Wednesday, July 23, 2014

A Saver’s View of RRSP and TFSA Room

We hear many stories of people who seem completely unconcerned about building up great piles of debt. However, there are savers at the other end of the spectrum who handle money far differently. My own tendency toward saving shows up in how I feel about RRSP and TFSA room.

Looming in just over 5 months (at the start of 2015) is more contribution room in my retirement accounts. This is a good thing. Contributions reduce my taxes over the long run. However, to me it doesn’t feel entirely good. It feels like a debt. It feels like I owe money to my retirement savings accounts. It should be satisfying to max out my contribution room, but what I usually feel is just relief that only lasts until the start of the next calendar year.

It’s not that I gnaw my fingernails with worry. I’m generally happy, and there isn’t much that keeps me awake at night. But RRSP and TFSA room feels like an obligation. When I had mortgage debt, the feeling of obligation was much stronger, but the feeling of having to top up my retirement savings accounts is similar.

I’m not looking for sympathy here – I live a great life and my finances are in very good shape. My point is that spenders and savers have very different emotional responses to money matters. My feelings about contribution room may not apply to all savers, but I doubt they are unique.

15 comments:

  1. My TFSA contribution feels sort of like an income tax to me. Each month a certain amount of money transfers accounts, and it almost seems like the TFSA account isn't even mine. Seeing the money leave isn't a bitter feeling either, it's just something that happens that will supposedly benefit me later. I feel the same way about seeing deductions on a pay slip; somehow they are helping.

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    1. @Dave W: I guess since most of my contributions aren't automatic, they seem more like something I have to do instead of something that just happens as in your case. Your TFSA contributions ought to benefit you more directly than income taxes do. Your CPP contributions are similar to TFSA contributions; the main difference is that CPP benefits are far less flexible.

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  2. Totally agree with this! Still working on maxing out all registered accounts but I definitely feel that strong obligation to make it happen.

    I don't have negative feelings about it though, it's not like the money is just going out the window!

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    1. @Tim: We have the feeling of obligation in common. You're right about the money not just going out the window.

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  3. I used to do an annual RRSP top-up in the post-Christmas period and it felt like a wallop! Now that I've switched to monthly transfers, the smaller wallop happens in the middle of every month and it hardly bruises at all!

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    1. @Anonymous: I guess Chilton knew what he was talking about in the first Wealthy Barber book when he said to pay yourself first.

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  4. "FREE" money is a Godsend. Maybe not right now but later on at least.
    I have three kids and topped up the RESP every year to get the $500 per child SO $1.5K per year "free" from our tax dollars. Only one chld made the max use of it but graduated jsut about debt free.
    As to the TFSA, the youngun's had better top up as I would just about bet that when they retire the CPP or OAS will have been modified in some way to pay out less or as we already see, at a later date.
    I will retire next year and hope to be able to keep topping up the TFSA for several years more from non-registered monies and then from the RRIF that I will take out in another six years. At least once the money is within the TFSA there will not be a minimum withdrawal amount imposed on it like what is done with the RRSP/RRIF monies

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  5. I wish the TFSA contribution limit could be $20K every year. I would rather have that at the 18% limit of earnings then the RRSP. Imagine withdrawals with no tax hit!

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    1. @Paul: You're right that each $1000 of TFSA room is more valuable than $1000 of RRSP room. I wouldn't hold my breath waiting for $20k/year of TFSA room.

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  6. Actually, you could even measure your bad feelings in dollars. Unused contribution room creates opportunity cost through the taxes you could have saved if you had used it.

    The calculation is a bit tricky and depends on two things: (1) The expected capital gains and distributions for the period where you could have contributed but haven't. (2) The applicable tax rate.

    Sorry if this doesn't really make you feel better now.

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    1. @Holger: If I had excess room going to waste, that would be a bad feeling indeed. However, what I'm talking about here is the sense of obligation that comes from new room popping up to start each year.

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    2. I think we're talking about the same thing here. Leaving new contribution room unused when it becomes available does cost you money (through opportunity cost), after all.

      At least that's a strong motivator for me to keep my tax sheltered accounts topped up as new room becomes available.

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  7. Still working on maxing our RRSPs, but getting close. Mine should be there in another couple of years, my wife's will take another 5-10 years.

    TFSAs already "there".

    I don't mind the obligation, I figure if the savings rate "hurts" it means I'm saving enough. Delaying gratification should feel like chore sometimes and it is. Just my take.

    Mark

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    1. @My Own Advisor: Your take on this may be healthier than mine. I'm happy to have the savings, but I focus too much on unused room for part of each year.

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  8. Totally feeling the guilt. Part of the problem for me is too many savings goals. TFSA, RRSP, downpayment. Started some non-registered stuff last year, that is just reinvesting itself this year and feel guilty that I'm not contributing to it .. but that was the plan!
    Now that TFSA and RRSP is done, thinking whether I should put money into the non-registered or start saving for next years TFSA?
    Just have to keep reminding myself saving 20% (not exactly sure the rate) does not mean that I need that 20% when the contribution room opens up.

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