When I see someone declaring that RRSPs are a scam and dig into their reasoning, I find they fall into a few categories.  Here are my thoughts on each type. “I sell life insurance products whose investments are better than RRSPs.  Look at this projection.” So far, I’ve found these projections like puzzles.  How long will it take me to see the error?  Do they leave out taxes?  Do they add numbers decades apart without adjusting for inflation or investment returns? Somewhere in the columns of numbers there is a mistake or deliberate deception that makes the life insurance investment seem better than it is.  This is the part of the RRSP-is-a-scam crowd that I have the least patience for. “Now that I’m 72, look at how much income tax I have to pay!” They’ve spent their adult lives enjoying tax refunds from RRSP contributions, but all that is forgotten now.  For a million-dollar RRIF, the minimum withdrawal based on age 72 is $54,000.  For those with o...

We’ve heard that melting down an RRSP early can be valuable when it lowers your future tax rate on RRSP withdrawals later in retirement.  But we’ve also heard that delaying RRSP withdrawals so the RRSP can continue growing tax-free is valuable.  But not everyone agrees that longer tax-free compounding is valuable.  Who’s right?  Let’s dig in. We can make mistakes when we try to measure the value of some portfolio choice in isolation.  We have to consider all of its effects to draw a correct conclusion.  Here’s an example: Scenario 1 (RRSP meltdown) : You withdraw an amount M from your RRSP today.  If your average tax rate on the withdrawal is T, you get to keep M(1-T). Scenario 2 (no RRSP meltdown) : In a second scenario, you delay RRSP withdrawals for a decade.  Your RRSP grows by a factor of R in that decade, and you withdraw MR then.  If your future average tax rate on that withdrawal is U, you get to keep MR(1-U). It’s important to note t...

When Canadians have some money available, a big decision they face is whether to invest it in an RRSP or TFSA or to focus on paying down debt.  Dave Chilton, The Wealthy Barber, asked me how I thought about this choice on his podcast .  Here I give a fuller answer to his question. This is really two separate questions.  The first is whether to invest savings or pay down debt.  The second is whether to put savings you’ve decided to invest into an RRSP or a TFSA. It never makes sense to invest ahead of paying down high-interest debt.  We could make a case for starting to invest a little, just to start the habit, but paying down high-interest debt should be the initial priority.  This leaves the question of whether to invest or pay down your mortgage. Invest or pay down your mortgage A popular answer to this question is that you expect to make about 7% per year on your investments, but your mortgage is only 4%, so you should always invest.  This is right ...

The high MERs charged by some employers’ group RRSPs can be frustrating.  But these fees seem small compared to the employer matching of employee contributions.  A recent guest on The Wealthy Barber podcast said “those [group RRSP] fees aren't going to eat that [contribution matching] up over time.”  Challenge accepted!  People, including experts,  consistently underestimate the corrosive effect of high MERs over long periods of time. It’s not my intention to be overly critical of David Chilton or his guest Brian Orlando.  They gave some great information for helping Canadians with their finances.  But I do want to explain how high fees can consume an employer match faster than we might expect. An example The podcast segment began with the example of 2.5% MERs in the group RRSP.  So, let’s compare two scenarios for a hypothetical employee Evan: Group RRSP Evan’s contributions are invested in a crappy closet index global stock fund with 2.5% MER....

Recent Rational Reminder podcasts ( 319 and 321 ) have had a debate about tax rates on RRSP contributions and withdrawals.  Most people agree that when you contribute, you’re lowering your taxes at your marginal tax rate.  The debate concerns withdrawals.  Some say that RRSP withdrawals come at your “average, or effective tax rates, not your marginal tax rate.”  Here, I address this question. With Canada’s progressive tax system, the first part of your income isn’t taxed at all (or is taxed negatively when you consider income-tested government benefits), then the next part of your income is lightly taxed, and marginal tax rates increase from there as your income rises. A question that comes up in my own portfolio accumulation and decumulation planning is what order to stack income each year.  Is it CPP and OAS that are taxed lightly and RRSP withdrawals taxed more, or should I stack the income in some other order?  What about other income from non-register...

Recently, I was helping a young person with his first ever RRSP contribution, and this made me think it’s a good time to explain a confusing part of the RRSP rules: contributions in January and February.  Reader Chris Reed understands this topic well, and he suggested that an explanation would be useful for the upcoming RRSP season. Contributions and deductions are separate steps We tend to think of RRSP contributions and deductions as parts of the same set of steps, but they don’t have to be.  For example, if you have RRSP room, you can make a contribution now and take the corresponding tax deduction off your income in some future year. An important note from Brin in the comment section below: “you have to *report* the contribution when filing your taxes even if you’ve decided not to use the deduction until later. It’s not like charitable donations, where if you’re saving a donation credit for next year you don’t say anything about it this year.” Most of the time, people t...

The financial products available today can make do-it-yourself (DIY) investing very easy, as long as you don’t get distracted by bad ideas.  Here I map out one possible lifetime plan from early adulthood to retirement for a DIY investor that is easy to follow as long as you don’t get tempted by shiny ideas that add risk and complexity. I don’t claim that this plan is the best possible or that it will work for everyone.  I do claim that the vast majority of people who follow different plans will get worse outcomes. Most of my readers will be more interested in the later stages of this plan.  Please indulge me for a while; the beginning lays the foundation for the rest. Starting out Our hypothetical investor – let’s call her Jill – is at least 18, currently earns less than $50,000 per year, and has a chequing account at some big bank.  She has a modest amount of savings in her account earning no interest.  It’s about time she opened a savings account to earn some ...

We can only buy food with after-tax money, so it might seem obvious that we should take into account taxes in any financial decision. However, Justin Bender, portfolio manager at PWL Capital, has some reasons why you might ignore income taxes when when calculating your portfolio’s asset allocation. Justin has created a series of excellent articles going over a great many issues do-it-yourself (DIY) investors need to understand. The articles are organized as a series of portfolios with decreasing costs, but increasing complexity. The portfolio names are inspired by the comedy movie Spaceballs : Light , Ridiculous , Ludicrous , and Plaid . My focus here is on accounting for taxes in your asset allocation, but this is only a small part of the many useful ideas Justin explains in this series. The main difference between the latter two portfolios in the series is that the Ludicrous portfolio ignores taxes when calculating asset allocation, and the Plaid portfolio takes taxes into ac...

It’s tough to watch your hard-earned savings dwindle in the COVID-19 stock market crash, particularly if you’re retired or getting close to retiring. For this older crowd, retirement savings mostly means declining RRSPs or RRIFs. But I have some good news. When you withdraw from your RRSP or RRIF, the amount becomes taxable income for the year. This leads to paying income taxes on the withdrawal. Suppose you’re destined to pay 25% tax on your withdrawals. Then you might as well think of your RRSP or RRIF as being 75% your money and 25% CRA’s. CRA is right there beside you watching its share bounce up and down over the years. So, if you’ve seen your tax-deferred savings drop $100,000 recently, only $75,000 of it is your loss. The remaining $25,000 is CRA’s loss. Focusing on CRA’s loss might make this whole experience a little less painful. Many thanks to Justin Bender at PWL Capital for inspiring this article when he told me “During the March 2020 downturn, I didn't re...

Every so often we see calls for the government to eliminate mandatory minimum RRIF withdrawals. Ted Rechtshaffen writes this “win-win change would be cheered by seniors and likely lead to higher taxes in the long run.” He fails to mention the tax-planning strategies it opens up for wealthy seniors. Under current rules, Canadians have to turn their RRSPs into RRIFs and make minimum withdrawals by age 71. These withdrawals are taxed as regular income. Wealthier Canadians who don’t need this income tend not to like having to make these minimum withdrawals. Here are a few ideas for tax planning if the government eliminates mandatory minimum withdrawals. Marrying a much younger spouse Normally, when you die, all your remaining RRIF/RRSP assets become taxable income. An exception is that you can pass these assets to a spouse’s RRIF without any tax consequences. Currently, this tends to happen after a RRIF has been depleted by mandatory minimum withdrawals. Without these withd...

When it comes to investing, we should keep things as simple as possible. But we should also keep costs as low as possible. These two goals are at odds when it comes to choosing between Canadian and U.S. exchange-traded funds (ETFs). However, there is a good compromise solution. First of all, when we say an ETF is Canadian, we’re not referring to the investments it holds. For example, a Canadian ETF might hold U.S. or foreign stocks. Canadian ETFs trade in Canadian dollars and are sold in Canada. Similarly, U.S. ETFs trade in U.S. dollars and are sold in the U.S. Canadians can buy U.S. ETFs through Canadian discount brokers but must trade them in U.S. dollars. Vanguard Canada offers “asset allocation ETFs” that simplify investing greatly. One such ETF has the ticker VEQT. This ETF holds a mix of Canadian, U.S., and foreign stocks in fixed percentages, and Vanguard handles the rebalancing within VEQT to maintain these fixed percentages. An investor who likes this mix of glo...

For years, a big personal financial focus for me and my family has been making annual RRSP contributions, but no more! I’m done with RRSPs. Or at least I’m done with contributing to them now that I’m retired. It’s a strange feeling to contemplate starting to withdraw from RRSPs/RRIFs. Long-time successful savers often have a hard time turning off the saving habit, and I’m no different. My spreadsheets that contain multiple layers of conservative assumptions tell me how much I should be spending each month, but I rarely get there. RRSPs are a great personal finance tool to reduce income taxes over a lifetime. But, barring unforeseen new sources of income, I expect that the RRSP room created by my 2017 income will go unused. Instead, I expect to make annual withdrawals starting at the end of 2018 to use up my lightly-taxed income room. I’m interested in hearing from others about how it felt to transition from being savers to spenders.

Recently, Jonathan Chevreau wrote about a way to try to save money on taxes called “liberating your losers” from your RRSP. It’s no fun owning a losing investment, and when it’s in your RRSP, you don’t even get a capital loss for your taxes. Chevreau offers a way to reduce the sting. Unfortunately, it doesn’t work. The idea is to withdraw a losing investment from your RRSP so that when it rebounds, you’ll only pay capital gains taxes on 50% of the increase. If you leave the investment in your RRSP you’d end up paying taxes on 100% of the increase when you eventually withdraw the assets from your RRSP/RRIF. According to Chevreau’s broker friend, this makes sense “when you have had bad timing in your RRSP/RRIF investment choices; when you're confident your investment will return to its previous higher value; and if you prefer to pay tax on 50 per cent of a capital gain rather than 100 per cent of income.” The first condition just means you’ve made an investment that lost mon...

A reader, R.V., asked the following thoughtful question about investing in a non-registered account: “As I approach maxing my registered accounts, I need to start thinking about perhaps opening up a non-registered account. At present, I do the following: TFSA: TD e-series funds (25% each of Bonds, CAD Index, US Index, & Int'l Index) RRSP: 70% VXC and 30% VAB via a brokerage account For Non-reg, I was thinking of HXT. Benefits of a swap-based ETF is no dividend to worry about and only need to be capital gains tax upon selling. Do you have any comments and/or recommendation on some non-reg ETFs? What do you normally buy for your non-reg account?” To start with, R.V. is obviously handling his finances very well given that he has maxed out his RRSP and TFSA. He has also chosen good diversified low-cost index mutual funds and ETFs. If he can stay invested and not tinker too much with his asset allocation, I’m optimistic about his future. I don’t give financial advi...

It’s common in high tech for employers to pay annual bonuses to most employees. Those who run a company’s group RRSP like to make an enticing offer: “transfer your bonus into your group RRSP TAX-FREE!” They make it sound like this is a special privilege where you’re getting some huge tax advantage, but this isn’t true. To start with, any amount you transfer into your group RRSP counts against your RRSP limit, so be careful not to contribute too much. The next thing to understand is that the only tax advantage of transferring a bonus to a group RRSP is the timing of your tax refund. Let’s look at an example. Suppose Alice and Ben are both in a 40% tax bracket and both get a $10,000 bonus. Alice puts hers in a personal RRSP account, and Ben contributes to his group RRSP. Alice’s employer will deduct $4000 in taxes from her bonus and give her $6000. If Alice has another $4000 kicking around, she can make a $10,000 RRSP contribution and get her $4000 back as an income tax refun...

Many companies offer their employees a group RRSP rather than a defined-benefit pension plan. The main attraction of a group RRSP is that the employer often matches employee contributions with an additional 50 cents to a dollar on each employee dollar. Such plans have embedded costs as well. Here I look at my own plan’s costs to examine which are providing value and which are not. There are actually more parties involved in our group RRSP than I initially guessed: Employees : Those who save money and invest it in their personal accounts within the group RRSP. Employer : Main functions are to hire a benefit services expert and match employee contributions (with an extra 50 cents on the dollar in my case). Benefit Services Expert : Hired by the employer to help choose a group RRSP provider and set up the plan to suit the employer’s needs. Also performs ongoing negotiations with the group RRSP provider to make changes such as lowering fees or changing the available investments...

I liked Preet Banerjee’s recent book Stop Over-Thinking Your Money so much that I decided to read his older book RRSPs: 41 Strategies Canadians Need to Know about our Country’s Greatest Tax-Planning Tool . I thought I knew a fair bit about RRSPs, but Banerjee managed to teach me a few things. If you decide to read this one, keep in mind that it is 6 years old and that some RRSP rules have changed. As far as strategies go, the biggest change in that time has been the introduction of the TFSA. The 41 strategies are aimed at a wide range of investors. The earlier ones tend to be for beginners, and the later ones are more advanced. Banerjee’s command of RRSP rules and strategies make it worthwhile to read this book with the caveat that you should confirm that anything you plan to use hasn’t changed since 2008. The following are some points that were interesting or new to me. Be sure to check that the rules haven’t changed. If you hold your mortgage in your RRSP and fail to m...