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    Default TFSA and RRSP

    So I'm at that point where I need to start taking my future more seriously and put money away for future education/retirement/rainy days/buying a home one day.

    I've been reading up on and trying to do my research on how to effectively manage TFSA & RRSP savings and investments. Wondering if anyone here has any articles or anything that are good reads so I can do some homework and figure out how to utilize each one.

    All help is appreciated

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    If you're planning on using the savings for a home purchase, be sure to take advantage of the home buyer's tax stuff on RRSP's. The first 20k? Is 'tax free' to deduct from your RRSP when used for the purchase of your first house.

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    I think a very general rule is if your tax rate is 65-70K or more use RRSP, if you're under use the TFSA.
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    Use TFSA first. Every penny of your savings should go into that account up to the cumulative annual limit. After that, determine your spending needs and apportion the split between an unregistered account and RRSP. I dont think that putting money into an RRSP for a tax refund is a well thought out strategy, especially since it is locked in. The TFSA is great because everything inside it grows tax free and you can take it out whenever you need it. Personally I put anything with yield inside the TFSA and RRSP. Other than those, I will pay down mortgage or other personal debt with savings since they are risk free, after-tax returns.
    "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."
    -Thomas Jefferson 1802

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    Delerious - isn't the home buyers plan 25,000? (I could be wrong)

    Young You:
    - Max out the TFSA. The compounded return in that account is 100% tax free, so it makes the most sense to have your investments in there for as long as possible. (TFSA taxes the principal, RRSP taxes the principal plus capital gains/dividends)

    Old You (ideally):
    - You've now acquired 40 years of RRSP contribution room. You've made 10% every year on your TFSA and that accounts ballin', and what you see is completely yours (if it was an RRSP account, that money would be significantly taxable). But your salary is now $250,000. So you use those years of RRSP room to bring yourself down to, say, the 60,000 in taxable income. You successfully keep all of your investment income, and make huge tax savings at the same time.

    Old You (wrong):
    - You put all that money into your RRSP. Now entering retirement, you lose 40% of those returns when you withdraw because you didn't use the TFSA perk. And you also claimed your RRSP contributions every year since you finished school, so you ALSO have to pay full tax on your $250,000 salary. The result is your retirement savings are cut in half (or whatever).

    The only real reason for a young guy to contribute to RRSP is for the home buyers plan or if their employer offers some incentive (contribution matching, etc). You might be able to delay claiming contributions, but I'm not sure for how long. And that misses the TFSA perk.

    Disclaimer: good luck getting 10% consistently
    Last edited by woodywoodford; 03-18-2013 at 02:25 PM.

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    Ok- I'm sure there is a simple answer here but I'm oblivious and would like to hear it.

    You guys are suggesting to max our TFSA's first, then RRSPs as a secondary investment. I do understand that interest in TFSA is non taxable. (Though I actually thought RRSP income was as well)

    However, when you put into TFSAs, you're not getting the money back on your taxes like you do with RRSPs. And yes, I understand you might get taxed on the RRSPs when you take them out, but there's some 12-14k you can make without being taxed so as long as you stay below that once you hit retirement, isn't that the better choice?

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    ^Yes RRSP income is tax free as is TFSA. However, you eliminate the ability to use the RRSP unless you want to pay hefty taxes on it in the case of emergency or if you just want to have cash to put towards another use. The TFSA gives you that flexibility of being able to access it when you need it. As for RrSP contributions, I don't see the point in spending $25k to get $10k back on tax return (assuming 39% rate). You have locked up the $25k in RRSP and cannot access it unless you pay that tax back on withdrawal.

    Realistically, its only $5k a year we are talking about into TFSA, so the first $5k ideally should go there and then put into RRSP as available. Personally, if there is a personal debt of anything more than 4%, I would pay that off. 4% after tax is 6.6% before tax RISK FREE. Good luck finding anything in the market that has a risk free return of 6.6%. Fixed income cannot even come close to that unless you are going high yield bonds. Equity securities can return much more obviously but the risk/return profile is much different.
    "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."
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    Originally posted by woodywoodford
    Delerious - isn't the home buyers plan 25,000? (I could be wrong)
    It could be, but last I checked it was 20k. There was also a 5k tax credit IIRC.

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    Originally posted by ercchry
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    Originally posted by Mckenzie
    ^Yes RRSP income is tax free as is TFSA. However, you eliminate the ability to use the RRSP unless you want to pay hefty taxes on it in the case of emergency or if you just want to have cash to put towards another use. The TFSA gives you that flexibility of being able to access it when you need it. As for RrSP contributions, I don't see the point in spending $25k to get $10k back on tax return (assuming 39% rate). You have locked up the $25k in RRSP and cannot access it unless you pay that tax back on withdrawal.

    Realistically, its only $5k a year we are talking about into TFSA, so the first $5k ideally should go there and then put into RRSP as available. Personally, if there is a personal debt of anything more than 4%, I would pay that off. 4% after tax is 6.6% before tax RISK FREE. Good luck finding anything in the market that has a risk free return of 6.6%. Fixed income cannot even come close to that unless you are going high yield bonds. Equity securities can return much more obviously but the risk/return profile is much different.
    This - enough said (especially with regards to the personal debt).

    My only change would be that I tend to split between my RRSP and TFSA.

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    Alternatively, you could contribute to your RRSP, get a nice healthy refund, and use that to fill your TSFA. That's the route I go. Best of both worlds really.

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    Thanks guys. I see alot of good info. I guess everyone has their own way, ill see about getting started and try finding more info as i go

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    Still confused. And perhaps it is due to my perception on how taxation works in the first place. Perhaps I've made an assumption or been told misinformation.

    I understand that if one pulls the RRSP out early they're getting it up the ass with tax. No doubt. My my intentions of investing in an RRSP is to never take it out until required. I have enough of a safety net that I don't need to have my RRSP money accessible any time soon.

    And when it does come time to retire, provided you do not take out more than your annual tax credit amount based on the province you're in, aren't you exempt from being re-taxed on that amount? So in Alberta last year or perhaps the year before it was $17,XXX. Can't I take that out and am only taxed on the amount after that? And if that is the case, then why not get the 40% back when investing right now? You don't get that with TSFAs.

    I'm gonna invest regardless because my company contributes along with me. But even if they didn't, I'm still inclined to think the only advantage of maxing out TSFAs is that you have access to that money whenever you need it.

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    Originally posted by Kloubek
    Still confused. And perhaps it is due to my perception on how taxation works in the first place. Perhaps I've made an assumption or been told misinformation.

    I understand that if one pulls the RRSP out early they're getting it up the ass with tax. No doubt. My my intentions of investing in an RRSP is to never take it out until required. I have enough of a safety net that I don't need to have my RRSP money accessible any time soon.

    I'm gonna invest regardless because my company contributes along with me. But even if they didn't, I'm still inclined to think the only advantage of maxing out TSFAs is that you have access to that money whenever you need it.
    In short:

    RRSP:

    - tax refund when you buy into it.
    - grows tax free as long as under shelter
    - pay tax when you withdraw, withdrawal treat as income and subjected to income tax.

    TFSA:

    - no tax refund when you buy into it.
    - grows tax free as long as under shelter
    - no taxes when you withdraw

    Originally posted by woodywoodford
    The only real reason for a young guy to contribute to RRSP is for the home buyers plan or if their employer offers some incentive (contribution matching, etc). You might be able to delay claiming contributions, but I'm not sure for how long. And that misses the TFSA perk.
    That's pretty much it. But instead of young and old, I would say income tax bracket. (Really, a lot of kids out of school are now starting in the $60-$70K/year range).

    If you are making more than $44K a year and in Alberta, a portion of income will be taxed at a minimum of 32%. So for every $10 of RRSP you buy, you are getting at least $3 back as tax refund.

    Tell me another investment that we net you instant 30% return?

    Take your return and go buy TFSA.

    Yes, there is always the idea of saving your contribution later and save 39% instead of 32% and on bigger portion of income. But just think of the tax free growth in that time while(if) you get to the top bracket. Remember, the bracket is a moving target, this year it's >$135K for top bracket federally.


    The way I would choose these vehicles is basically affordability. If I can afford to lock it away, RRSP. If I need rainy day funds, TFSA.



    And when it does come time to retire, provided you do not take out more than your annual tax credit amount based on the province you're in, aren't you exempt from being re-taxed on that amount? So in Alberta last year or perhaps the year before it was $17,XXX. Can't I take that out and am only taxed on the amount after that? And if that is the case, then why not get the 40% back when investing right now? You don't get that with TSFAs.
    Yes. the idea is withdraw minimum possible when you have no income to minimize tax grab.

    But here's the problem with RRSP, RRSP over-contribution. You are forced to turn RRSP into RRIF when you hit 71. @ 72 you are forced to take out 7.5%. If you have 1M, that's $75K of income and a lot of that will fall on the higher tax bracket.

    So when you reached over-contribution point, stop. And if you are over by a lot, you should look at retiring early and spend it on yourself and slowly get money out and put it toward TFSA. IMHO, you should review your RRSP by 50 to make sure you are not over-contributing to avoid forced, heavy taxes by 72.

    There is no point having money when you are old.
    Last edited by Xtrema; 03-18-2013 at 05:50 PM.

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    If you're not putting in a lot when you're at the top tax bracket to be able to bump down, is it even worthwhile?
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    Originally posted by msommers
    If you're not putting in a lot when you're at the top tax bracket to be able to bump down, is it even worthwhile?
    Minimum of $3 return on $10 investment.

    You do the math if its worth it or not.

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    Generally you would want to put your riskiest investments into TFSA because if you hit it big then you will be laughing.

    If you don't own a house yet, I would put 25k into RRSP (to eventually be used towards a house DP via the Home Buyer's Plan) and then anything after that into TFSA. Note that you have to pay yourself back this 25k over 15 years, but you will get a minimum 7500 back in tax refund for contributing (25k*0.3) so it shouldn't be too bad.

    The most important thing to understand about RRSPs is that it is essentially just a way to defer taxes. The idea is that you have less income when you are retired so you will be taxed at a lower rate.

    For example:
    150k income today, the 15k from 135 to 150 is taxed at 39% (5850 taxes for that 15k). but if you put that 15k into an RRSP you basically only made 135k for the year and will get the taxes back on that 15k (so an extra 5850 on your tax refund). when you are retired, the idea is that you won't have a paycheque any more so when you pull that 15k out again, you will be at a much lower tax bracket.

    that said, you have to predict what your lifestyle will be like when you are retired. if you want to toys / trips / baller lifestyle then you probably won't be good with such a low income and you're essentially just going to pay the same amount of taxes in the future. so ideally you will want a combination of other retirement income (like TFSA) to supplement the taxable amount you would be pulling from your rrsp.

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    What is the stance on investing in RRSP/TFSA vs paying off ones house asap?

    In my mind, interest rates are low therefore I want to pay off the house as soon as possible to decrease the amount I give the bank in interest. Thoughts?
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    Originally posted by 90_Shelby
    What is the stance on investing in RRSP/TFSA vs paying off ones house asap?

    In my mind, interest rates are low therefore I want to pay off the house as soon as possible to decrease the amount I give the bank in interest. Thoughts?
    If you can make more than your mortgage interest rate on your investments than the money is better spent investing. I do like the idea of being payment free though and you worry less about your investments, if it were me I'd probably put the extra $$ in a stock that pays dividends that are > your mortgage rate.

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    Originally posted by 90_Shelby
    What is the stance on investing in RRSP/TFSA vs paying off ones house asap?

    In my mind, interest rates are low therefore I want to pay off the house as soon as possible to decrease the amount I give the bank in interest. Thoughts?
    Amortized debt on primary residence is costly. You should try to pay that down first. There is nothing that will generate thousands per month like you lose to amortized interest. And if you have the principle to make thousands per month, your house would be paid off.

    Paid off your house and then get heloc to catch up on rrsp/tfsa. Heloc is way cheaper than mortgage.

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    nm
    Last edited by e36bmw///; 03-05-2018 at 11:24 AM.

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