Lets talk about RRSP's

[sxtasy]

Its RRSP time, just have some questions.

1) I know that your maximum contribution is based on your income from the prior year, what is the percentage??

2) Is it a cheaper interest rate for an RRSP loan than conventional loans because the money is somewhat "secured"

3) Anybody have any recommendations as to where and type of RRSP to purchase.

4) What are the rules to using your RRSP money for a first time home purchase?

Anyone have anything else they want to discuss regarding RRSP's, I want to learn as much as I can about them.

[1badPT]

1) 18% Also if you didn't contribute your maximum in previous years, you can carry forward those amounts.

2) generally yes but its usually such a short term that you're borrowing for so this shouldn't be too great of a concern

3) that depends on your situation, there are lots of great options but you have to take a few things into consideration - you tolerance for risk, your age, etc.

4) I'll answer this when I get home and have a look in my notes, unless someone else gets to this first, but there aren't very many rules IIRC

[Altezza]

1. 18% to a maximum of $15,500 for taxation year 2004. For 2005-06, they are $16,500 and $18,000 respedtively.

2. no idea

3. Anywhere is good...if you aren't sure what you want to do with your RRSP, just contribute into a cash RRSP account and figure out what to do later. That way, you'll make your contribution and get your tax receipt.

4. http://www.cra-arc.gc.ca/tax/individ...bp/menu-e.html

[Z_Fan]

Some more information for you...on number 3.

Unless you are want to get a self-directed plan (Like RBC's Action Direct) - you will likely wind up with a 'bank' plan. When you go that route, your account is basically divided up between funds to securely grow your RRSP. You will be restricted as to what % you can put in the various types of funds. Example, you may be restricted to putting in 5% of your total RRSP into an energy fund. (Because it is higher risk.) Quite often you CAN do what you want, but you have to speak with a rep and they will advise you against it - that is there job, to keep the plan within designated specifications. If you want total freedom to do what you want, like I already said, you need a self-directed plan - one where you can take much more extreme risks and no one will ask questions. It is there you can lose money much faster! (Or gain!)

But worry not, even in bank moderated plans, you can get into higher risk (higher payback or loss) funds. I have a fund that has earned 10% in the last 3 weeks through a bank moderated plan. So it's not like you can only get high growth through self-directed or stock-market scenarios. A few years ago, there was a fund that did 150% in the year. So, insane rates of return are possible.


Some more information for you...on number 4.

I used this plan (Home Buyers Plan or HBP) and it has its pros and cons.

If you are fortunate enough to have cash somewhere, not in RRSP, then I would use that for your downpayment and don't touch your RRSP...

The nice thing about the RRSP method is that it is a tax free loan essentially. In my case it was easier to build up the cash for a downpayment on a house by putting it into RRSP because of the tax shelter - knowing full well I was just going to take it out for a house later...

BUT - like I said...if you have cash use that. The main reason is that the interest rate you'll be losing on your RRSP is (generally) much higher than the cost of borrowing as mortgage rates are insanely low.

So, if you can just use cash to acquire the downpayment, there is absolutely no benefit to throwing the RRSP funds on top of that downpayment too - simply to have a lower mortgage payment. This will lose valuable interest and growth in your RRSP.

It is a great plan though (HBP) if you can't save any other way, and it's very nice to be able to pay the money back over a 15 year period. The one annoying thing is that you have to pay back (in my case) over $1k a year in RRSP and you ofcourse don't realize any tax benefit for those RRSP purchases - because you already did once. (When you originally purchased the funds you withdrew for HBP)

[sputnik]

Originally posted by Z_Fan
Some more information for you...on number 4.

I used this plan (Home Buyers Plan or HBP) and it has its pros and cons.

If you are fortunate enough to have cash somewhere, not in RRSP, then I would use that for your downpayment and don't touch your RRSP...

The nice thing about the RRSP method is that it is a tax free loan essentially. In my case it was easier to build up the cash for a downpayment on a house by putting it into RRSP because of the tax shelter - knowing full well I was just going to take it out for a house later...

BUT - like I said...if you have cash use that. The main reason is that the interest rate you'll be losing on your RRSP is (generally) much higher than the cost of borrowing as mortgage rates are insanely low.

So, if you can just use cash to acquire the downpayment, there is absolutely no benefit to throwing the RRSP funds on top of that downpayment too - simply to have a lower mortgage payment. This will lose valuable interest and growth in your RRSP.

It is a great plan though (HBP) if you can't save any other way, and it's very nice to be able to pay the money back over a 15 year period. The one annoying thing is that you have to pay back (in my case) over $1k a year in RRSP and you ofcourse don't realize any tax benefit for those RRSP purchases - because you already did once. (When you originally purchased the funds you withdrew for HBP)

I used to HBP when I bought my house. If you have the cash available for the downpayment. I would invest it into RRSPs, get the tax benefits then (after 90 days) withdraw it for your downpayment.

The HBP basically gives you an interest free loan (to a max of $20k per spouse) that you have 15 years to pay back. So if you are going to dump a pile of liquid cash on a house. Why not reap some tax benefits before hand and end up with a larger downpayment?

For example

$10,000 in cash downpayment...

or

$10,000 in cash tossed into an RRSP
$4,000 in tax return (or borrow $5000 and roll it into an RRSP)

$14,000 - $15,000 downpayment

[str8jkt]

Currently have approx. $4200.00 put towards RRSP's this year ($175.00 automatically put into it bi-weekly).
Also ust entered the second year of my mortgage with approximately $158,000 remaining on it.

Would it make more sense to sink $1500.00 into RRSP's or onto the principal of the mortgage?

More background info on RRSP's. 26 years old and have $21,000 total in RRSP's. Any suggestions?

[sputnik]

Originally posted by str8jkt
Currently have approx. $4200.00 put towards RRSP's this year ($175.00 automatically put into it bi-weekly).
Also ust entered the second year of my mortgage with approximately $158,000 remaining on it.

Would it make more sense to sink $1500.00 into RRSP's or onto the principal of the mortgage?

More background info on RRSP's. 26 years old and have $21,000 total in RRSP's. Any suggestions?

Personally, I am paying 4.4% interest on my mortgage and making about 15% on my RRSP mutual funds. I am a big fan of putting money in your RRSPs instead of paying off your mortgage. Here is my rationalization...

On a mortgage you generally will pay 2.5X the value of the mortgage in 25 years. On a $200k mortgage thats $500,000 ($300,000 interest). If you were to pay off the mortgage in 10 years you could potentially save a portion of the $300,000 interest charge, but you would have to invest about $125,000 cash directly into your house. Which in my opinion will grow quite a bit slower than a mutual fund.

Now if you were to invest that $125,000 into RRSPs before you turned 35 ($7000/year @ 10% compounded annually) you would have quite a nest egg and when you turned 65 it would be worth about $2,500,000 at 10% compounded anually. Technically it's not even $7000/year. What you could do is put $5000/year into RRSP and borrow against your income tax return to make your investment $7000/year. So if you take that $175 bi-weekly payment and up it to $200 you would be investing $5200/year and should get a return of at least $1800 to top off at $7000/year

If you chose to pay off your house and start heavily investing in RRSPs from the age of 35-45 (and saved $125,000) when you turn 65 your investment would be worth just under $1,000,000 (at 10% compounded annually). Thats a difference of about $1.5M. Compound interest it the reason here, because in 10 years (when you are 75) that $1M would be at the $2.5M mark. Unfortunately many of us wont be working much past 65.

If you think that your house will be worth $1.5M more than you paid for it. Then pay the house off. Otherwise invest in RRSPs. The catch however, is that interest rates, the housing market and the stock market are all volatile so there is risk regardless of your choice. For me, paying off my house isnt as important as I once thought.

So in the end... a $1.5M gain on my RRSPs is worth more than saving ~$200,000 in interest on my mortgage.

[Xtrema]

Originally posted by sputnik
So in the end... a $1.5M gain on my RRSPs is worth more than saving ~$200,000 in interest on my mortgage.

Well put. But also consider this, RRSP isn't tax free, it's tax deferred.

When $$ leave your porfolio, you'll still need to pay income tax on it. So at some point, you'll be over contributing unless you want to leave your RRSP as inheritence for your children.

@ $1.5M, if you're taking it out over 20 years, that's 75,000/year. Hopefully by then the tax deductible is that higher but very unlikely. So, you'll probably have to pay $20K in taxes on that. So your $1.5M is more likely to be $1M after taxes. And remember, RRSP withdrawal may not be your only source of income (hopefully).

So, at some point, if your RRSP portforlio is growing to a good size, you should start diverting you investment elsewhere like real estate, in the stock market and paying off your own mortgage.

Another point, your RRSP withdrawal, regardless of what the investment is, will be taxed as income on the whole amount (principal and captial gain). But for investment outside of RRSP, you only get taxed only 50% of captial gain. That's a lot less taxes.

So in my viewpoint, RRSP is only a safety net that you'll never hope to use. If it grows too big, government will get a bigger slice when you take it out. Diversify is key, invest in RRSP, out of porfolio investmen and mortgage equally.

[91_Integz]

Originally posted by Xtrema

But for investment outside of RRSP, you only get taxed only 50% of captial gain. That's a lot less taxes.

This is assuming only investing in stocks and getting capital gains and not interest income.....outside an RRSP you lose the power of the tax deferal which is a much bigger advantage than many people think.

[91_Integz]

Originally posted by sputnik


Personally, I am paying 4.4% interest on my mortgage and making about 15% on my RRSP mutual funds. I am a big fan of putting money in your RRSPs instead of paying off your mortgage. Here is my rationalization...

On a mortgage you generally will pay 2.5X the value of the mortgage in 25 years. On a $200k mortgage thats $500,000 ($300,000 interest). If you were to pay off the mortgage in 10 years you could potentially save a portion of the $300,000 interest charge, but you would have to invest about $125,000 cash directly into your house. Which in my opinion will grow quite a bit slower than a mutual fund.

Now if you were to invest that $125,000 into RRSPs before you turned 35 ($7000/year @ 10% compounded annually) you would have quite a nest egg and when you turned 65 it would be worth about $2,500,000 at 10% compounded anually. Technically it's not even $7000/year. What you could do is put $5000/year into RRSP and borrow against your income tax return to make your investment $7000/year. So if you take that $175 bi-weekly payment and up it to $200 you would be investing $5200/year and should get a return of at least $1800 to top off at $7000/year

If you chose to pay off your house and start heavily investing in RRSPs from the age of 35-45 (and saved $125,000) when you turn 65 your investment would be worth just under $1,000,000 (at 10% compounded annually). Thats a difference of about $1.5M. Compound interest it the reason here, because in 10 years (when you are 75) that $1M would be at the $2.5M mark. Unfortunately many of us wont be working much past 65.

If you think that your house will be worth $1.5M more than you paid for it. Then pay the house off. Otherwise invest in RRSPs. The catch however, is that interest rates, the housing market and the stock market are all volatile so there is risk regardless of your choice. For me, paying off my house isnt as important as I once thought.

So in the end... a $1.5M gain on my RRSPs is worth more than saving ~$200,000 in interest on my mortgage.

I really agree with this logic.

[TrevorK]

Originally posted by str8jkt
Currently have approx. $4200.00 put towards RRSP's this year ($175.00 automatically put into it bi-weekly).
Also ust entered the second year of my mortgage with approximately $158,000 remaining on it.

Would it make more sense to sink $1500.00 into RRSP's or onto the principal of the mortgage?

More background info on RRSP's. 26 years old and have $21,000 total in RRSP's. Any suggestions?

Just did the calculations.

A $1500 prepayment, on a 25 year biweekly mortgage for $158,000 on the 12th month of the mortgage (Since you said you just entered the second year) would save you $2611.58 in interest over the course of the mortgage (Which should be ~22 years since you're paying bi-weekly vs monthly).

Do you think, in 22 years, you could turn $1500 into say $6000?

(The $6000 takes into account the $4100 shaved off the mortgage, then I added in a ~50% tax rate (Very, very generous obviously, but it could reach that if he retired in another province with a high income in the far, far future. Either way, better safe than sorry))

At 10% you return $13414.67 after 22 years.

At 7% you return $6965.65 after 22 years.

At 5% you return $4495.96 after 22 years.


So, just by judging the numbers you'd be better off investing in a RRSP providing you can get a minimum 7% return (After paying all your MER fees, trading fees, etc, etc...). But if you're just investing in GICs, you would be worse off doing that than putting it onto the mortgage.

However, there are many, many other variables that can be taken into play when considering this (Like company pension, spousal pension, planned RRSP savings, faith in the market, your mortgage rate (If it jumped to 10% in say 5 years), current/future income levels, etc...)


<Note: The calculations assume you are like almost all RRSP investors who spend their refunds instead of investing it. Obviously the number will change if you re-invest your $500 refund from the $1500 contribution>

[sputnik]

Originally posted by Xtrema
Well put. But also consider this, RRSP isn't tax free, it's tax deferred.

I understand the tax implications of RRSPs and TOTALLY agree that diversification is key. I just chose to leave it out of the discussion to simplify things. I also just stuck with RRSPs for the same reason. Personally I like to have a 50/50 split when it comes to registered vs non-registered portfolios (given that you dont have a pension at work). The non-registered portfolio can be a good "go to hell fund" if you ever need to quit your job, or if you lose your job you have something to fall back on.

If you have a pension at work, I would recommend a 33/33/33 split between pension/RRSPs/non-registered investments, but thats just a personal opinion.

In the end I was just trying to illustrate that paying off a house as quickly as possible might not be the best thing to do in comparision to saving/investing.

[str8jkt]

Thanks for all the great suggestions guys. I appreciate the time put into the posts. Interesting reading.

[Xtrema]

Originally posted by 91_Integz
This is assuming only investing in stocks and getting capital gains and not interest income.....outside an RRSP you lose the power of the tax deferal which is a much bigger advantage than many people think.

Yes, of course GIC is useless and barely keep up with inflation.

But here an example:

Assume you invest in $1000 in mutual fund or stock and pay out is 10%/year. Assuming your tax bracket is @ 30%.

After 10 years:

RRSP: $2593.74, but taxed @ 30% on withdrawal = $1815.62

Outside of RRSP, paying tax on cap gains yearly: $2226.49

So you DO NOT have any advantages saving in RRSP unless you withdraw within tax free deduction limit. And this get worse if you're in the higher tax brackets.

So RRSP is really 'Dead' money that only good if you have no other income, just a safety net. Don't expect to use it unless you're in a jam.

The only good thing about RRSP is the tax refund which you could either reinvest elsewhere or into mortgage.

[max_boost]

I have a quick question with RRSP's that I forgot to ask my financial advisor.

Example: I have $50K in my RRSP portfolio, $30K of that is the invested principle, the other $20k is interest earned.

Now I want to buy a house (primary residence) and I take out the $50K, I have a 15 year period to reinvest into my RRSP, but what amount do I put back in? Just the contribution limit amount right $30k right?

[Z_Fan]

Originally posted by max_boost
I have a quick question with RRSP's that I forgot to ask my financial advisor.

Example: I have $50K in my RRSP portfolio, $30K of that is the invested principle, the other $20k is interest earned.

Now I want to buy a house (primary residence) and I take out the $50K, I have a 15 year period to reinvest into my RRSP, but what amount do I put back in? Just the contribution limit amount right $30k right?

No.

Firstly, you can only use $20k towards your house. (Per spouse)

Secondly, if you initially invested $15k, and it grew to $20k, and then you withdrew $20k for HBP, you must pay back $20k. How much interest your investment had earned prior to extraction is irrelevant.

[max_boost]

Originally posted by Z_Fan


No.

Firstly, you can only use $20k towards your house. (Per spouse)

Secondly, if you initially invested $15k, and it grew to $20k, and then you withdrew $20k for HBP, you must pay back $20k. How much interest your investment had earned prior to extraction is irrelevant.

Thanks for the clarification.

[Khyron]

Originally posted by Xtrema

Assume you invest in $1000 in mutual fund or stock and pay out is 10%/year. Assuming your tax bracket is @ 30%.

After 10 years:

RRSP: $2593.74, but taxed @ 30% on withdrawal = $1815.62

Outside of RRSP, paying tax on cap gains yearly: $2226.49

So you DO NOT have any advantages saving in RRSP unless you withdraw within tax free deduction limit. And this get worse if you're in the higher tax brackets.

You're assuming you're in the same tax bracket when you contribue as when you withdraw.

If I'm in the 40% bracket and contribute 20K, I get 8K back in savings (0% tax on that 20K)

Then when I'm 65, I have a house and my cars, etc - so I don't need a 100k/year salary. I might only withdraw 1500-2000 a month - that's under 30K a year. So I pay my (defered) taxes on it which is now only 15% because of my new lower bracket, saving me 25% in taxes on my income. Not many returns will net you 25%.

And that's not including the benefit of having that 8000 dollars to re-invest back when you're young as opposed to retired. Money is worth more the earlier you get it.

Percentages pulled out of my ass, but that's the advantage to doing it. If you are making 100K/year, and plan to withdraw 100K/year when you retire you are completely correct that there's no tax advantage. The thing is most people won't do that.

Khyron

[Z_Fan]

^

I was going to respond to Xtrema earlier, but then I figured someone else would.

LOL

But yeah, basically if you are putting in money to RRSP expecting to extract it later while in the same tax bracket, you just completely defeated the entire concept and purpose of RRSP.

When you are OLD is when you are supposed to take out the RRSP. Fact is for many that CPP, Pension and RRSP may be the only three things they have as income. When/if that is the case, tax on the RRSP funds may be very very low...

If you are putting money in RRSP when you are 21, expecting to take it out in 4-5 years, well, your stupidly wasting valuable contribution 'limits' for no purpose or noticeable benefit. This would be very foolish...

[TrevorK]

Originally posted by Khyron


You're assuming you're in the same tax bracket when you contribue as when you withdraw.

If I'm in the 40% bracket and contribute 20K, I get 8K back in savings (0% tax on that 20K)

Then when I'm 65, I have a house and my cars, etc - so I don't need a 100k/year salary. I might only withdraw 1500-2000 a month - that's under 30K a year. So I pay my (defered) taxes on it which is now only 15% because of my new lower bracket, saving me 25% in taxes on my income. Not many returns will net you 25%.

And that's not including the benefit of having that 8000 dollars to re-invest back when you're young as opposed to retired. Money is worth more the earlier you get it.

Percentages pulled out of my ass, but that's the advantage to doing it. If you are making 100K/year, and plan to withdraw 100K/year when you retire you are completely correct that there's no tax advantage. The thing is most people won't do that.

Khyron

One thing to remember is that you are FORCED to convert to a RRIF, so if you have a lot of savings in your RRSPs the government may actually forced you to withdraw a large amount, which may bump you into a different bracket then you intended to be in.

One thing I've seen is people who retire early (So no CPP or anything at first) start withdrawing out of their RRSPs first instead on their non-registered savings.