Thanks a lot!

Bill

[...] contributing to my RRSP, to bring the taxable gross down & to set up for the [...]

Here in Alberta, the lowest combined Federal/Provincial tax bracket is 25%. Even at that rate, you can boost your investments by 1/3 ($133.33 pre-tax = $100.00 after-tax). That extra initial investment is still going to make a huge difference compounding over a working-life.

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There’s one thing I’m trying to decide for myself, right now.

I’m about to purchase a home. I’m going to be using HBP withdrawals for part of the down payment.

What I’m not sure about is where to direct surplus money — mortgage prepayments or HBP repayments (over and above what’s required). My RRSP contributions will already have been maxed, so I won’t be able to take a tax deduction for any payments into the RRSP (they’ll just come off as HBP repayments and go back to growing tax-free until retirement).

So, whether it’s mortgage payments or HBP repayments, it’ll end up being after-tax money. I would get a better return within the RRSP, but the mortgage savings are guaranteed.

Cheers.

Dividend income in a non-reg account gets preferable tax treatment, regardless if it’s during retirement or not. Check out my article on how dividend income is taxed:
http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm

Someone earning $35-40K knows they’re not rich, but they may not think of themselves as “low income” either, so when reading an article like this, it’s easy to say: “He’s not talking about me. So I’m going to continue to follow the advice of the person at the bank who sold me that RRSP.”

Thanks for the link to the other article. I’ll check it out, because I’m still not sure if dividend income in retirement is any different than RRSP withdrawals for “low-income earners”?

Cheers,

Andrew

http://www.milliondollarjourney.com/tfsa-vs-rrsp-clawbacks-income-tax-on-seniors.htm

Even if you’re income is only $20K, I’m assuming you’re going to be earning less when you are retired and not working at all. So wouldn’t that meet your requirements of “anyone who is employed and expects to be in a lower tax bracket when they retire”?

So if you are earning $25K now, but never expect to make much more than the national average of about $35K, then you’re not really a “low income earner”. So do RRSPs still makes sense? If not, then what kind of income do you need before it makes sense to contribute to an RRSP? Are there better investment options for low income earners who want to save something for retirement? I’ve read that withdrawals from a TFSA won’t involve clawbacks of the Guaranteed Income Supplement, Old Age Security payments, etc.

What about dividend income? Would that be treated the same as withdrawals from an RRSP in retirement?

Cheers,

Andrew

To answer some of your questions:
1. AFAIK, you can carry forward your deductions indefinitely.
2. Correct
3. I’m not 100% sure on this one, but I “think” you can continue carrying forward even though you are on HBP.
4. If you need the money soon (within a few years), I would personally keep the money out of the market. Not unless you are a good market timer, which not many people are.
5. SM works best for those in higher brackets, just like RRSPs.

I am completely new to investing and RRSPs and the whole shebang as I am still in school, but I would like to get a jump start on my financial future. Reading through a bunch of Can. finance blogs and other resources, I think I have a good grasp on how everything works, but there are a few things I just want to clarify.

First, some background. I am 21 with 2 years (3 tops) of school left. I have about 21k in the bank including a maxed out TFSA. As a full time student currently living with the parents, I am making about 11 or 12k/yr. about 5k goes to tuition, 90% of the rest into savings. I have no debt. Shortly after graduation I am looking to buy a house (renting is for suckers!) and quite possibly get married. I will also probably buy a car (in cash, preferably). I wish I could bike year round, but Canadian winters are not so accommodating. In my back-of-a-napkin calculations I have been assuming no finances coming from anyone else (i.e. spouse, parents, inheritances) for any of these major purchases, just to play it safe.

Now for the questions:

1. Claiming deductions for RRSP contributions is best done in a higher tax bracket than you will be in upon retirement. As a student, I am currently not paying income taxes but would like to get a jump on compounding savings. How long can I put off deducting contributions?

2. RRSPs grow tax free, correct? Correct me if I am wrong, but I am assuming that the tax free growth isn’t impacted by not claiming the deductions.

3. If I were to take advantage of the HBP, can I continue to defer claiming RRSP contributions? I don’t entirely see much point to putting money in an RRSP without claiming it, just to HBP it out again, but I just want to check.

4. If I do put some funds into an RRSP with the intention of pulling it out via HBP in a couple of years, is that a wise move? The market seems to be in a good place to buy right now, but as a complete novice, I’m not 100% comfortable diving in for the short term.

5. While on the subject of home purchases, I’ll toss in a question about the Smith Maneuver. Since I will likely be in a low tax bracket when I buy the home, if I do decide to do the SM, it is probably best that I wait a little while for the tax bracket to jump up.

So, thoughts?

Ben

[...] (100% at your marginal rate), I would be placing these equities in a tax sheltered account like an RRSP or [...]

[...] later in the year to meet one of my financial goals.  However, the priority is to maximize my RRSP and TFSA before paying down the mortgage any further as my mortgage rate is currently very low [...]

For me, I think the rules for who and when to contribute to an RRSP are simple:

Step 1) Contribute to an RRSP only after you have eliminated most of your high-interest debt (no credit card payments, no car payments, no student loans, etc).
Step 2) When you have no high-interest debt (say, only the mortage and bills to pay each month), contribute to an RRSP to reduce your taxable income
Step 3) Keep contributing until you get tax refund(s) from the federal gov’t for a few years (i.e., you are slowly building your wealth)
Step 4) Keep contributing, modestly, to the RRSPs but start using the tax refunds or the new tax-free savings accounts as a means to start buying dividend-paying stocks
Step 5) Keep modest contributions to the RRSP but slowly transition most of your monies to buy dividend-paying stocks to fund your retirement

So far, I’ve completed steps 1-3, I’m working on step #4.

There is lots of information on the ‘net about CPP, OASP, and GIS. Have a look to learn more for yourself.

DAvid

about Gis I have been encouriging my wife to open an rrsp account which she did hooray she makes around $36,000 per year before taxes
am I corect from what I am reading that while she is working hard to accumalate for a retirment she would forgo the gis while someone who never really worked or accumalted anything would have a gis there waiting for themself guarenteed so whats the point of going to work working hard saving and stil finishing the same off as someone who never financed school or worked hard. Can you make it black or white should she have an rrsp or not?

also does joint income affect the gis would I lose mine I have 45,000
in rrsp and have been dedicated to saving for retirment should I withdraw the money so I would get the gis I am 48 my wife is 35

thanks

DAvid