tag:blogger.com,1999:blog-5465015914589377788.post5327886862324972274..comments2024-02-17T11:07:06.232-05:00Comments on Michael James on Money: Debunking RRSP Myths with PicturesMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger44125tag:blogger.com,1999:blog-5465015914589377788.post-66375715293206532182019-08-11T17:57:23.429-04:002019-08-11T17:57:23.429-04:00@Steve88861: If you're 65 you can split RRIF i...@Steve88861: If you're 65 you can split RRIF income with a spouse (up to 50% of the income). So, you can't do any splitting before age 65, and you can't share more than half the income. To many people, these restrictions don't matter, but they do in some situations. For example, those who retire young or those who have significant income from a taxable account and would want to allocate more than half the RRIF income to a spouse.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79984894073189847052019-08-11T17:14:58.152-04:002019-08-11T17:14:58.152-04:00Correct me if I'm wrong, but I believe it does...Correct me if I'm wrong, but I believe it doesn't really matter in retirement whether money was put into the RRSP of the high-earner or lower earner because when paying taxes in retirement you can re-allocate some or all of the income to your spouse to minimize overall taxes.Steve S.https://www.blogger.com/profile/03044998150191331029noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-34541452677042588102015-11-06T20:53:55.747-05:002015-11-06T20:53:55.747-05:00The preference comes from a general distrust and d...The preference comes from a general distrust and dislike of the government. It's more psychological than mathematical. I don't trust the government to not hike taxes in the future, nor would I want to partner with them. I understand other people will have a different view on this, but it is something to consider.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-29021582313446032872015-11-05T09:36:50.365-05:002015-11-05T09:36:50.365-05:00@Garry: Okay, I get what you mean now. There is ...@Garry: Okay, I get what you mean now. There is a bias towards making the whole repayment sooner (if you have the money) because then the growth on the portion that is yours (and not the government's) will grow tax-free. If you expect to have future years with a low marginal tax rate, the calculation is more complex, but you could always just withdraw the money again in these future years. I haven't thought this through in full, but I'd be surprised if paying it all back now isn't the best choice.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-39837142350029363192015-11-05T09:24:22.427-05:002015-11-05T09:24:22.427-05:00Sorry Michael, I wasn't clear. I will be makin...Sorry Michael, I wasn't clear. I will be making the repayment. The question is whether repay over 15 years, or repay the entire amount in 2015, 2016 and 2017, as I will have the funds available.<br /><br />So, repay early, or not? Anonymoushttps://www.blogger.com/profile/10050035326406538508noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-58390525670054354492015-11-05T09:21:50.698-05:002015-11-05T09:21:50.698-05:00@Garry: The part you haven't mentioned is the ...@Garry: The part you haven't mentioned is the income taxes you would have to pay if you don't make the HBP repayment. You would be, in effect, giving back the tax break you got way back when you first contributed the money to your RRSP. So, if you make the HBP repayment, you save yourself from paying these taxes. For this reason I don't agree that you'll "eventually be paying capital gains tax on 100% of this repayment."<br /><br />When you consider all the side effects of making the repayment or not, the difference between the two choices is the same as the difference between making an RRSP contribution and not making a contribution.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-12950318992580354262015-11-05T08:27:56.587-05:002015-11-05T08:27:56.587-05:00I think I have a different scenario not explored. ...I think I have a different scenario not explored. I raided my RRSP via the Home Buyer's Plan (HBP) to buy a house two years ago. I have to repay 25,000 over the next 15 years, starting this year. I will be repaying the minimum this year, but - and this is key - next year I will have my TFSA & RRSP contribution room maxed, with money still left over to invest.<br /><br />So then I will have to make a decision on whether repay my Home Buyer's Plan amount back into my RRSP early, or invest in a non-registered account and just continue repaying my HBP amount over the 15 years allocated for repayment. <br /><br />Essentially, this problem is like your first example, except I won't receive the tax refund to re-invest when I re-pay (I already have received the refund). I believe you could look at it like I'll eventually be paying capital gains tax on 100% of this repayment.<br /><br />When I try to boil it down to the basics, I come up with this quandary: is it more tax efficient to pay immediate capital gains tax on dividends and eventual 50% capital gains tax (non-registered), or just eventual 100% capital gains tax (RRSP HBP repayment) ?<br />Anonymoushttps://www.blogger.com/profile/10050035326406538508noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-71932446027830384292015-11-05T07:43:37.956-05:002015-11-05T07:43:37.956-05:00@Anonymous: If you're concerned about governme...@Anonymous: If you're concerned about governments increasing tax rates significantly in the future then this makes some sense. However, the desire not to cut the government in on future profits is often based on the misconception I tried to explain in this article. Would you like to have $6000 to invest and keep the profits, or would you rather have $10,000 to invest but have to give the government 40% of the profits? I see no reason to prefer one over the other.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-60228600082057290952015-11-05T02:13:50.753-05:002015-11-05T02:13:50.753-05:00Another consideration when choosing between TFSA a...Another consideration when choosing between TFSA and RRSP is whether you would prefer to:<br />1. Pay taxes on your income now, be done with it, and go and make your own profits.<br />OR:<br />2. Pay taxes on your income later, giving the government a stake in your investments.<br />I prefer choice 1, since that eliminates the uncertainty of what my tax rate is going to look like decades in the future, and I have a hard enough time getting that income out of the government in the first place. I don't have any desire to cut them in on the profits I (hopefully) make.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-47534830408355077502015-04-08T13:26:16.131-04:002015-04-08T13:26:16.131-04:00@Vinnie: The thing I see missing is the $2400 tax ...@Vinnie: The thing I see missing is the $2400 tax refund from the $6000 RRSP contribution bringing the RRSP return up to $16,008. This leaves us with TFSA first, RRSP a close second, and non-registered account third. This small difference between the RRSP and TFSA comes from the delay in getting a refund, re-contributing the refund, and getting the next refund, etc. Over many years, this difference between RRSPs and TFSAs is small. A much more important factor is whether your tax rate goes up or down when you start withdrawing from an RRSP/RRIF. In almost all circumstances, though, the non-registered account loses to both RRSPs and TFSAs by quite a bit in the long run.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51973072667430370862015-04-08T12:24:53.669-04:002015-04-08T12:24:53.669-04:00Michael: What's wrong with this?
Which is mo...Michael: What's wrong with this?<br /><br />Which is more tax efficient — a RRSP, a TFSA, or a Non-Registered Account (a NRA)?<br /><br />Assume:<br /><br />—Just prior to the deadline for RRSP contributions, all three accts are empty.<br /><br />— just prior to that deadline, $15K was put into each of the three accounts and the same stocks in the same amounts were purchased for all three.<br /><br />— the investor’s income tax rate is 40%. So he got a $6K refund for the RRSP contribution which … he put into the RRSP the DAY the refund was available. That $6K was used to buy more of the same stocks in the same proportions.<br /><br />—after 12 months from the DAY, each account has appreciated in market value by 5% and has returned 3% in eligible dividends<br /><br />— at the end of 12 months from the DAY, all securities in each acct are sold and taxes owing are paid. Which account then produces the most after-taxes cash? <br /><br />The RRSP: $21K to start. At the end of the 12 months, market value = $21K + ($21K x 5%) = $22, 050K. Dividends = $21K x 3% = $630. Cash out at the end of the 12 months = $22, 050K + $630 = $22, 680. Taxes = $22, 680 x 40% = $9072. Return net of taxes = $22, 680K - $9072 = $13, 608.<br /><br />The TFSA: $15K to start. At the end of the 12 months, market value = $15K + ($15K x 5%) = $15, 750. Dividends = $15K x 3% = $450. Cash out at the end of the 12 months: $15, 750 + $450 = $16, 200. Return net of taxes = $16, 200.<br /><br />NRA: $15K to start. At the end of the 12 months, market value = $15K + ($15K x 5%) = $15, 750. Dividends = $15K x 3% = $450.<br /><br />Taxes on Cap gain of $750 = taxes on half $750 at 40% = $150<br />Taxes on eligible dividends of $450 at 23% = $103.50.(23% is the approximately the combined federal and MB rate for 2014 and 2015. See TaxTips.ca))<br />Return net of taxes $15, 750 - ($150 + $103.50) = $15, 496.50<br /><br />So the TFSA wins while the NRA comes in second, and the RRSP third.Vinniehttps://www.blogger.com/profile/08657339755946151354noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-87023569801176723532015-04-05T15:32:55.190-04:002015-04-05T15:32:55.190-04:00@Vinnie: I'm usually careful not to give expl...@Vinnie: I'm usually careful not to give explicit advice because you never know all the details of another person's finances. However, it's true that using a TFSA is almost always better than a non-registered account, and as long as your tax rate doesn't go up significantly from your working life to retirement, an RRSP is almost always better than a non-registered account.<br /><br />Yes, these "wrong-headed inferences" usually come from forgetting that the RRIF balance is higher than a non-registered balance would have been.<br /><br />I hadn't seen Heinzl's article yet -- thanks for pointing me to it. Thanks for the A+. I've learned quite a bit from my readers over the years and responding to them is one of the joys of blogging.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-4496940269163105982015-04-05T15:02:18.268-04:002015-04-05T15:02:18.268-04:00So your advice would be to max one’s RRSP and TFSA...So your advice would be to max one’s RRSP and TFSA first and then if one has money left over to invest, invest in a Non-Reg Acct? <br /><br />When I was working (I’m now 82), I did not want to touch a Non-Reg Acct because I got no contribution refund and had to pay taxes on it every year. But when my parents died twenty one years ago, I inherited a Non-Reg Acct. And then looking at the taxation on it and one of my RRIFs with comparable distributions and comparable market values, it’s very easy to be mightily impressed by the small taxation on the Non-Reg Acct owing to both the div credits plus in the years before the income trusts were closed down the very large returns of capital. That impression can lead one to draw some wrong-headed inferences as to the relative values of the two kinds of investment accounts. <br /><br />I suppose you noticed that John Heinzl, in yesterday’s G & M, has an article making many of the points you do. A reader in commenting on Heinzl said in effect that Heinzl was old hat and that you had covered all this in more detail.The reader provided a link to you. And that ’s how I got to read you. You set the matter out very well and the diagrams help.<br />And it's just A+ that you respond at such length to those who write in.<br /><br />I’m glad I discovered your blog.Vinniehttps://www.blogger.com/profile/08657339755946151354noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-43527869295984235222015-04-05T12:05:58.823-04:002015-04-05T12:05:58.823-04:00@Vinnie: You are misunderstanding the FP article y...@Vinnie: You are misunderstanding the FP article you pointed to. It's true that many people would like to reduce the forced RRIF withdrawal rates. However, this would just make the gap between RRSP and non-registered accounts even bigger. RRSPs/RRIFs are a better deal than non-registered accounts under the current rules. People can be fooled into thinking this is not the case when they look at a comparison where the start both accounts with the same savings. But this isn't realistic. The tax break on RRSP contributions and the tax-sheltering of gains mean that with the same hit to cash flow you will certainly build more savings in an RRSP than in a non-registered account. This larger RRSP balance will more than compensate for the added taxes that come later on the RRIF.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-84745576884076087122015-04-05T10:55:53.147-04:002015-04-05T10:55:53.147-04:00In assessing the advantages and disadvantages of i...In assessing the advantages and disadvantages of investing in a RRSP vs TFSA vs Non-Reg Acct, one has to deal with the tax hit on RRIFs, for most RRSPs get converted to RRIFs. The tax hit on RRIFs, taking out each year just the required min withdrawal, increases with age and with increasing RRIF market value. That is not so with a Non-Reg Acct. This is a big negative for putting money into a RRSP if one assumes that the RRSP gets converted to a RRIF. See this by Jonathan Chevreau: http://www.financialpost.com/personal-finance/rrsp/RRIF+rebels+take+RRSPs+dark+side/4185870/story.htmlVinniehttps://www.blogger.com/profile/08657339755946151354noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-82719387216064089862014-08-28T14:54:00.881-04:002014-08-28T14:54:00.881-04:00@Retail Investor: Once people get the idea that a...@Retail Investor: Once people get the idea that a fraction of their RRSP contents isn't really theirs, the next logical conclusion is that the RRSP profits on the part that is theirs isn't taxed.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-57801904798747787652014-08-28T14:39:24.604-04:002014-08-28T14:39:24.604-04:00Another way to argue the same points is to dispute...Another way to argue the same points is to dispute the claim that profits earned in the registered accounts are taxed on withdrawal. They need that presumption for their argument (that the deferral of a preferential tax rate is worth less than the eventual 100% tax rate on the profits at withdrawal).<br /><br />Yes, RRSP withdrawals are taxed, but you cannot say that the profits earned in the account are taxed. The tax $$ are an allocation of principal. They are paying back to the government its original loan to you plus all the income it earned. Watch the 2nd video of the series https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxgRetail Investorhttp://www.retailinvestor.org/RRSPmodel.htmlnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-53561562360557555002014-03-21T12:59:39.328-04:002014-03-21T12:59:39.328-04:00@Anonymous: If you don't count the refund, the...@Anonymous: If you don't count the refund, then you are quantifying it even if you don't realize it. You are valuing the refund at precisely zero on the assumption that it gets entirely wasted, which is rarely the case. I'm open to other reasonable analyses, but any analysis that simply ignores the refund is obviously wrong.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-34522114914614565692014-03-21T12:38:03.926-04:002014-03-21T12:38:03.926-04:00But you also cannot quantify peoples' temptati...But you also cannot quantify peoples' temptation to spend the refund, which is the key factor in RRSPs being effective. I think people would be more likely to spend their refund than withdraw from a TFSA.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-2800271521671869982014-03-20T13:40:46.722-04:002014-03-20T13:40:46.722-04:00@Dan: In fact, even if your marginal tax rate sta...@Dan: In fact, even if your marginal tax rate stayed exactly the same, the RRSP and TFSA cases work out the same. A dropping marginal tax rate is an added bonus for RRSPs.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-91126513505042625792014-03-20T13:13:09.227-04:002014-03-20T13:13:09.227-04:00For myth 1, I think the difference maker (as you m...For myth 1, I think the difference maker (as you mentioned) is the difference in marginal tax rates over time. From what I've come across most people (including myself) are in a higher marginal rate when they're working than when they retire. In this case an RRSP makes more sense than TFSA (or non registered). Sure, the full amount of a gain may be taxable within an RRSP but the difference in marginal rates (assuming a higher rate now than in retirement) more than makes up for the differenceDan @ Our Big Fat Wallethttp://www.ourbigfatwallet.comnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-77257864562949087802014-03-17T11:13:29.581-04:002014-03-17T11:13:29.581-04:00@Julie: I'm actually in a similar situation to...@Julie: I'm actually in a similar situation to yours. One difference is that my wife makes enough that here effective tax rates on dividends is positive. I'll think about whether it makes sense to describe what we do in a future post. However, I would never claim that anyone else should blindly follow what we do. Other people's situations may be different in some important way, and I certainly don't have it all figured out.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-85712863281727147712014-03-17T10:26:03.743-04:002014-03-17T10:26:03.743-04:00Thanks for your input... that's something I...Thanks for your input... that's something I'm definitely going implement going forward!<br /><br />I guess my overall point (beyond the discussion of my personal situation) is that many of the articles comparing TFSAs, RRSPs, etc and overall investing strategies seem to assume that each investor is single. This makes situations like mine nearly impossible (having a low salary and lower tax rate now than at retirement) except for the fact that I have access to 2 sources of income when planning the most efficient retirement strategy. <br /><br />Perhaps an analysis on retirement vehicles for couples in the future? Particularly those with significantly different incomes who can take some advantage of alternative strategies.Anonymoushttps://www.blogger.com/profile/09469045073498023756noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-76472496198199061932014-03-13T13:32:38.334-04:002014-03-13T13:32:38.334-04:00@aB: I would agree if you take into account all f...@aB: I would agree if you take into account all future effects. The RRSP refunds lead to a cascading set up refunds year after year. If not, then we have a situation where someone needs to spend their refund. In the TFSA or non-registered account cases where there is no refund, this means making a withdrawal from savings to spend.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-3710512264506951852014-03-13T13:04:47.030-04:002014-03-13T13:04:47.030-04:00+1
I think the $6000 only (with RRSP refund) is mo...+1<br />I think the $6000 only (with RRSP refund) is more applicable to people.aBnoreply@blogger.com