RRSP facts you must remember this year and beyond!
To help you make the most of your Registered Retirement Savings Plan (RRSP) before the RRSP contribution deadline, coming up very soon (!), I thought I would list some of my favourite RRSP facts for this tax year and beyond.
RRSP facts and tips for this 2022 tax year
Fact:
You should know the deadline to make RRSP contributions for the 2022 tax year is March 1, 2023.
That’s the deadline for contributing to an RRSP for the 2022 tax year (last year).
December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP.
If you’re already lucky enough to have maxed out your RRSP and Tax Free Savings Account (TFSA), read up on how to invest in a taxable account here.
Fact:
You don’t have to wait until March every year/”RRSP season” to make your RRSP contribution.
Some investors believe “RRSP season” starts in the late-winter and early spring. Not true.
What’s important to remember is you can make your RRSP contribution from March to December, each tax year, AND/OR you can make your RRSP contribution in the first 60 days of the year that follows for the tax year (as in January 1 to March 1, 2023) up to any RRSP available contribution limit.
What’s also important to remember is just because you make the RRSP contribution, up to your contribution limit, that doesn’t you must claim your RRSP contribution for a tax deduction.
So, a reminder you have 60 days after the end of the year, usually March 1, to put money in your RRSP to get a tax deduction for the previous year. But don’t wait until the deadline. Begin regular contributions (monthly or every payday) as soon as possible and your investment savings will start to grow sooner.
Fact:
Your RRSP contribution room is based on 18% of your earned income from the previous year, up to a maximum contribution limit this tax year.
Learn what your maximum RRSP contribution is.
The maximum contribution for 2022 is $29,210.
The 2023 limit is $30,780.
I know my RRSP contribution limit thanks to my recent Canada Revenue Agency (CRA) Notice of Assessment (NOA). My CRA NOA includes employment income, net rental income, self-employed income and more.
So, unless you’re a member of a workplace pension plan or profit sharing plan then your RRSP contribution room should be up to 18% of your earned income (not adjusted for these pensions above) to a maximum annual contribution amount.
Fact:
CRA keeps tabs on your RRSP contributions.
- The total amount you can contribute to your RRSP each year will be limited to 18% of your previous years’ earned income or up to a maximum amount (see above) plus any carry-forward contribution room that you may have.
- Please know if you have a company pension plan or profit sharing plan your RRSP contribution limit is reduced. This is my case actually.
- Both your annual contribution limit and any carry-forward contribution room are shown on your notice of assessment.
Some quick RRSP facts and tips for any tax year
- An RRSP is an account. So please tell others to stop saying “I have to buy RRSPs!”
- Contributions to an RRSP are tax deductible. This means you can use these tax deductions to reduce your taxable income.
- Some Canadians shouldn’t use an RRSP. Gasp!!! Why do I say that???
RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
This means, there are really two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction today from your RRSP contribution, and
- tax deferred growth.
Should you use the RRSP or the TFSA to invest?
My bottom line on this:
The RRSP vs. TFSA investing debate can be summarized in one sentence instead of reading 43,129 articles every year on this subject:
Is there a penalty if you over-contribute to my RRSP?
Yes.
There are penalties if you over-contribute to your RRSP although a small exemption exists.
Do you have to pay taxes on my RRSP withdrawals?
You bet.
Remember, RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
Also remember the RRSP is a tax-deferred account – you’re not as rich as you think: when you take money out of the RRSP account you have to pay tax.
Now, some exceptions apply: RRSPs can be used for home purchases and education and there are programs associated with the RRSP for this. See below for my takes on these.
There are rules and age restrictions when you must collapse the account. In fact, Canadian taxpayers can contribute to their RRSP right up until December 31st in the year they turn age 71.
Back to RRSP withdrawals, if you withdraw money from your RRSP before you turn it into a Registered Retirement Income Fund (RRIF), *withholding taxes will apply to RRSP withdrawals:
- If you take up to $5,000, you’re going to pay 10%.
- If withdrawals are between $5,000 and $15,000, the financial institution will hold back 20%.
- If you withdraw more than $15,000, 30% is held back.
It’s also important to keep in mind that this won’t be the only time you’ll be taxed…
The amount you withdraw from an RRSP will count as income, so you’ll have to declare it once you do your tax declaration for the year that you’ve withdrawn. If the withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe. That’s why withdrawing prematurely from an RRSP is not a great move and should be a final last resort decision.
When you withdraw from your RRSP, your financial institution will provide a T4RSP showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it. You can find the income tax rates for the current year on the Canada Revenue Agency (CRA) website.
So, RRSP withdrawals count on your tax return as income. At that time, you may have to pay more tax on the money — on top of the withholding tax. It depends on your total income and tax situation.
*Quebec has some different rates for withholding taxes.
These are just some of the RRSP facts.
Other RRSP uses?
There are two important programs you can use to take money out of an RRSP without incurring taxes – but be careful!
There are two programs you can use to take money out of an RRSP without incurring taxes – but be careful!
1.The Home Buyers’ Plan (HBP) allows you to take tens of thousands out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. That’s the good news. The bad news? You’ll have to pay that back into your RRSP over the next 15 years.
Actually, thanks to the TFSA, I don’t think you need to use the RRSP Home Buyers’ Plan any longer.
2.The Lifelong Learning Plan (LLP) allows you to take out up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your or your spouse’s education. You can’t use it for your child’s education – this is where RESPs come into play. You do have to pay back 10% per year for up to 10 years.
These are just some of the RRSP facts and uses you need to know!
The punchline – why RRSPs should matter to you!
Again, as referenced above, there are two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction today from your RRSP contribution, and
- tax deferred growth.
With your tax deduction, you can reduce the taxes you pay today.
With tax deferred growth, investments in your RRSP can compound over time without being taxed as long as money made stays in the account.
Based on our long-term investment plans – we strive to maximize contributions to both our RRSPs – every single year.
RRSP “do’s” and “don’ts” for this year!
- Do use the RRSP to reduce your reduce your taxable income. If you’re in a high tax bracket, contributions to your RRSP could help push you into a lower tax bracket. You’ll also receive a tax receipt based on the amount of money you contribute, which you should always re-contribute.
- Don’t bother using the Home Buyers’ Plan personally. With so much TFSA contribution room available to every adult Canadian now, I see no reason why this plan should be used. See above!
- Don’t consider the RRSP-generated tax refund as a financial windfall. It’s essentially a tax-deferred government loan to you and you’ll need to pay taxes on RRSP withdrawals.
- Don’t contribute to an RRSP if your earned income is less than $50,000. I think it makes far more sense to maximize contributions to your TFSA first. After you max out your TFSA, then contribute to your RRSP. The TFSA is the perfect investing account for every Canadian, including those in lower tax brackets who will end up in a similar income bracket in retirement. The TFSA is also an ideal account for any investor who cannot or will not max out their RRSP contribution room.
I’ll continue to maximize contributions to my TFSA every year because…
- Don’t bother with any RRSP loan. That’s generally a bad idea. I mean it. Yes, while a short-term loan to contribute to your RRSP might sound like a good idea – let’s face it – borrowing for investing is not generally a good idea for most of us. Especially if you have a large mortgage already. Instead, get your emergency fund in place. Pay off all consumer debt. Pay down your mortgage or car loan debt without fail. Contribute to your TFSA for tax-free wealth-building AND then contribute to your RRSP if that makes sense – if you have more money leftover. Don’t dig yourself another financial hole. If you cannot afford to make regular RRSP contributions in the first place then I don’t believe you should consider any RRSP loan.
RRSP contributions can work wonders over time…
Consider a 25-year-old that started with just $1,000 in their RRSP in that year.
If said 25-year-old consistently socked away $500 per month for the next 35 years, at 7% average rate of return for 35 years, they would have a nearly a million dollar portfolio in their RRSP by age 60 for retirement.
My go-to RRSP calculator at Get Smarter About Money from my Helpful Sites page.
Add on CPP and OAS government benefits in your 60s, and that’s a very healthy retirement for many Canadians who have no debt.
That could be your portfolio value if you follow my guidelines!
Happy investing this “RRSP season” and ideally throughout the year.
Mark
Other RRSP reading:
Learn about the best ETFs for your RRSP here.
Learn more about dividend growth investing inside your RRSP here.
Can you have too much in your RRSP?? Yes but a very nice problem to have!!
How soon can you retire using your RRSP? Read on for an answer here.
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.
Order of draw down of retirement assets is important. A BC couple age 65 can take 25K each out of RRIF and pay absolutely no tax. This must be there only source of income and is a good opportunity to delay CPP and OAS for a few years. There is the with holding tax to deal with but that will be refunded once taxes are filed.
That same couple at age 60 would pay about 3400 in taxes. 3400/50K = 6.8% tax rate. BC bottom MTR is 20% and you take the money out at 6.8%. I like that spread.
It’s when have Pension, CPP, OAS and then RIFF/RRSP income that the RRSP/RRIF gets taxed at the full marginal rate.
This is because of the various tax credits available to seniors. At age 65 you have personal, age and pension credits.
Correct.
There are various tax credits available to seniors. At age 65 you have personal, age and pension credits.
I think the RRSP/RRIF remains a great account for saving and investing but the reality is, in practice, I far prefer to max out my TFSA over the RRSP although I also do the latter given my personal income.
Absolutely, when a senior has a pension + CPP + OAS, the RRSP/RRIF income in terms of taxation can sting a bit.
Thanks for your thoughtful comment,
Mark
Hi Mark,
I decided to max out my contribution room this year, but not my wife’s. Her DB pension will be sufficient, and I can get a much better tax credit. In fact, she has a balance owing this year. When I calculated the return on getting her to a zero balance owing compared to me contributing that money it just made more sense for me to contribute it. You might recall I used to think I would save some RRSP contribution room for the future, and in particular for some future capital gains, but it I decided “a bird in hand”……
Having said that, due to some terrible past investing my RSP is small in size for my age so I’m not too worried about pulling the money out at a higher tax rate than what I’m contributing. I made sure every dollar generated a 43% refund and no way will I pay that in retirement.
~James
Nice, re: DB pension. Those can be generous!
Yes, ideal to be in lower income in withdrawal years vs. contribution years but that’s not the end of the world… 🙂
Hi Mark: Wkg you have done marvelous but consider if you turned 72 today than the government would extract over $55000.00 from your RRIF. I left the work force 31 years ago and so didn’t contribute any more to my RRSP because any money I made was dividends and would be interest in the RRSP. I pay taxes as I go and I get to use the money to invest to make more money and more dividends. I always max out the TFSA in JAN. but am not a fan of maxing out the RRSP at the deadline as maybe stocks are up then and can be bought cheaper in APR. or the summer. When I first started one which I had doubts about I did over contribute. I didn’t make much so I put in $3000.00 and later that year I put in another $3000.00. Nothing was said.
Ya, I won’t be contributing to my RRSP likely past the next few years. I will likely move more $$ into our taxable accounts since I will slowly draw down the RRSPs in our 50s and 60s. The RRSP/RRIF is a tax liability really. A great account though 🙂
Mark
Thank you for the summary, Mark. Very clear! I loved this part “An RRSP is an account. So please tell others to stop saying “I have to buy RRSPs!”” I personally never heard anyone saying it but it sounds hilarious.
Gladly, I started maxing out my RRSP since my income went above $50K just 5 years ago (The first 6 years in Canada were just trying to learn how things work I’d say). Yes, it was tough to save 18% of $50K with 2 kiddos but the power of will can make things happen magically.
Also, one consideration, the tax withhold can be returned based on the total income when the income tax is done or they might want more payments depends on the tax bracket at the time. Right?
I’ve heard “Kelvin the Money Guy” who is on am1010 and 640 in Toronto say “buy a RRSP” countless times. And apparently he is a top 50 financial advisor in Canada. Go figure.
Wow, that’s terrible, and certainly not top-50 in my book 🙂
Thanks for the chuckle!
Mark
Very smart to invest inside your RRSP, again, not right or wrong, just that the TFSA is available to everyone and RRSP contributions usually benefit higher income earners!
If I understand your question…you don’t have to count your RRSP contribution in the current tax year….meaning you don’t have to deduct an RRSP contribution on your tax return in the same year you make the contribution. You can wait and deduct it in a future year. You may choose to do this if you think your income will be higher in the future, moving you up to a higher tax bracket. 🙂 Tax smart.
All the best Dreamer and thanks for your thoughtful comment.
Hi Mark,
Thanks for the great info!
One note I would like to suggest, you mentioned that you should not buy a RRSP with under $50000.00 income.
It may make sense to contribute to a RRSP when you make less then $50000.00 or less then $30000.00 when you are retired and collecting government benefits…IE:GIS, the lower your income the more GIS you would receive.
Yes, it may defer taxes while you do this but you could come out ahead in the long run.
I believe it works best when you make taxable income.
Hope that makes sense!
Thanks again for all that you do Mark!
Thanks for reading Perry!
I say that, around $50,000 since 12% of your net income, if $50k per year, could go to your TFSA first and max that out. ($6,000 contribution room this year.)
I think it makes far more sense to maximize contributions to your TFSA first…but of course, anyone can do both – max out TFSA and RRSP. I feel the TFSA is the perfect investing account for every Canadian, including those in lower tax brackets who will end up in a similar income bracket in retirement. The TFSA is also an ideal account for any investor who cannot or will not max out their RRSP contribution room.
I don’t think anyone should aspire to earn GIS but I can appreciate some Canadians will absolutely need it!
Thoughts?
Mark
Hi Mark,
I completely understand your comments yes for most, it’s probably the right thing to do.
I kinda look at it this way, as a senior on fixed income, I consider this as an investment into a RRSP (Taxable income) you will defer the taxes, then take your GIS payments and put that that into your TFSA.
It may be a small gamble but it’s an investment….
I know this is not for everyone but I see a good approach here personally. ( hopefully I’m right)
Maybe a possibility for some but maybe not others.
Each individual really needs to look at the best approach for their own situation.
Thanks Mark for responding!
You bet Perry and nailed it: “Each individual really needs to look at the best approach for their own situation.”
I know for us, we hope to slowly draw down RRSPs, and largely keep TFSAs intact “until the end” for tax-free money with CPP and OAS inflation-protected benefits. We hope to avoid GIS.
If folks have meagre income and expenses, then a combination of TFSA and GIS could work but you need OAS to get GIS as well. Something for people to consider.
The good thing is when it comes to GIS: unlike CPP and OAs, the GIS is totally tax-free. Certainly those with some combination of generous employer pensions, maximum CPP benefits, significant RRSP or RRIF income and non-registered investments will find they are considered too “rich” to receive the GIS. But……TFSA withdrawals won’t result in the loss of any GIS benefits, which is one reason our government designed the TFSA the way it did, I think 🙂
Hi Mark!
Yes, that’s one thing I really like is…GIS is tax free(for now)
One thing is I would rather be in your position then my current situation but we do make it work for us and that’s what’s important.
I wish you nothing but the best in your future goals etc, you are track for great success!great Job Mark!
I will continue to read your updates via email etc. I thoroughly enjoy them!
Thanks for the great chat Mark!
Stay safe….
Thanks Perry, trying and mostly investing to stay out of my own way 🙂
All the best and stay in touch.
Mark
Sometimes, living in QC is a good choice. Withholding Tax is half in QC comparing with the rest of Canada.
10% (5% in Quebec) on amounts up to $5,000
20% (10% in Quebec) on amounts over $5,000 up to including $15,000
30% (15% in Quebec) on amounts over $15,000
My RRSP contribution gave me more than $5000 back in income tax this year. I am happy to maximize both TFSA and RRSP (And my wife’s TFSA as well).
However, it will get a bit complicated when living abroad planning to withdraw RRSP (Which is my plan). The good thing is, I doubt we will need to withdraw more than $35K a year so the income tax will be minimal.
That’s good – I’ll have to pay a small portion of tax this year but that’s OK. Better than a fat government loan!
Great info Mark.
But I note in your withdrawal section you mention withholding tax rates and say you may however pay more when you file. That’s true but I also think its worth noting you may also pay less, depending on the amount and other income. Especially with relatively high withholding rates above just 5K and even more at only 15K.
Very true and good point! I wonder if most/some retirees actually withdrawal from RRSP and keep their tax rate lower than 15%? That would be amazing.
With federal rates:
15% on the first $49,020 of taxable income, plus
20.5% on the next $49,020 of taxable income….on the portion of income over $49K.
That would be the sweet spot right for couples if they can pull it off? Earned income around $48-$49K each?
Mark
Well that’s probably more than an average retirement income and having possible benefit of income splitting would help.
But yes for those who’ve saved well and/or have work pension that’s definitely a nice range – reasonable taxes and a healthy income. And when a couple gets to CPP/OAS availability that’s another pretty big boost.
Yes, that seems to make sense to me.
I aspire to stay within the 20.5% threshold for sure – I have a good idea of what income I/we need to cover basic annual expenses: about $3,000 per month +/- a bit after-tax to cover necessities.
The debt seems to be our last major financial barrier now.
Just to continue the thread (testing!) – I figure most couples that have worked and contributed to CPP modestly for 25-30 years, might expect $1,000 per month each in CPP and OAS benefits combined at age 65 after tax. Maybe more!
I’m always too conservative! Ha.
Site seems to be back up fine, reordered with whatever you might have done.
We’ve been a little into the 20.5% range since being retired, except 2020 since we weren’t travelling. My rate was only 5%, wife’s around 15%, as we used HISA to fund reduced spending instead of more registered withdrawals.
Calculations for us @ 65 in 3-4 yrs are (combined). We had less than CPP max due to shorter working careers, and some self employed years (non contributory), and less than max earnings. LOL, ya your estimates are way conservative- like 1/3 to 1/2 of most likely.
CPP 1863
OAS 1230
@ 70
CPP 2645
OAS 1672
Good! Glad it seems to be working again. Technology is great when it works – what I always say!
“Calculations for us @ 65 in 3-4 yrs are (combined).” Those are great numbers.
If I start working part-time in semi-retirement in another 5 (?) years I suspect ours will be similar.
https://www.myownadvisor.ca/my-financial-independence-plan/
There is a requirement for both of us to work full-time until at least age 50 – Owen had ours at:
1. @ 65 (combined CPP x2 + OAS x2) = $35K (just shy of $3K per month)
2. @ 70 (combined CPP x2 + OAS x2) = $49K (about $4K per month).
I figure CPP at 70 is where I will trend. Likely OAS though at 65. Around those ages I will have my pension or LIRA > LIF which should deliver $3K per month pre-tax.
Finally, we’ll have TFSA assets to draw down in our 70s and 80s at will.
Huge benefits to CPP deferral really.
Ha, so true on technology.
Thanks. I’ve said it before but your numbers and path seems quite similar to here. We went to 52, 53 working FT. No PT for one and 2 years for the other (me).
Likely same on CPP here, but likely one OAS @ 65, other @70. We’ll see. Its getting more real for us as we get closer. Agree on benefits of deferral. Some will see it very differently and that’s okay.
So hard to say on when TFSA assets will be used for us. Depends on lots of factors most of which are not controllable. Market returns, dividend growth, interest rates, spending/needs, health….. etc
So far our path is fine.
Hi,
I have U.S stocks (U.S Dollars) in a non-registered account and if I wish to move these funds to my RRSP, would that mean I have to pay taxes? Any advice on how to go about this?
Thanks
You might Sam if you have capital gains to pay.
Here is a scenario where I moved non-reg. stocks to my TFSA. I haven’t done it yet with my RRSP. Similar tax issues will apply to you.
https://www.myownadvisor.ca/should-i-transfer-stocks-into-my-tfsa/
Hope that helps, also below.
https://www.bnnbloomberg.ca/personal-investor-tax-tricks-for-transferring-shares-into-your-rrsp-and-tfsa-1.720254
Mark
Thank you for the information.
So, it may be wiser to transfer stocks with “capital losses” than “capital gains”, since that wouldn’t require you to pay taxes on the gains. I understand that you can’t claim your”capital losses” but it still seems the ideal way to go.
Yes, that is an option certainly if you want to avoid paying any capital gains, sell at a very slight loss. Keep your winners running in your taxable account since capital gains is an efficient form of taxation overall.
Again, not investing advice, just things to think about 🙂
All the best Sam.
Mark
Ok!
Thanks.
An option? I’m calling this one a golden choice. I have Shopify in my non-registered account for a large position – error of my ways when I first started investing without knowledge. As it’s a high growth stock with exponential growth set for the future I continue to whittle away at it every time it takes a dip by doing a transfer in kind into my RRSP therefore triggering a capital gain but at what will be a lower amount than trying to sell it in the same account 5-10 yrs from now. Really going to work well this year as I’ll have 1/2 to 3/4 year with minimal income as I slide gracefully into retirement. This will partly mitigate the effect of a large capital gain on next years taxes.
Great to hear from you Jeff. Nice problem to have 🙂
You can always move non-registered to RRSP but any “sells” may trigger a capital gain and in Shopify case, I bet you might!
You should make sure you sell the stocks to realize a loss and then contribute the cash sale proceeds to your RRSP, rather than transferring stocks with an unrealized loss in-kind, otherwise you will lose the benefit of claiming your capital losses (can be carried back or forward): https://ca.rbcwealthmanagement.com/documents/1435520/1435536/In_kind_RRSP_contributions_06122018_high.pdf/83086ae5-c9b1-4a96-8fcb-3a1cf85a5fb2#:~:text=When%20you%20transfer%20an%20investment,to%20offset%20any%20capital%20gains.
Fair comment DoRo!
Personally, I think if you want to make an RRSP contribution, you should do it with cash.
A second option, is to move investments in-kind to your RRSP. That said, there can be tax consequences with in-kind as well.
Hi
I stopped contributing to my rrsp 21 years ago. At that tint, it was worth 123k. Today it is worth 1.05 m. Average return, I am guessing. I am happy it is there now. It cash flow 52k a year in div. biggest mistake I ever made, reaching for yield
Very impressive and very well done!!
Great points there Mark!
I’ve personally made it a habit to take the refund I get from my RRSP contributions to reinvest right back into the RRSP account to maintain the tax advantage of deduction now, pay tax later.
Great stuff. I think the key is, you understand the benefits or drawbacks in managing the RRSP-generated refund.
Gruff403,
You are absolutely right that fees from mutual funds choked any growth for 20 years. Once I started self directing with my brokerage in 2007 invested in dividend growth stocks only, the portfolio took off.
My monthly pension is $3400 net and I will have to see what my 2019 tax return results are as it’s my first year of retirement income. My brokerage charges $50 for each RRSP withdrawal so I was thinking of deregistering $5k annually lump sum and see what happens. Should be ok because my dividends are approximately $5300 annually. Pension will be decreased at 60 and again at 65. I’ve never worried more about money as much as this 1st year of retirement!!! Maybe because I don’t want to have to go back to work…lol.
Thanks for your thoughts Gruff!
Convert part of your RRSP into RRIF. Transfer $5000 dividends from your RRSP to RRIF at the end of year , then withdrawal it from RRIF. This way you don’t need to pay the $50 withdrawal fee.
haha nice post mark. All solid points until the last one.
Dont use a loan for rrsp contributions. I literally just did that. You can read about it on my newest post.
I saw I was getting 6k back so used a loan and put that 6k in b4 march 2nd. I’ll get roughly 1800 for doing that and will most likely repay it within a month once I get our return. Why would that be a bad thing?
cheers
I will check that out Rob. You might be in the rare case whereby your interest costs are minimal and it might make sense getting that money working for you. I doubt many folks have the same financial discipline 🙂
Will check out and link to in a future Weekend Reading!
Mark
It is heartening to see so much interest in a discussion around RRSPs and saving in general. My wife and I always made it a priority to max out both RRSP and TFSA contributions annually.
If you are able, doing this early in the year is far preferable to later in the year … this extends the compounding period (I also like the idea of automating the process, but if you are fortunate enough to be able to max out quicker, then quicker is better). I fully agree with the concept of trying to maximize the return you get on your invested capital, but only within you risk tolerance. I don’t like the idea of chasing higher returns if it takes you into an investment profile that you are not comfortable with or one that is inappropriate for the intended use of the capital. This is always a balancing act, and while timing the market is not possible and not something that should be attempted, the markets are relatively expensive currently due to a long period of relatively strong returns. That doesn’t mean you should stay away from the market, just that you should stay within a well thought-out asset allocation strategy appropriate to your circumstances. If you are looking to increase your returns, the first place you should focus, in my humble opinion, is on managing the fees embedded in any managed products you include in your portfolio. Over a long term investment horizon (which is how you should likely view your RRSP and TFSA account) minimizing fees can make a huge improvement on total returns. Take a look at Beat The Bank, or Larry Bates website, if you are interested in the impact fees can have.
Big fan of Larry Bates book and your points are excellent yourself Larry:
“If you are looking to increase your returns, the first place you should focus, in my humble opinion, is on managing the fees embedded in any managed products you include in your portfolio. Over a long term investment horizon (which is how you should likely view your RRSP and TFSA account) minimizing fees can make a huge improvement on total returns.”
I’ve been a DIY investor for a decade + now and I can’t imagine how much fees would have eaten into my juicy portfolio if I maintained high-fee products. I shudder at the thought!!
Mark
Hi Mark. Tax-deferred growth in an RRSP will only be of benefit if your withdrawal (years down the road) is done at a lower tax rate than was the case at the time of contribution. In fact, in a margin account you will get tax credits on dividends, and pay tax on only half of your capital gains. You do not get these benefits in an RRSP. When you finally get to withdraw from the margin account, everything will tax-paid, whereas everything from the RRSP/RRIF will be taxable.
Tell me I am wrong please! But as I see it the RRSP has its greatest benefits to young people, who can accumulate growing space through their earnings each year while in a low tax bracket, which they can use later when they are paying at a high rate. Another good use of the RRSP occurs when a person retires early (before CCP, OAS and other pensions kick in); an RRSP can then bridge the gap until more money is flowing, and at the lowest tax rate (or even zero). If you able to defer CPP and OAS income, so much the better. Blow the entire RRSP while you have the chance, especially if it is small.
The TFSA is an entirely different animal, and should be started on the child’s 18th birthday. There are some limitations, but with a bit of forethought it is wonderfully flexible, Get it while its going; I can’t see the Liberals leaving this alone this for much longer; they have too many nicer ways to spend your money.
RRSP is still beneficial even with the marginal tax rate being the same as the initial amount for growth will be much higher. Let’s assume marginal tax rate of 50%, growth rate of 10%. One has $1000 before tax in RRSP, and withdraw one year later. Or pay tax on this $1K, also withdraw one year later.
RRSP, you have $1000 * 1.1 * 0.5 = 550
Taxable account, you have $500 + (500 * 0.1 * 0.75) = 537.5
It’s the same with TFSA though in this case:
TFSA, you have $500 + (500 * 0.1) = 550
For higher income people, most likely marginal tax rate in retirement will be lower than before, so maxing out RRSP should be quite beneficial.
However, if too much RRSP at year 71 and minimum RRIF withdrawal caused OAS clawback, it would be a different story. Personally, I foresee we will depend on RRSP withdrawl only for more than 10 years and shouldn’t have too much RRIF so I will not worry about it. If the market will be really nice to us and we actually encounter this problem, well, not a bad problem to have anyway.
Another point is when contributing to RRSP, the benefits one gets is on the marginal tax rate, but when withdrawing, the tax rate on withdrawal will be the average tax rate. In BC, let’s say the annual income is $60K, the marginal rate is 28%, and the next tax bracket is 20%. If my annual income of $60K after retirement is all from RRSP, then the average tax rate is 17.7%.
I would imagine only in very rare cases, you pay a higher tax rate on the money you withdraw than the tax rate on the money you put into RRSP.
You are wrong on the first point as May has illustrated. It seems to be a somewhat common misconception.
Using the same tax rates the outcome for the TFSA and the RRSP are identical. If your RRSP withdrawal is done at a lower tax rate than at time of contribution your outcome then the outcome will actually be superior to the TFSA. This seems to be relatively common with retired people I know and read about. (Higher working income vs lower retirement income, which is also my personal situation)
RE margin acct comparison I think you would need to provide an example of a superior outcome since you seem to ignoring a larger starting pile with RRSP due to tax refund and growth tax free on that while inside the acct.
I agree the TFSA is very flexible. Trouble is thats also its potential downfall for plenty of undisciplined people that have easy access to raiding if often which impairs their long term retirement savings. For disciplined investors its great.
Great point RBull about the undisciplined part. It’s not just the TFSA involved in that 🙂
Absolutely discipline is certainly vital for long term successful investing and applies to all accounts.
However the point I think that’s generally accepted is the TFSA has more potential for abuse with investors that are undisciplined, due to the fact it does not have the same “penalties” involved with early (working years) withdrawals as RRSPs or even unregistered for that matter. Although governments that open up silly things like borrowing from RRSPs (retirement plan) for homes also do harm likewise.
Bottom line to me its fantastic to have more tax beneficial investing account options and room created. Its a shame stats show us there isn’t strong enough uptake on them although the TFSA is definitely winning. I wonder what the future brings for all these accounts etc with increasing government spending appetities and with it becoming more fashionable in society to let someone else worry about their financial retirement future. Good thing you and your site are trying to do something about that!
There is little to no chance I’m going to miss building up my TFSA from registered withdrawals when its advantageous at very least until govt pension benefits start, in an effort to tax smooth. My bias is neutral on both accounts after having used RRSPs and TFSAs in both accumulation and withdrawal stages.
Fair…as I type this with red wine in hand after a day at the Belizean beach 🙂
“Although governments that open up silly things like borrowing from RRSPs (retirement plan) for homes also do harm likewise.”
The reason why they open up these programs is they know many Canadian will raid their RRSP in doing so, and therefore, not maximize their own tax-deferred savings because of it. Ugh, these boutique programs are annoying. Then again, I never will use them. I hope others consider the same but alas it is their money and and at least the LLP is far better than HBP in IMO.
“I wonder what the future brings for all these accounts etc with increasing government spending…”
Not good. Our generation (GenX) and the next will pay for it severely I think.
I’m just trying to do my part since I hope I can afford a Belize or two every year. That way, I will know I saved enough 🙂
Lol, I’m typing this at a Nova Scotia beach…but it has ice and snow on it!
Yes, boutique programs are bad. I think the main reason governments come up with them is for political gain.
Some Canadians will raid their RRSPs or any savings accounts no matter what, but putting incentives out there to do it makes it worse. Retirement savings go down, house prices go up and affordability goes down. Monkeying to make it easier to finance and leverage more……= Dumb. Its unfortunate but in some markets young people just can’t expect to own a home now, at least until there is a correction.
I think it will affect numerous generations including me as I hope to be on this earth another 30 years plus. The people paying will be those who have.
Ha, I know some think I’m having a “hey boomer” moment. Whatever!!
Well said. We’re aligned on our thinking on the boutique program crap. Another example of the imperative need to simply the tax code. Alas, it might not happen in my lifetime.
Can always hope.
Time for a morning Belize rum punch!!
Not wrong Doug…but very difficult to forecast the financial future including tax rates!
Therefore, unless you are or will be within a low-income bracket for many decades on end, I would advise CDNs at least consider using the RRSP to get that compounding power going…
“The TFSA is an entirely different animal, and should be started on the child’s 18th birthday.”
Fully agree and have maxed out my TFSA every year since Day 1 as an investment account. Happy to see it well into the 6-figures now.
Thanks for your detailed comment.
Hi Dave;
Great you are thinking about this. It is so important that you look at all your potential sources of retirement income going forward. I did that for us in five year increments and discovered we would end up in essentially the same tax bracket as when we contributed to RRSP once I accounted for Pension + CPP and OAS. Retired at 56 and have decided to convert all RRSP to RRIF and start winding it down early. Enjoy it while knees still work.
Gruff403, Congrats on retiring at 56. I’ll have to settle on 60 myself ( 6 more months to go! ). So far so good. No health issues, but one never knows for sure.?
It’s now $35,000 for HBP.
Thanks for seeing that typo, I did change it and great eye 🙂
Mark
Hi Dave,
I am sure Mark is much wiser than I am and will have some sage advice, but I faced the same question when I was approximately 60 and retired. In the end, I decided to wait until I was required to RRIF my RRSP at age 71, and just withdraw the exact amount I needed from my RRSP each year until I turned 71. Some years, I withdrew more, and some years, nothing at all. I knew that once I converted my RRSP to a RRIF, the government would require me to withdraw a specific minimum amount, whether I needed it or not. WealthSimple advises: “If you are under the age of 71 and need income periodically (as opposed to, say, monthly), you’re usually better leaving your money in an RRSP and making the occasional withdrawal.” (https://www.wealthsimple.com/en-ca/learn/converting-rrsp-to-rrif#when_to_convert_a_rrsp_to_rrif)
Another thing to remember is that your RRIF withdrawal amount can be based on the youngest spouse’s age if you are married. That can help your RRIF to last longer if you think you may live a long time and are worried about running out of income.
Interesting points JR.
I’m certainly “not there” yet with my age (in my 40s) but I am helping my parents out now with their RRSP/RRIF.
I have advised both of them because they have DB pensions to slowly withdraw from RRSP in their 60s and early 70s to smooth out taxes. This would effectively leave them with $0 money to convert to a RRIF.
I actually wrote about this plan for them many years ago.
https://www.myownadvisor.ca/cha-ching-cash-rrsp/
“One common approach I hear financial experts write about is using up your non-registered money first and leaving RRSP withdrawals until the end. For some investors this makes no sense. If some investors wait to convert their hearty RRSP accounts into Registered Retirement Income Funds (RRIFs), based on RRIF minimum withdrawal requirements, they’ll pay more tax.”
I have also advised them that if they don’t really need the $$ to spend from the RRSP withdrawals, then use that $$ to make contributions to their TFSAs and max out that account for tax-free growth as they get into their 80s. This way, even less tax to pay since only their pensions and CPP + OAS will be taxed once RRSP/RRIF are gone.
Thoughts?
Mark
In our case, roughly 75% of our savings are in RRSPs, 10% in TFSA’s , and 15% in non-registered. No DB pension. Given those ratios, it seems prudent to whittle away at the RRSP/RIF for a few years. So yes I would agree that leaving the RRSP withdrawals to the end doesn’t make sense in our case.
Sounds good Dave. I think I’m learning more and more that (depending on some circumstances of course…) most 50- and 60-somethings are better off withdrawing from their RRSPs in that age range; spending that money and also maxing out their TFSAs during that time as well.
With the dawn of the TFSAs and now being able to have tens of thousands of dollars of tax-free money inside that account churning out income, it’s a HUGE benefit to any early retirees in converting tax-deferred money (RRSP) to tax-free money (TFSA) with they also have tax-efficient income as well (non-registered account).
Thoughts? Does that align to you thinking?
Cheers,
Mark
Mark, curious to know your thoughts on converting an RRSP to a RIF at 60. Lots of articles out there saying you must do so by 71, but very little weighing the pros/cons of doing so earlier. Have my own thoughts, but I’d love to hear your opinion.
Hey Dave,
Just wrote some comments back to JR on this one that likely apply to you as well. I have advised my parents to withdraw from their RRSPs throughout their 60s and early 70s to avoid having any large RRIF in order to smooth out taxes. Have a read on what I wrote to JR and let me know your thoughts.
Cheers,
Mark
Ok, thanks Mark. I don’t want to be running to the bank every 2 months to do a 2x5K (spouse and I) RRSP withdrawal. Converting a portion to a RIF make sense and seems to be a lot less maintenance. Thinking we’ll supplement those RIF withdrawals with non-registered account withdrawls to minimize taxes. I’ve read that RIF minimum withdrawals are not taxed. I assume that means only at withdrawl time, and that you may eventually have to pay some taxes when filing if you’re not planning carefully.
Belize! Very nice. That’s not a typical destination from Ottawa. What resort are you staying at?
I think so Dave. I mean, you’ll have to run the numbers but I know my Dad recently converted his RRSP to RRIF and is enjoying not having to worry about timing any market by selling equities.
His RRIF withdrawals are going to fund their new small cottage expenses and have some travel fun. Now is the time to really enjoy things I keep telling them! Life is short…
RRIF min. withdrawals do not have any withholding taxes but it is income so you’ll need to enter that income on your tax return this year or in future years as income in the year you earned it.
RRIF min. withdrawals can be a great way to see how you can best smooth out taxes if you have a sizable RRSP to draw down. At least this is what I’ve learned from others in their 50s and 60s doing this right now.
Belize is VERY nice Dave. Highly recommend as I reply from the pool near the sea 🙂
We’re at Twisted Palm Villas in San Pedro.
Mark
As we plan to retire before 60 without any pension, we will depend on RRSP withdrawal to cover expenses. I did a little bit research on this. As I understand, you can convert part of your RRSP to RRIF any time. And the minimum withdrawal will apply only to your RRIF account. Meanwhile, you can transfer from RRSP to RRIF any time with any amount or in kind. As our accounts are with TD, one benefit is RRIF withdrawal won’t have any fees while RRSP withdrawal will have fees.
So our plan is to convert part of the RRSP to RRIF once retired. As long as we keep the size of RRIF low, I do not see any cons with it.
Sounds like a good approach that will work for you May.
The good thing is, this you know, you can convert any amount you want to a RRIF. It’s not all or none like others might believe. I think the key is to smooth out taxes to the extent possible.
Mark
Correct on your understanding May. In my case I have an RRSP and I had a LIRA. The LIRA I converted to a LIF 3 years ago and take minimum withdrawals. My broker doesn’t charge for RRSP withdrawals so I have yet to convert any of this. I’m not sure if this has to go to a new RRIF or if it can move to my LIF. Doesn’t really matter. I also have a small amount of tax taken from the LIF withdrawal in addition to RRSP standard amountsas I prefer to not enter into installment territory.
Sounds similar to our situation including the bank you are dealing with. LOL! Appreciate your input!
I’m late to the commenting but wanted to add that if you convert some of your RRSP to a RRIF at age 65, you can claim the pension income tax credit benefit of $2,000. You do not qualify for this if you simply withdraw funds from an RRSP – it needs to be a RRIF, LRIF, annuity, or of course a company pension. This plus qualification for OAS brings advantages to those turning 65!
Prior to age 65 I don’t know if there are advantages of converting to a RRIF vs. RRSP withdrawals. A number of people here have posted about delaying CPP or even OAS and melting down larger RRSP holdings before the age of 65-70.
Yes, I should add that to that post Bart for improvements. I will look to do that next year for sure.
Always interesting with RRSP to RRIF complexities. Makes me think we should abolish any tax credits (GASP!) and just simplify the RRIF withdrawals without any min. values. Forget any spousal attributions, etc. It’s just overly complex and not needed.
“Prior to age 65 I don’t know if there are advantages of converting to a RRIF vs. RRSP withdrawals.”
Well, we might be one of those people that actually start “living off dividends” in our 50s so small RRSP withdrawals might occur for us in another 5+ years.
I would have to run my own projections but it might make sense for me to kill off:
1. taxable account while working part-time, then
2. RRSP assets/LIRA assets, then
3. take workplace pension + CPP @ 65 or 70 + OAS at 65.
For us, it really depends how long we work full-time. At least another 3.5 years until the mortgage is dead and then I believe we’ll be a good Crossover Point.
What would you do? 🙂
Mark
Hi Mark,
I was trying to figure out how much to contribute per month to maximize the RRSP and TFSA for my family for this year alone. Wow! When you use the pre tax income to calculate it, there is not enough left over for comfortable life style. Now I admire you very much for doing that. It is a tough process.
Do writing this blog helped you achieving the financial goals for you?
Well, I use a rule of thumb of ~ $500/month per TFSA to max that out. The contribution room should be at least $6k in 2021 for TFSA. Saving for that now!
https://www.myownadvisor.ca/2020-financial-goals/
In terms of our RRSP contributions, we set aside a fixed amount like a bill payment and make regular, monthly contributions to our RRSP accounts so that we strive to max out RRSP contribution room each year by the time tax season is here. We contribute at least a few hundred bucks to our RRSP accounts every month.
In terms of the blog, for sure, the income from it helps a bit of saving and spending but to be perfectly honest, I don’t invest a penny of what this blog makes. All my TFSA and RRSP investing (maxed out accounts for both) is a product of my day-job.
The blog income is not even minimum wage in terms of what I put into and it’s fun money to spend as I please.
Cheers Bindhurani!
Mark
Help me understand why my RRSP account has not grown much over 33 years of maximizing contributions each year.
I started at 23 yrs old maxing out my RRSP room annually, albeit I have a Gov’t work pension plan too. The first 20 years were invested in mutual funds with “financial advisor” Nesbitt Burns. A difficult year caused me to foolishly cash out $5k. For the last 13 years I have self directed with my bank’s online brokerage where I switched all those mutual funds to good Cdn dividend paying growth equities. I have not traded much within the account, only annually when it was time to contribute and purchase stocks. To date, the market value of this RRSP account is approximately $113,000. Now I’m retired at 55, no longer have employment rrsp contribution room and I’m collecting my work pension monthly. I do not understand why this account is so low. Maybe I’m not seeing the obvious.
Ideas?
Couple of things come to mind. Your RRSP value will be based on how much you have contributed, your rate of return and how long the investments have been in the RRSP. In the former case, if you were getting a work pension, you may not have much additional RRSP contribution room remaining since the pension amount is deducted from your RRSP contribution room each year. If your pension plan is quite good, it could eliminate almost all your RRSP contribution room each year resulting in lower contribution rates. Also, in terms of rate of return, if your early success was impacted by poor investment choices, this would have a major impact on your total RRSP value today.
Fully agree. The biggest factors in realizing any major portfolio value are contributions, rate of return, and time. Low-fees also matter since it enables the rate of return in some cases over higher fee products.
I know these three factors (contributions, RoR, and time) are critical since I see it in my own portfolio!
Mark
Hey Bonnie,
You seem to have done quite well despite any investment choices. I feel the biggest factors in realizing any major portfolio value:
1. high contributions
2. high rate of return (for investments), and
3. time for contributions and rate of return to do their work.
I think your decision to buy and hold (and/or keeping buy more over time) the top-stocks in CDN ETFs like XIU and XIC and VCN, etc. will be rewarded for income and growth. I could be wrong of course, but I strongly feel that way.
Perhaps those funds using a “financial advisor” were high-fee products and/or your contributions were not that high?
Ideally, at 7% or so RoR, money should double every 10 years.
Happy investing to you as always,
Mark
Bonnie: Fees probably hurt as well.
If you have a solid Pension, consider using RRSP to bridge until CPP and OAS kick in. If you don’t, you will likely be withdrawing the RRSP/RRIF at the same tax level you stopped working at. I am in a similar situation as you with a medium RRSP/RRIF, and collecting pension. Enjoy that money. You could start withdrawing $500 per month and with a 4.5% growth rate, adjusted for 1% annual inflation your $113K should last at least 30 years. My RRSP/RRIF is also only invested in dividend growth stocks.
Hey Mark – i have a question for you. So for my 2019 tax year. My 2018 CRA NOA says i have $X of “Available contribution room for 2019”. So is my actual contribution room for 2019 this $X plus 18% of my 2019 earned income ($Y). So $X + $Y? or is it just $X based on what the 2018 NOA says? The wording used is confusing in all the stuff i have read. Thanks
Just $X
If I understand your question my friend…your NOA should correctly identify all your available contribution room for the upcoming tax year.
This means, any NOA statement you would have received in spring 2019 was up to date, at that time that statement was generated, for the entire 2019 tax year.
That NOA could include any carried-forward RRSP contribution room as well.
Thanks Mark. I think I started overthinking it after I read some posts where it seemed it was my 2019 income and not 2018 that partly determined the room for 2019. So 2019 earnings determine 2020 amount and so on….
Yes, I replied to Fraser above since I probably wasn’t as clear as I could have been. Ultimately CRA does not know what you will or will not make for the coming year so your NOA will be a point in time, it will essentially highlight all available contribution room to date as determined by the proceeding tax filing year.
So, any spring 2019 NOA sent back to you will highlight all RRSP available contribution room following your 2018 Jan – Dec. 2018 tax year filing.
CRA can’t possibly know what you will or won’t make $$ from in the 2019 calendar year for that tax year.
Personally, I would simply confirm with CRA what you intend to contribute if concerned and then max out the RRSP to that limit, if that makes sense of course for your situation (usually does for many Canadians!) and don’t worry too much beyond that.
I think it should be $x+$y…..your NOA only tells you the unused RSP room going forward…..CRA don’t know what your income for 2019 is so you can contribute 18% of 2019 income plus the unused room from your 2018 NOA.
Thanks Fraser. NOA reports unused to date RRSP contribution room. I should have mentioned that to be more clear.
Correct in that CRA can’t know your earned income for 2019 tax year through December 2019 when they issue the 2019 spring NOA for the previous 2018 tax year.
Could be helpful for ddivadus here, detailed reading though!
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4040/rrsps-other-registered-plans-retirement.html
When in doubt, since CRA is not perfect, I would always call them and discuss.
What I do FWIW is I always contribute to the RRSP room the CRA says I have available. I don’t worry about the difference between what I could contribute extra if my income were to rise. I try and keep things simple.