I’ve maxed out my TFSA and RRSP. Now what?
Seriously, what a great problem to have!
Mark, I’ve maxed out my TFSA and RRSP. Now what?
Read on…
Here are some recent reader questions and comments (adapted for site):
Reader 1:
“I’ve finally been able to max out my TFSA and RRSP. I’m 41. Now what? Should I consider investing in a taxable account? If so, what should I own?”
Reader 2:
“Mark, I’ve been reading your site for years. I’ve put a priority on paying down our mortgage for many years now, and striving to max out our kids’ Registered Education Savings Plan (RESP) every year for their financial future. Those have been priorities number one and two for years.
When the TFSA came along, I thought it would be an excellent place to keep our family emergency fund for our house repairs and small renovations in a tax-free way but I’ve since realized by reading your site that I should have thought of this as an investment account (like you did) since day 1. I now invest in low-cost ETFs inside this account and I’ve never looked back! I have a six-figure portfolio thanks to you!
Now, with the mortgage balance down the high-five figures; RESPs maxed for our two kids and now our TFSAs maxed out as well – I’m thinking we should work on maxing out the RRSPs like you have and eventually get into taxable investing if we can.
Thoughts on my approach?”
Reader 3:
“Mark, I have been an avid reader of your blog for the last two years but this is my first intervention 🙂 Better later than never! My question today is how I can diversify my portfolio even more?
I’ve maxed out my registered accounts (RRSP: $32,000 in VEQT and TFSA: $75,000 also in VEQT) and invested significant chunks of money in a non-registered account ($50,000 in VEQT). I’m also helping my cousin with his RESP. I’ve also got an emergency fund with Tangerine.
At only 29, and single, I think I am off to a good start but it would be nice to find more ways to diversify my investments. I still have another $10,000 that I want to invest. What are some options?
- Real estate? (not sure about this) Maybe Real Estate Investment Trusts (REITs)?
- Crowdfunding?
- Peer-to-peer lending? (seems risky)
- Other?
Looking forward to your thoughts Mark!”
Wow, great stuff readers.
I mean, people thinking about investing inside your taxable accounts after your registered accounts are maxed; readers paying down their mortgage while diligently investing; folks wondering how to invest in a taxable account now that their emergency fund, TFSA and RRSP are managed and full – amazing stuff!
Get invested and stay invested!
Now, what should these readers do???
“It depends.”
I’ve maxed out my TFSA and RRSP. Now what?
With the TFSA and RRSP now full, I think this reader and other investors in this situation have plenty of options for your additional cash flow.
I would be curious if this reader had any debt? If so, I would tackle that. If so, and it was a very manageable balance, then I would absolutely consider to start investing in a taxable account.
You can read about some of the tax-efficient methods to invest in that account here.
I use the following set-up for some tax efficiency related to my income goals, your mileage may vary!
TFSA |
RRSP |
Taxable Account |
· Canadian dividend paying stocks.· Canadian REITs.· Growth oriented low-cost Canadian ETFs. |
· Some Canadian dividend paying stocks.· Some U.S. dividend paying stocks but more and more over time U.S. ETFs. |
· Canadian dividend paying stocks to tax advantage of the dividend tax credit when I’m not working in a few years. |
Now, you’ll notice I have no bonds or GICs or lots of foreign equity above.
That’s because I’m striving to own more foreign equity via U.S. ETFs over time.
I also don’t own any bonds or GICs because bond yields are terrible now (and likely will be for decades to come…) and I am very fortunate to have a workplace pension that is essentially a big bond. So, I figure to maximize my portfolio returns I might as well own equities over bonds long-term. So far, so good on that one.
Beyond any strategy above, I would further consider this investor to think about owning any Canadian non-dividend paying stocks for growth and/or potentially U.S. non-dividend paying stocks for the same reasons.
Why?
Capital gains (if and when you have to pay them) are a great form of taxation all things considered.
On the other end of the spectrum, fixed income and international dividends are taxed at 100% of your marginal rate. This means holding these assets in a taxable account, is tax “poor”; it therefore makes more sense to own these types of assets in tax-sheltered accounts such as your TFSA, RRSP, LIRA and other registered accounts.
What exactly should the investor own? That’s totally up to them and their investment goals of course!
Taxation is a factor when it comes to investing but it shouldn’t drive all your decisions.
Time to work on maxing out RRSPs and then onto taxable investing – thoughts?
“Now, with the mortgage balance down the high-five figures; RESPs maxed for our two kids and now our TFSAs maxed out as well – I’m thinking we should work on maxing out the RRSPs like you have and eventually get into taxable investing if we can. Thoughts on my approach?”
I love your approach!
While I can’t speak to the income bracket this reader/investor is in, I suspect if he/she can pay down their mortgage, max out the kids’ RESPs (x2 it seems), max out their TFSA, and they’re already thinking beyond the RRSP to taxable investing – they are doing OK!
Although I didn’t follow this advice myself (I have since learned), I would absolutely advocate maxing out all tax-sheltered accounts before any taxable investing.
Why?
Simply put: why pay taxes (or capital gains if there is a sale for any appreciated stock) if you don’t have to?
Best to maximize the power of tax-free (thanks TFSA) AND tax-deferred (thanks RRSP) investing as much as possible.
This is why I suggest all Canadians work hard to max out their TFSAs, first, like you are doing reader before striving to max out their RRSP. Besides, if you can consistently (or easily) max out your TFSA every year (and maybe the TFSA of your spouse as well without fail) then:
- you’re probably making decent money to contribute to your RRSP anyhow after than, and/or
- you’re disciplined enough to contribute to your RRSP and not waste the refund to appropriately maximize the tax-deferred account benefits.
By following this approach myself, my TFSA is now worth 6-figures and my RRSP is maxed out as well.
Age 29, I’ve maxed out my TFSA and RRSP, now what?
Party and travel abroad!
Kidding, somewhat…
Congratulations and yes, you’re “off to a good start” for sure…especially owning one of those low-cost ETFs like VEQT for built-in diversification and long-term growth.
What are some of your options for taxable investing?
I highlighted some of my favourite options above so personally I would stay away from peer-to-peer lending, crowdfunding and other similar avenues. I mean, sure, you could probably get good returns and potentially luck out with some of your choices but I think someone as smart as you who learned to invest in low-cost, diversified funds, should likely continue on that path.
You already own VEQT. That fund holds thousands of stocks from around the world, including some from Canada in the fund’s top-10, for a rock-bottom fee. With a long investing horizon, you’ll surely be rewarded. You’ve figured out the game already.
Image below from Vanguard site:
The greatest stock market returns over time have typically come from a) being a boring investor/staying invested who b) retained ownership in a broad basket of common stocks or owned an index fund that held those stocks and many, many more. If history has any form of repetition, the same goes for our foreseeable future.
Real estate eh? I wouldn’t rule that out but certainly there are risks and headaches with being a landlord.
We were landlords once but it wasn’t for us. I ended up gravitating to REITs since I wanted to remain a landlord but without all the headaches. I have enjoyed that type of real estate ownership ever since.
I’ve maxed out my TFSA and RRSP summary
For many Canadians or my American friends as well, the goal to max out contributions to your registered accounts first is both aspirational and potentially rewarding. As referred to above, taxable investing should likely only occur after registered accounts are fully maxed out.
I mean, why get taxed on investments when you can invest tax-free (TFSA) or tax-deferred (RRSP) first??
Taxable investing, or simply what to do with your cash when your registered accounts are out of contribution room becomes a bit more complicated. For any taxable investing, you’ll have the added complication of managing your adjusted cost base. This must be done to accurately tabulate any rolling baseline for the costs of the assets you purchased over time against what you actually sold those assets for – thereby calculating capital gains or losses.
Beyond investing, there are also the subjects of increasing your charitable giving or simply spending any excess funds to celebrate your hard-earned investing ways. Either one could be why your personal finance plan is personal.
Whatever you choose, to any and all readers that max out their TFSA and RRSP like I strive to do every year and then wonder what’s next (?) keep up the great work. You’re on a fine path to financial prosperity!
Thoughts on what these readers should invest in? Why change something that isn’t broken? Any successful retirees out there wish to weigh in on this nice to have problem for GenY and GenX?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I notice a lot of comments about not maxing RRSP because of one’s lower income bracket. People should realize that you are able to contribute the maximums every year, and not claim the the amount for a tax refund.
So in other words, you can use the account to have tax-deferred growth while saving those tax credits to claim at a future time once you do move into a higher bracket.
Well said Joe. I think that is very smart long-term planning you’ve picked up on that many investors in a lower income bracket might ignore. Too bad. I captured that element in my RRSP 101 post too.
https://www.myownadvisor.ca/tax-deferred-investing-rrsps-101/
Good stuff 🙂
I am surprised how many comments concerned not maximizing RRSPs due to future taxation issues. In today’s investment environment, crazy things never seen before are happening, i.e.: negative interest rates, environmental degradation, global climate change, runaway debt in Canada, overpriced real estate backed with huge mortgages, a southern neighbor running up their own national debt at never seen levels, oceans fished out and awash with micro-plastics, trade wars etc. I realize that many of your readers will not see eye to eye with my analysis but the fact remains that food prices (for good fresh healthy produce, not junk food) have been going up by margins far higher than the government’s official inflation rate.
I am suggesting that many may find retirement far more expensive than they imagined. Our wonderful health care system has sadly been left to wither due to our politician’s desires to find stupid ways to spend money for what they hope will be their own lasting legacy! Capital gains rates could easily go back up to 66%. In other words, one should never assume that the future will be exactly like the past and one’s future costs may be far higher than expected. As our government finds more ways to waste money, the demand for ever more revenue will only increase taxation. Sadly, only hindsight is 100%.
Lastly, I have yet to see anything relating to US estate taxes. Owning US stocks is considered the same as owning US real estate. If one happens to die with over 60,000 US$ in stocks (RRSP, TFSA, etc), very complicated forms must be filed with the IRS and failure to do so within short time limits means onerous penalties. Today, about 10 million is tax exempt however that ends in 2025. Considering the US’s great appetite for increasing debt presently, this could all change drastically as the US$ is debased. So maybe, that is why the CRA insists on taxpayers filling out Form T1135 and I suspect that this info is passed on to the IRS, part of the sweet hard deal made with the US.
In conclusion, shedding light on this topic would be greatly appreciated. Thanks
I don’t get the “but I have to pay tax on the RRSP withdrawals” issue either.
It was never tax-free money. How many people don’t get this I don’t understand but it’s also why I always try to refer to the RRSP as a tax-deferral strategy.
“In other words, one should never assume that the future will be exactly like the past and one’s future costs may be far higher than expected.”
Totally agree and yes, sadly, our government is not very efficient but other than voting there is really very little I can do to change that machine…
re: I have yet to see anything relating to US estate taxes.
Oh, I did write an older post on that:
https://www.myownadvisor.ca/death-and-taxes-and-taxes-in-death-u-s-estate-taxes/
Another related article on T1135; older stuff, not direct tax advice either 🙂
https://www.myownadvisor.ca/note-to-cra-foreign-income-reporting-doesnt-need-to-be-a-foreign-concept/
Let me know if my articles on such subjects helped?
Mark
Comment:
Ultimately the power in the RRSP is the tax-deferred growth and the fact you can contribute to the account when your income is high and withdrawal when your income is low. Taxable is always taxable but you can buy assets in the taxable account purely for capital gains and defer for many years.
My understanding is, is some cases, a lender cannot come after your RRSP assets.
https://www.theglobeandmail.com/globe-investor/personal-finance/how-to-protect-your-retirement-funds-from-creditor-claims/article549663/
Thanks Mark for your very informative (as always) comments. Regarding the tax advantage of the non-registered a/c v/s RRSP a/c, what I was referring to and should have added to my earlier comments was if the investor is a retiree and has no more earned income to report. Thus, it would not be tax beneficial for him to contribute more to his RRSP to take advantage of the tax deduction. Instead it would be more tax beneficial to contribute to a regular investment a/c to take advantage of the 50% capital gain exemption. When it comes time for the retiree to withdraw his RRIF and is added to his CPP, OAS and other income streams, the taxable income level is the same or higher than what he contributed and deducted during his working years, there won’t be any tax advantage. This is when the capital gain from his regular investment a/c is more beneficial. Am I right?
Regarding the protection of RRSP and TFSA accounts from creditors if the contribution moneys were borrowed from the banks, and without the investor declaring bankruptcy, I assume the banks and other creditors cannot seize or forfeit the RRSP and TFSA accounts. I could be wrong. A different scenario I was thinking about is if the RRSP and TFSA accounts (without any borrowed moneys) that are transferred from a husband to his wife who has huge outstanding loans on her personal unsecured lines of credit, can any lenders seize the RRSP and TFSA of the wife to pay off her unsecured loans? Any comments would be greatly appreciated. Thanks so much Mark for your input.
Ah yes, now I see Ken….thanks for the clarity….
Given the RRSP account structure, I agree, there is no tax advantage between non-reg. vs. RRSP assuming you stay in the same tax bracket for good. You either pay today or pay later. This is generally speaking of course. 🙂
Capital gains are a very efficient form of taxation, all other means considered.
“When it comes time for the retiree to withdraw his RRIF and is added to his CPP, OAS and other income streams, the taxable income level is the same or higher than what he contributed and deducted during his working years, there won’t be any tax advantage.”
Correct. This makes the RRSP one of the best accounts for tax arbitrage per se. Contribute when income higher than any retirement income withdrawals. Otherwise, if you withdraw $$ at a higher than you contributed, you would have been better off with non-registered investing.
I actually don’t know what creditors can or cannot seize, I recall RRSP no but not sure of TFSA; I suspect it’s messy!
https://www.hoyes.com/blog/rrsp-bankruptcy-laws-canada/
So, don’t let it happen? 🙂
All the best,
Mark
Maxing out RRSP & TFSA is great and investing in non-registered a/c is another good option. To me, the non-registered a/c provides more tax benefits v/s the RRSP a/c since all withdrawals from RRSP have to be added back to income and taxed at the marginal rate. The gain in the investment a/c is taxed at 50% (the taxable gain) at the marginal rate and given the tax free gain of 50% is allowed, I find it’s more beneficial to invest in an investment a/c even if there is still contribution room left in the RRSP a/c. Am I missing something here?
To digress from this subject of maxing out, I have one question that may interest many readers. If someone has borrowed money (say $100K) from their unsecured lines of credit to max out their RRSP and TFSA accounts and failed to pay back the borrowed amount, can the banks go after that person and seize the RRSP and TFSA accounts to repay back the unsecured loans? This question is of great relevance given that in the current economic environment, countless people are highly indebted, especially in Canada where people are carrying enormous debts. Any feedback would be greatly appreciated.
Ultimately the power in the RRSP is the tax-deferred growth and the fact you can contribute to the account when your income is high and withdraw from the account when your income is low. Taxable is always taxable but you can buy assets in the taxable account purely for capital gains; avoid selling such assets, and therefore defer gains for many years.
My understanding is, is some cases, a lender cannot come after your RRSP assets.
https://www.theglobeandmail.com/globe-investor/personal-finance/how-to-protect-your-retirement-funds-from-creditor-claims/article549663/
I would have to speak to an insolvency trustee for sure to confirm this and other accounts for sure.
I don’t worry about which registered is the best, just max out all of them and then some in the taxable account. I understand I belong to the lucky ones. Looks like quite a lot of Mark’s readers are in the same group.
I don’t put a cap on our RRSP accounts. As most likely we will retire before 60 and we will delay CPP/OAS. So there will be more than 10 years for us to reduce our RRSP as we won’t have any pension. For at least 10 years, RRSP and taxable accounts will be our only source of income. I also plan to continue to max out TFSA every year before we depleted RRSP and taxable.
There could be other ways to melt down the RRSP faster. For example, implement SM portfolios, borrow on margin to invest, etc. Of course, leveraging to invest is quite risky. But if one has too much RRSP and be able to afford the risk, then why not.
At this moment, I decide not to let the tax tail to wag the investment dog.
I’m in the same place as you May, I have no pension so max RRSP, then TFSA and then taxable with the intention of melting down the RRSP while delaying CPP and maybe OAS. A lot depends on when retirement happens so things may need to evolve.
I havent borrowed to invest out of risk concern as well but should a major correction occur I might consider it.
If a person is in a position to max both, and then some unregistered I totally agree May. You’re doing it right. IMHO there is some flawed assumptions out there about how to determine what is best so those choosing need to do their homework.
All I had was pretty much RRSP as far as advantaged accts. Due to career issues I saved nothing since 2007 (age 48) about 4 years before semi retiring and 7 years before fully retiring. I had a small DC pension that accumulated a few dollars. We pushed some $$ into unregistered as well as the RRSPs in savings years. Since the TFSA introducton in ’09 we have transferred money from cash and RRSP to max these and also contributed a small amount annually into unregistered since retiring. Probably will have wife take CPP & OAS at 65. Me OAS @ 65 and possibly CPP@ 70. We’ll see.
I also don’t put any proposed cap on our RRSP. We’re trying to continue to max out all big four accounts (x2 TFSA, x2 RRSP) and pay off our debt in a few years. We’ll see where we “end up” with that strategy. If it’s a combination of > $1 M portfolio and a paid off condo worth about $800k, we will have been a) lucky and b) done well I think.
I could also do other things like SM, heavy leveraged investing, etc. but why bother. 🙂
Despite rates being historically low, I decided to pay off my mortgage once my RRSP and TFSA were maxed out. It’s only been 3 months since I paid off my mortgage but I haven’t regretted it one bit! The extra cash flow I now have gives me such great flexibility for investing and I’ve been able to loosen the purse strings a little without feeling too guilty, knowing my yearly budget is now quite modest and I have extra cash set aside for life emergencies. In this particular case, the decision to pay off my mortgage was based on psychology and not math.
I have no doubt that being debt-free is very liberating…I hope to get there as well someday Karl!
There is absolutely psychological benefits with any financial decision that can trump math. Nothing wrong with it, the key is to understand it as you have.
Option for parents that are in the enviable position of having everything “filled up”….if you have adult children starting out, offer to match their TFSA contributions.
Very smart. Good addition for the article.
Good discussion here. I agree and have always put US dividend payers in the RRSP to grow tax free. But should have capped at 500K as Ben-R said. Now we have to figure how to get it out before the taxman takes half of it.
I say max your TFSA’s first and use the RRSP to reduce taxes now depending on your income. But always remember there will be tax at the other end. But what a problem to have.
Interesting to hear about your “cap” at $500k. Is that because when you factor is all other sources of income, you might be in a higher tax bracket or taxed more in retirement vs. working years?
Yes, the dividend strategy has worked so well that we more than doubled our initial goal for retirement. the only problem is that over half of it is in RRSP’s. Our income is more than double what we made working and don’t have to sell any shares.
Wow. “Our income is more than double what we made working and don’t have to sell any shares.” That’s really amazing. Congrats.
Double? Well done goes to show this approach really works. Sorry but it looks like you will be having a good tax problem:)
That will be a great problem though!!
Lot’s of great stuff here as usual. Love these reader question editions Mark, please keep them coming.
My portfolio:
CA holdings in RRSP and TFSA US/INTL holdings in RRSP. Mostly hold Canadian dividend paying companies with international footprints, US/INTL mostly held in ETF’s, no material non registered investments to date other than some P2P lending which I’m not exited about. Not planning to rely on Cap gains to fund retirement.
IMO TFSA is always #1 and should be maximized every year the others are more nuanced and based on my situation (<10 years from retirement) folks in their 20's, 40's or 70's will have a different perspective.
1- TFSA (more tax free income is better)
2- RRSP/SPRSP (tax efficient returns + tax credits + lower tax on part of retirement income)
3- RESP (free money + the kids more likely to pay their own way and leave = FI)
4- Mortgage (no FI with a mortgage)
5- Taxable investments only when #4 is gone and #2 is near it's cap
I do not believe one should simply max out one's RRSP without understanding the future income/taxation implications. Mine will be capped at $500K any more simply generates tax inefficient income when I add in CPP/OAS/DB/RIF.
Will look into holding US equity in TFSA some more, intrigued..
Will try Ben-R!
“Not planning to rely on Cap gains to fund retirement.” Same!!
Good plan on #1-5.
Like my other comment to DivInvestor – is your plan to “cap” at $500k because you’re worried your taxes will be higher in retirement vs. working years?
I am considering for 2021 TFSA, putting some U.S. low-divided payers inside the USD $$ side of the TFSA. Need to think that through but looking for more U.S. exposure.
$500K is not a hard cap but assuming a 5-6% return it would generate $25-30K PY any higher would potentially put me in a higher bracket based on today’s tax rates. I’d still be in a lower bracket vs today however I do not want to have to save extra just to pay more tax so best not to over contribute. One way to deal with the too much income issue would be to split my RRSP in two, convert one to RIF and start drawing down early while the other accumulates with tax benefits. That would be a nice topic for this site actually I’m sure your readership has opinions on this:)
For my 2021 TFSA I might actually look at US growth options, find US is not really good for Div investing (APPL is the exception)
Also like Lloyd’s TFSA match suggestion.
Makes sense, re: $500k delivers $25-$30k per year and therefore with other income sources, could be an issue for OAS clawbacks. A good problem to have 🙂
Yeah, not sure about 2021 TFSA. Got 11 months to figure it out but leaning on a CDN ETF that holds U.S. stocks or just some U.S. stocks that pay little dividends but more growers. APPL could be an option…
We’ll see!
At the risk of opening up the term vs perm debate once again, I’m surprised to see that there’s no mention of permanent life insurance here – especially if there’s no existing cover in place. Tax-efficiently load up a permanent plan to build cash values and later in life cash out the policy for a mostly tax-free payout – or leverage the cash value to take out a loan with your FI (proceeds of which are also tax-free). It’s not for everyone, but there are many cases where it’s a very viable option.
Possibly Kevin. Personal finance is personal!
Great article (as always) and very interesting discussion re: holding foreign dividend-paying equities in a TFSA vs. RRSP. Some comments seem to indicate that holding in TFSA is preferable (15% withholding per year instead of taxed upon withdrawal)…. but isn’t this ‘benefit’ not negated by the fact that the foreign dividend-paying equities grow tax free UP TO the point of retirement in the RRSP? As opposed to an annual TFSA withholding UP TO the point of withdrawal? I have not modeled this out, but I would be curious about anyone’s views on this.
I’ve heard this from some investors Adam – they like using the USD $$ side of their TFSA for U.S. growth stocks. Seems like a good idea if you have already exhausted the RRSP room. Thoughts?
No mention if there is a pension involved in the future. If you have a DB pension coming your way then order could be TFSA, RESP, Unregistered, RRSP, Mortgage
1st – TFSA no brainer and I like what Ron said about paying 15% now vs higher rate from RRSP later, hadn’t thought of it that way
2nd – RESP – free money from Gov’t savings grant – Family plans over individual plans
3rd – Unregistered – tax on 50% of capital gains, dividends, and chance to offset capital gains with capital losses
4th – RRSP – those with DB pension should not let their RRSP get big. They are probably limited with how much they can put in anyway due to pension adjustment. They will get pushed into same or higher tax brackets when hit 71 almost guaranteed. Take RRSP out before 71.
5th – Mortgage last – we have had it drummed into our heads to get the debt gone and I understand why. Get the debt under control. Mortgage rates are at historic lows 2.5%-3.5%. Lock into a 5 year fixed and keep paying mortgage and instead put the extra money into the market. If interest rates start to rise you could always pay off a chunk or all. Why take a 2.5% gain when in 2019 you could have made 20% plus with almost any index fund? But hey, do what helps you sleep well at night.
I think I had a small line or two about my personal pension being a big bond but I see your point. Definitely a consideration…
The challenge is if you want to retire early/have some form of semi-retirement then you likely need some taxable income and that conflicts with the pension waiting in the wings. If I planned to work at my current employer for the next 20 years full-time, I wouldn’t need to add another cent to my portfolio.
That said, why would I do that if I have potentially other options including working part-time in another 5 years?
With rates where they are now, folks with a small mortgage, can likely carry that and instead strive to max out all registered accounts including RESPs if they have kids. Otherwise, debt should be a priority because owing lots of money is an anchor for other things.
This is the situation I’m currently in as I move towards retirement (< 10 years).
TFSA, RESP maxed out, no mortgage & debt but with a DB pension coming and still has RRSP contribution room. I don't want to end up with the same or even higher tax bracket after retirement. It would be good to know what is that threshold for RRSP when it then becomes no benefit?
Sharon,
You seem to be a great shape! “TFSA, RESP maxed out, no mortgage….” If you have a DB pension, that’s gold!
It really depends on what you what you want to spend in retirement – how to smooth out taxes.
No obligation for our services at Cashflows & Portfolios but do consider reaching out and we can run some math for you!
https://www.cashflowsandportfolios.com/contact-us/
https://www.cashflowsandportfolios.com/
FWIW, in same boat. We have a pension coming our way but we continue to max out RRSPs for the coming 3-4 years.
Mark
Max out TFSA and Reduce RRSP
Hi Mark, I turn 70 this year and have 2 LIRAs. Next year I can unlock 50% and convert the remainder to a RIF and LIF. I will also have to convert my existing RRSPs to a RIF. I have chosen to reduce my RRSPs, pay the witholding tax while I have low income and hopefully minimize clawback. I do maximize the TFSA but am building a non-registered investment account for dividends and growth (capital gains). I do recognize that the dividends will also impact clawback but I think this will give me more flexibility to manage my income stream when I turn 71. Of course there is the other option of maxing out the RRSP before I turn 71 and spread out the tax deduction into the years after I turn 71. Would appreciate your comments.
Sounds smart Nancy to pay withholding tax and move $$$ out of RRSP at the lowest income possible. This way, you are reducing your tax liability now. I think more people really need to think about RRSP withdrawals when they have little to no other income sources to deal with. It was and has always been a tax-deferred account. So, move $$ in when income is highest; take $$ out when income is lowest.
The sooner you can get your RRSP $$ out at your lowest possible income with all other income sources considered, the better.
Having a taxable account income stream (via dividends) that is tax-efficient is going to provide you with more options once CPP, OAS or other income streams occur.
I would be curious to hear from other retirees on this but that is my personal thinking in my asset accumulation years!
Agreed, what a great problem to have!
Maxing out your RRSP makes sense if you plan to have very low (or no) income when you turn 65 (or whatever age you decide to retire). However if you plan of having lots of money coming in even after 65 (for example: business owners, independent consultant, real estate income, dividend income, massive royalties from book sales, speaking gigs….) then it doesn’t make sense to max out your RRSP, because the moment you take out any money (whether it’s dividends or capital gains) from your RRSP it will get taxed as income. Even if you wait to convert it to a RRIF at age 71, then the Canada Revenue Agency (CRA) specifies that you must take a minimum amount out of your RRIF each year. This amount is also taxed as income.
So, for those still planning to earn lots of income after 65, I think it’s best to max out your TFSA, then RESP (if you have kids), then pay down the mortgage.
You raise some good points Kanwal and you might be one of those people who have that income source problem! 🙂
I owe you a reply to your email and hope to get to it this weekend my friend – been busy!
Mark
Mathematically:
Income over 80k/year = RRSP, TFSA, Mortgage, Taxable Investment Account
Income under 80k/year = TFSA, RRSP, Mortgage, Taxable Investment Account
Sounds about right. Meaning, if you make good $$ then max out TFSA and then fill up that RRSP. If you don’t have a higher paying job, that’s OK, then make the TSFA a priority anyhow. Right?
If you make good money do RRSP first. If you make less TFSA should be the priority.
I’m always a fan of maxing out the TFSA, any income. Lower incomes, that is the only account they need to consider. Higher incomes, can likely do a bit of both.
Thanks for posting this, Mark. My wife and I have recently been blessed in an unexpected way to receive a significant inheritance from a family member who sold property (no one died!) and it just maxed out the RRSP’s and TFSA’s for us and we now have funds leftover and are deciding what to do. The timing of this post is great for us.
Great stuff and glad to hear about the windfall without any deaths! 🙂
I agree with the idea of keeping dividends in the taxable account. I think the best part of having a taxable account is that when Jan 1 hits you can just transfer cash into to your TFSA…and similar for RRSP when the Notice of Assessment arrives from CRA the cash can be transferred early in the year….no stressing as the money was already there…
Exactly what I plan to start doing in the coming years Lhm:
1. Withdraw from RRSPs – live on that via dividends and distributions.
2. Spend some taxable dividends; i.e., live off dividends.
3. Use any money not spent from taxable account to fund the TFSA every year going forward.
This way, as RRSP assets wind down in my 50s and 60s, I will have a growing TFSA account that is ideally fully maxed out.
Congratulations to all who managed to max out both their TFSA & RRSP.
Indeed. Incredible stuff for these folks.
Hey Mark,
Great information!
I’ve maxed out TFSA and RRSP as well and am focusing on my non-registered account at this point.
My 2 cents is that I prefer to hold REIT investments in my RRSP over the TFSA as I would save the high growth investments in the TFSA as at one point the RRSP will have to be converted to a RRIF and you’ll be forced to make minimum withdrawals. Granted if you’re holding US domiciled investments then you’re better of using the room in your RRSP for these investments due to withholding taxes.
-DGX Capital
Great additions to the post in that I also use my RRSP but mostly my TFSA to hold REITs since I’m very lazy when it comes to those REIT calculations.
“Granted if you’re holding US domiciled investments then you’re better of using the room in your RRSP for these investments due to withholding taxes.”
You bet, that’s me 🙂
I guess I have a different view on holding U.S. domiciled investments in my TFSA. Contrary to the above comments I would never hold U.S. investments in my RRSP. Yes you get 100% of the dividend but also yes you will pay tax on 100% of those dividends when you withdraw the monies at retirement. In my TFSA yes I lose 15% of the dividend to non recoverable withholding tax. But the remaining 85% is TAX FREE. My TFSA has U.S. investments with a cost base of $47,000 and a market value of $81,200. The resulting gain is TAX FREE. Not so in an RRSP. The dividends those investments provide approximate $3,200 of which I lose $480 to non recoverable withholding tax. The remaining $2,720 I receive is TAX FREE. The loss of $480 is a small price to pay for such tax free gains.
Yes but you what are missing is that any investment in the RRSP is taxed as income on withdrawal. Therefore say you have two investments: A, which is Canadian and B, which is US and both investments return the same in capital gains and dividends. By placing the US investment in your TFSA you are needlessly paying 15% tax on the dividends that you can avoid by putting it into your RRSP. Net, if the returns are the same you will have less money. Since there is no restriction on the % of US holdings anymore in RRSPs and long term generally the RRSP will have more room than a TFSA you can park an even larger amount of US holdings in your RRSP and save even more withholding tax.
Fair Ron, RRSP = always tax-deferred not tax-free sadly as some people might think….
So, are you putting U.S. ETFs or U.S. growth stocks vs. higher U.S. dividend payers inside your TFSA? I might consider the same in 2021 for my TFSA.
Also, you should not have any T1135 Foreign Income Reporting to deal with U.S. stocks or ETFs inside the TFSA. Is that your experience as well?
Would like to learn more about your approach 🙂
Mark
I don’t read Rons comment as having to do with people believing RRSPs don’t have tax owing. Our government evidently spent considerable time ensuring outcomes for the TFSA are the same as for the RRSP (given same situation), notwithstanding various pros/cons etc that have been discussed many times before.
It seems to be a belief that a net outcome from US dividend equity investing in a TFSA while paying 15% foreign withholding tax will be superior to doing the same in an RRSP that does not apply foreign withholding tax.
I would like to see the math on that. My believe is the same as Rob’s. All other things being equal the net result will be less in the TFSA since you will lose the 15% withholding amount and future compounding of that. The RRSP withdrawal taxes owing would only be a percentage (at your tax rate) of the equivalent of the withholding tax amount, and compounding growth on that. Logic follows that still leaves more in the RRSP (and net $$ in your pocket after withdrawal) than the zero you have after 100% loss of foreign withholding tax on US dividends in the TFSA.
But I am fine if someone can show where I am wrong with this.
I think it all depends on your tax rate really. I mean, if you have a desire to hold U.S. listed equities AND your tax rate on such equities should be <15% then owning U.S. assets inside the TFSA vs. RRSP does not make too much sense.
The challenge is: how many folks know what their tax rate will actually be in and throughout retirement? I have no idea.
That said, I think there is merit in owning U.S. listed assets inside USD portion of TFSA; especially those that do not pay heavy dividends. Take IVV or something like it inside TFSA. 15% withholding taxes would mean you’re getting about 0.3 less on your 2% yield (1.7%). You have all the growth on IVV that is tax-free. Not a bad deal and something I will consider for my 2021 TFSA room.
Yes, tax rate are certainly a consideration. ie someone with a very low tax rate probably shouldn’t even use an RRSP. I think re tax rates people approaching full retirement can do reasonable estimates, or at least project whether they would be higher or lower than being employed. A long ways out may be more difficult but for the vast majority they’re going to be lower than when working, maybe substantially. Mine is and thats what I expected many years ago. Robb Engen had an interesting piece on this recently.
My comments are primarily directed to Robs strategy. I was trying hard to see how that actually works. I can’t see how it does. But maybe I’m missing something.
Agree with you in on investing US etfs in TFSA, particularly where I think your situation is having RRSP already maxxed. Perhaps more of a comparison between TFSA and unregistered then. At some point I am going to be faced with a similar decision.
Ya, that’s where I’m struggling a bit since I don’t want to sell CDN assets to buy more USD assets in the RRSP. I have little RRSP room.
So I think using a CDN-listed ETF that owns U.S. assets OR owning some U.S. stocks, low-yielders, inside the USD $$ TFSA might be good for 2021.
Totally get that. Either choice seems like a good path given your situation.
Maybe portfolio simplicity could be an influencer as you move further along the journey.
I think so my friend! re: an influencer.
You lost me when you didn’t say TFSA contributions are made with after tax money (start with less) and RRSPs contributions are made free of tax (start with more), which is why outcome scenarios I’ve seen are equal given same tax rates etc.
That said I have trouble understanding how not paying foreign withholding taxes would be worse than paying them and not being recoverable.