 15%)?….am I missing something here, or is this so obvious and that is why it is not often discussed?

    Also, if this is the case, if I am making 25,000 as a grad student, should I consider contributing enough so that I move into the 0% tax bracket?

    Thanks in advance!

    Aug 7th, 2008 @ 1:41 pm

44. 51. FrugalTrader

    RJ, the strategy that you suggest is what a lot of readers here do. That is, contribute enough to drop to the next bracket.

    The problem with contributing while in a lower tax bracket is that you’ll be contributing at a tax rate that may be lower than when you withdraw during retirement. The RRSP strategy works best when your tax rate during contributing years are higher than during retirement years.

    Ofcourse, the way around it is to contribute now and carry forward the tax deduction for when you obtain a higher salary.

    Aug 7th, 2008 @ 2:14 pm

Trackbacks

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6. The Basics of RRSPs: Registered Retirement Savings Plans ? Get Rich Slowly - Jan 17th, 2008
7. Just Starting out with RRSP’s | Million Dollar Journey - Feb 7th, 2008

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