Tax Deferred Investing – RRSPs 101

Tax Deferred Investing – RRSPs 101

The Registered Retirement Savings Plan (RRSP) has been at the front of helping Canadians save for retirement for decades.

When you think of the RRSP, I think it’s always great to remember RRSPs are a tax deferred vehicle – one of the best we have!

A history of tax deferred investing: RRSP

When the RRSP was created in 1957, contribution limits were 10% of the previous year’s income to a $2,500 maximum. If an individual did not contribute in any given year, that year’s contribution room was gone forever.

Thankfully, things change.

By 1990, contribution limits increased to 18% of the previous year’s income, the dollar limit was raised to $11,500 and the contribution carry-forward rule was introduced, allowing unused room to be carried forward seven years.

In 1996, the government starting indexing the dollar limit to annual wage growth. The pension adjustment (PA) was introduced to level the playing field for contributors with employer pensions and/or deferred profit sharing plans. Around the same time, the seven-year carry-forward rule was scrapped and replaced with an indefinite carry-forward.

The RRSP has competition

A nice addition to tax deferred investing has been tax free investing!

Since 2009, the Tax Free Savings Account (TFSA) has provided Canadians with an outstanding and flexible savings option that avoid taxation on withdrawals whatsoever.

Tax Free Investing – TFSAs 101

Of course, I still believe RRSPs are great and you should absolutely consider them for your retirement planning purposes.

RRSP facts for 2021

You should know the deadline to make RRSP contributions for the 2020 tax year is March 1, 2021.

Your RRSP contribution room is based on 18% of your earned income from the previous year, up to a maximum contribution limit of $27,230 for the 2020 tax year.

Again, if you don’t use up your entire RRSP contribution room then that contribution room can be carried-forward.

These are some great tax deferred investing concepts you need to know about RRSPs.

1. The account encourages long-term savings. The taxation of RRSP withdrawals creates a disincentive to use RRSPs for short-term spending needs. If you need money short-term, including for a house down payment, I personally believe the TFSA or just a savings account is far better.

Thanks TFSA, we don’t need the Home Buyers’ Plan anymore

2. The account is best for retirement in a lower income bracket. Most retirees are in a lower tax bracket during retirement than during their working years. As a result, the net tax savings (from RRSP withdrawals in a lower tax bracket vs. higher income contribution years) make this account very appealing and powerful.

Then again, there is a linchpin to this debate!

Managing the refund well is the linchpin in the RRSP vs. TFSA debate

3. The account delivers tax deferred growth. The biggest benefit of this account is tax deferred growth; RRSP assets are not taxed annually like any funds inside a corporation’s taxable account or your personal taxable account. So, using the RRSP for retirement savings and making contributions to your TFSA as well, makes an outstanding 1-2 investing punch. 

4. The account may offer employer contributions. Employer RRSPs often mean matching contributions. I’ve always been a fan of free company money. Make sure you check out what your employer has to offer as part of their employee benefits package.

5. You can ignore U.S. tax reporting exemptions. For U.S. persons living in Canada, RRSPs are exempt from passive foreign investment corporation reporting. For Canadians, under our Canada-U.S. Tax Treaty, RRSPs are recognized as tax deferred accounts for U.S. tax purposes.

Here are more great RRSP facts

  • An RRSP is an account, not a mutual fund or an investment itself.
  • Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
  • Some Canadians shouldn’t use an RRSP (their income may not be high enough (yet) to reap the key benefits of this account).
  • RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
  • Contributions to an RRSP for the current tax year do not always have to be made in February.
  • There are contribution limits for an RRSP, but most Canadians will have a difficult time reaching their contribution limit year after year after year.
  • Contribution limits are based on the contributor’s “earned income” and can be found on his/her tax notice of assessment.
  • There are penalties if you over-contribute to your RRSP although a small exemption exists.
  • Unused RRSP contribution room can be carried forward, for future tax deductions in future tax years. So, even if you’re in a lower income bracket now consider contributing; just don’t claim the amount for any tax refund. Then, you can take advantage of the tax-deferred growth while saving those tax credits to claim at a future date and time once you make more income. This is a counter-argument to the “RRSPs don’t matter” perspective based on any (lower) earned income. 
  • Also, a unique thing – unused RRSP contributions have some interesting tax ramifications. You typically deduct your contribution amount on your tax return to lower your tax liability and pay less in taxes that tax year – this is what I do. But….you don’t need to deduct your RRSP contribution on your tax return in the same year you make it. You can choose to take that deduction in a future year. For instance, it may be smarter for you to take the deduction in a year where your income is greater so you fall out of a higher tax bracket. Something to think about!
  • After you select investments for the account, the income you earn on those investments inside the RRSP are tax exempt, as long as money stays in the account.
  • A common type of RRSP is an individual RRSP, registered in the name of the person contributing to it.  There are also spousal RRSPs and group RRSPs.
  • RRSPs can be managed by a professional money manager but you can do-it-yourself (self-directed).
  • If one spouse is in a different tax bracket than his/her partner, RRSP contributions can be used to lower the total amount of income taxes a couple must pay (income splitting).
  • Some people believe you can only have one (1) RRSP account. Not true!  There is no limit on the number of RRSPs you can have. The limit is on the total amount you can deduct. However, most people find it simpler to have only one or at most two plans (the second being with their employer-sponsored RRSP) therefore making it easier to keep track of their RRSP investments.
  • You’re not as rich as you think:  when you take money out of the account, you have to pay tax.  Some exceptions apply:  RRSPs can be used for home purchases and education and there are programs associated with the RRSP for this.
  • 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.
  • Withholding taxes apply to RRSP withdrawals.

Yes, if you’re taking money out of your RRSP before you retire, you’re immediately going to pay a withholding tax. This is because our Canada Revenue Agency (CRA) wants money back. Again, this is a tax deferred account.

RRSP *withholding taxes:

  1. If you take up to $5,000, you’re going to pay 10%.
  2. If withdrawals are between $5,000 and $15,000, the financial institution will hold back 20%.
  3. If you withdraw more than $15,000, 30% is held back.

You have to report the amount you take out 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.

Why RRSPs should matter to you!

As referenced above, there are two great tax benefits that RRSPs provide Canadian investors:

  1. a tax deduction from your RRSP contribution, and
  2. 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 my personal investment plan, I invest using an RRSP.  Be careful though – the RRSP-generated tax refund is great but it’s actually temporary; you need to give it back at some point. 

This makes reinvesting the RRSP refund year after year absolutely critical in my opinion to optimize wealth building – to take major advantage of an essentially a long-term but not permanent government loan.

For most Canadians, to reap the benefits of this tax-deferred account they should maximize their contributions where it makes sense (based on their earned income), keep the fees associated with their investments inside the account low and avoid making withdrawals for as long as possible.

What’s your take on RRSPs?  Use them? Maximize them? 

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm 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. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

76 Responses to "Tax Deferred Investing – RRSPs 101"

  1. Great summary Mark. One thing people with a pension need to consider is that the combination of pension, cpp, oas, and RRSP/RRIF can push people into the same or higher tax bracket. It is all taxable income. This can be especially true if one partner passes and the ability to income share is lost. That’s why the TFSA is such a beautiful gift.
    The other consideration is what happens when the second person passes away. The entire RRSP/RRIF goes on the final tax return as income and can get absolutely tax whacked leaving substantially less for the estate. Growing an RRSP is important but unwinding it in a tax efficient manner is also important.
    RRSP cannot be split until age 65 so it’s important to have spousal plans if you plan to retire early.

    Reply
    1. Great to hear from you. Good points.

      TFSA is a great gift for sure. Maxed out every year where I can Gruff!!

      As for the RRSP, yes, I wrote a comprehensive post with Sun Life a while back on this:
      https://www.myownadvisor.ca/beneficiaries-for-tfsas-rrsps-rrifs-and-other-key-accounts/

      “RRSP qualified beneficiaries – A spouse or common-law partner
      There is a spouse rollover provision that allows a spouse, who if listed as the beneficiary, gets to put the deceased’s RRSP assets into their own RRSP without any immediate tax consequences. For what it’s worth, this is what my wife and I have established for our RRSPs. This way, either one of us can use this rolled over money and maintain tax-deferred growth inside an RRSP account until monies are ultimately withdrawn.”

      Yes, pension income splitting is something we intend to take advantage of years down the road for sure. If we retire early or semi-retire early, I suspect our RRSPs will be depleted around age 65 or 70.

      That will leave our taxable account dividend income, TFSA income x2, CPP x2, OAS x2, my pension and my wife’s pension for income in our 60s along with any part-time work. Hopefully we’ll be OK!
      Mark

      Reply
  2. I wish RRSP was equal for everyone, like the TFSA is.
    RRSP contribution room is based on income, which means richer people are able to contribute more (and get richer) than poor people.

    As someone who is low income but live really frugally (1 bedroom, paid off car) I would easily contribute to both TFSA and RRSP unfortunately my RRSP room is the size of a pea due to low income.

    Reply
  3. Having finally reached the age where I must withdraw from my RIF, the benefits of using a TFSA have become rather obvious.
    Yes it was fun getting those big tax refunds when I maximized my rsp contributions but now it is time to pay up.
    Definitely no guaranteed income supplement this year.

    Reply
  4. I am seriously considering leveraging to invest to either reducing tax I would owe or accelerating melt down of RRSP once we retire. I kind of feel frustrated when I think about all the calculations and planning required for our retirement.

    Still, maxing out RRSP will still beneficial for us as the tax rate in retirement will definitely lower than our current marginal tax rate.

    Reply
  5. I always give preference to my TFSA account over RRSP, whenever it makes sense. After tax savings always go to TFSA and I love putting money in RRSP account, then getting a tax refund, which I then put in my TFSA account. The question is how long will the TFSA stay tax free :).

    Reply
    1. I think it will remain tax free Ben but I can eventually see a lifetime contribution cap. I hope I’m wrong. This is another reason to take advantage of the TFSA as much as possible. I don’t see where things could be tax-free forever but I would obviously love that!!

      Reply
  6. Oh it’s that time of the year when all you see on TV from banks and financial institutions is commercials about RRSP and a lot of articles about RRSP vs TFSA the pros and cons of each but i have yet to find an article or perhaps a calculator that would tell you how much RRSP you have to contribute in order to not owe the government any taxes year end, I always end up contributing more then i should and my accountant keeps telling me that i shoudn’t ( I have the room for contribution but she’s saying over contributing isn’t beneficial all the time ) so my question is how do i know how much rrsp i need every year ? my thing is that i have rental income as well so lets say for the sake of simplicity my work income is 50k and rental income is 50k , so how do i know how much rrsp is needed ? thanks in advance for anyone who can help 🙂

    Reply
    1. “how do i know how much rrsp i need every year”

      “need” can be fairly personal but I can’t think of a *good* reason to take taxable income down to zero suing RRSP deductions. Most of the stuff I’ve read is to look at the tax bracket a person is in and examine if it is “worthwhile” to use deductions from there.

      It would not make a lot of sense to use RRSP deductions within the 15% federal bracket (<$49,020). It would make sense to use RRSP deductions to shelter taxable income in the 29% bracket (151,978-216,511), or the next higher bracket (33%). It *could* make sense to use RRSP deductions to shelter income in the 26% bracket (98,040-151,978).

      Of course all this is dependent upon which bracket one might be in whence they withdraw funds from their RRSP and whether the OAS clawback comes into play. Ideally, if one deducts in the 26% or higher bracket, and takes it as income in the 20.5% (or 15%) brackets they've come out ahead (tax wise). A few variables that require some perusing.

      Reply
      1. Thanks Lloyd for your reply but please bare with me for one more question 🙂
        I get the point of my working income i kind a figure in what tax bracket i do fall in but when rental income is added since there’s no taxes deducted yet on it how do i then calculate it ? just add like my example 50k in employment income plus 50k in rental income? so i do fall in this example in the 26% bracket ?

        Reply
        1. Any taxable income *above* the 98,040 would be subjected to the 26% federal tax. I believe this is the concept of the marginal tax rate. So *if* your “taxable” income is 100K, then only ~2K is in that bracket and subjected to the 26%. (note that this does not take into account any provincial tax rates) (also note, this is just *stuff* I’ve read on the internet, I ain’t no tax/RRSP guru).

          Reply
        2. Recall we are in a graduated tax scale Gus.

          The marginal tax rate is the tax rate paid on the next dollar of income. So, the first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.

          Jim Yih does a great job updating his site on this stuff:
          https://retirehappy.ca/marginal-tax-vs-average-tax/

          Hope that helps?

          Reply
          1. Thanks Mark,
            You and Lloyd helped to clear a lot of stuff in my head but still I’m not going to fire my accountant 🙂 she does a great job and worth every penny I pay her .
            I’ll take a look at Jim’s article for sure.
            Thanks

            Reply
    2. For your RRSP contribution room Gus, check your Notice of Assessment from CRA from last year. You would have needed to claim your employment income and rental income – that Notice would have showed you what you can contribute to your RRSP for the 2020 tax year.

      Alternatively, you can login to “My CRA” assuming you have an account. A good place to keep track!

      As for “do you need to invest in your RRSP”? Nope. But it will reduce your taxes payable. 🙂

      Reply
      1. Mark,
        I do have a CRA account and yeah i have the amount of contribution left it’s just that I’m planning on maxing out my TFSA since i have lots of room ( i just started my TFSA 3 years ago ) over contributing into my rrsp , the way i’m thinking is if i keep both rental income properties into retirement plus a big nest egg in rrsp that’s going to trigger a high taxable income not to forget adding cpp and oas to the income as well although i’m thinking of delaying cpp and oas till age of 70 and between 65 and 70 rely on rrsp plus rental income only , i don’t know i’ve got 15 years to go so lots of time to think i guess :). the ideal situation is to have enough money to go around maxing out your rrsp tfsa and paying extra on your mortgage and my situation helping my two kids as much as possibly can with their university tuition fees.
        so yeah thanks again .

        Reply
        1. I find the site taxtips.ca has a Basic Canadian Tax Calculator which is very helpful for a lot of calculations and planning out your income and deductions.
          Also, if you did your own income tax, rather than relying on another person, you would have a better handle on how taxation works. The old fashioned paper forms are good for seeing everything that is there, while of course the programs (I use a free one) is great for doing all the arithmetic. Even if you just had a good look at it one time, it would help you.
          Don’t forget that only your Net rental income is taxable. I did not like the fact that my net rental income was 100 percent taxable, while dividends and capital gains were not. I was happy to sell my rental before the time I wanted to collect OAS. A big capital gain when you do sell will wipe out all your OAS that year, but it will be a one time thing.

          Reply
          1. Thanks Barbara ,
            I will check taxtips.ca for sure , as for doing my taxes my wife has been on my case for couple of years now but i guess I’m not comfortable when it comes to taxes and government 🙂
            as for the net rental income being taxed at 100% i agree with you on that and it has been on our mind to sell them both and invest the money for the ease of liquidity it’s just that we bought them a long time ago and the rent on them is very juicy.

            Reply
          2. Smart tax planning Barbara and one of the reasons we don’t have a rental also re: net rental income is taxable.

            I prefer more efficient CDN dividends and the capital gains in my taxable account as an efficient form of taxation – as I plan ahead.

            Thanks for those insights!

            Reply
        2. Totally understand Gus. Then again, a fat RRSP account is a nice problem to have!

          I’ve read emails and comments on this site from hundreds of successful retirees and I find the “sweet spot” for them is around the $40-50K per person in income assuming some income splitting is happening. That means at the top end, only some of their money is paying ~ 20.5% tax.

          Here are the current federal rates; at lower 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 taxable income over 49,020 up to $98,040)

          Many of these successful retirees are purposely delaying CPP to age 65 or even 70.
          https://www.myownadvisor.ca/when-to-take-your-canada-pension-plan-benefit/

          Most are taking OAS at age 65 since there is not a huge benefit to delaying OAS vs. CPP.

          All that said, yes, seems your “….ideal situation is to have enough money to go around maxing out your rrsp tfsa and paying extra on your mortgage and my situation helping my two kids as much as possibly can with their university tuition fees.”

          That’s a very good balance 🙂

          Reply
          1. Are those provincial tax rates? They don’t jive with the federal numbers.

            15% on the first $49,020 $49,020
            20.5% on the next $49,020 $49,021 up to $98,040
            26% on the next $53,939 $98,041 up to $151,978
            29% on the next $64,533 $151,979 up to $216,511
            33% on the portion over $216,511 $216,512 and up

            Reply
  7. One other consideration is that one can carry forward the actual *deduction* of an RRSP *contribution* to future years. This might be getting into relatively detailed planning but it can have a purpose in some cases.

    Reply
  8. Just found this post while scanning through something else.

    On your last point Mark I think it’s safe to say withdrawal taxes apply on all RRSP withdrawals for income.

    On the tax deferral idea of an RRSP I agree it could be considered as a government loan and not tax free. However the 1/3 number is likely much too high a tax rate for most people. To pay that kind of tax you would need to withdraw $100K range RRSP with no other income or 75+K RRSP with 14K of CPP/OAS. Those are obviously large amounts of withdrawal and income to create 1/3 taxes, and also create OAS clawback. More realistic is probably a tax rate closer to half that although your withdrawal amount, provincial residence and other income etc of course will impact all of this.

    Reply
    1. You’re probably right Deane and like usual, I am being overly conservative. That 1/3 number is what we are using for our tax rate. We won’t have enough funds to make that kind of RRSP withdrawal. I do anticipate we will draw down the RRSP by at least $10,000 per year ($5k each) in our 50s. We hope to deplete most of our RRSP or move RRSP withdrawals to TFSA in our 50s and 60s before both CPP and OAS payments kick in.

      Reply
  9. I’m 25, and have had an RRSP since I was 22. I also have a pension from work. I contribute monthly to my RRSP but recently have decided to increase my contributions as I have been working a lot of jobs from home, increasing my income, and I don’t want to be caught having to pay an insane amount of taxes at the end of the year. Plus – I want to retire eventually! My RRSPs are in mutual funds (balanced growth) and have been doing really well.

    Reply
  10. I will put the money I withdraw into non-registered investments. In the last couple of years I have bought TD e-series index funds, the US fund has done great.

    I haven’t had a good return on my RRSP portfolio over the past decade; too much loss due to fees etc. I suppose. I am hoping for a better return over the next while….but who knows. I don’t have a pension from my working days, only the RRSP, and the CPP that I will get is low, due to limited years in the workforce.

    I am also considering buying a one bedroom apartment for rental. Unlike the rest of the country, prices where I live went down years back and have never recovered. I’d do this to rent it to one of my kids, instead of them paying a high rent to someone else. I have another rental property that yields a fairly decent rate of return on my investment, (my contribution was less than $50,000, the rest is financed) but rentals can be a hassle. The low mortgage rates definitely help make it profitable.

    Of course as soon as January comes I will be making the TFSA contributions for the year. I also have this as a TD Waterhouse account, e-series funds.

    I enjoy your blog!

    Reply
    1. @Barbara
      I hope you already know that when you do apply for CPP you will need to call them and ask to have the years you were at home with a child under 6 “dropped out.” They don’t automatically give you this improved calculation, but you are entitled to it if you ask. (Assuming you had no income for one or more years while you had a child at home who was under 6.)

      Reply
      1. Thanks. I do know about that, but it is important to always get that word out. I had 11 years of kids under 6 and last child had/has disabilities so I couldn’t return to paid work even if I had wanted to.

        Reply
  11. I am making withdrawals from my self directed RRSP now. I find the mandatory tax withholding rates high. I’ve been a stay at home mom without income for a number of years, so it is funny to have income tax taken off at source.

    Yes, I will get that extra tax refunded, but with the long wait. Then it will be re-invested. You think you have a lot of money saved in your RRSP, but then you realize you don’t really have all that money, you only have the after-tax portion.

    Tax rates in Canada now are very low compared to 25 years ago, so now is a pretty good time to make withdrawals if you are wanting to run down your RRSP.

    Reply
    1. Thanks for the comment Barbara. I too, find the withholding tax high, not sure that will change? Never say never I guess.

      For a rough estimate, I always “chop” my RRSP savings in half, that’s pretty much what I’ve saved. That’s doesn’t amount to very much, less than 6-figures unfortunately but I’m working on that.

      I suspect if I want to retire early, I’ll need to withdraw from my RRSP as well.

      What are you doing with the money you withdraw? Spending? Putting into non-registered investments? Putting into TFSA? Do tell if you can.

      Cheers,
      Mark

      Reply
      1. True, but at tax time everything will be reconciled and some tax tax may be owing on the minimum withdrawals that weren’t taxed earlier.

        I take a minimum withdrawal on my LIF and have them take tax off at a rate that is closer to my what my actual will be.

        Reply
    2. Yes, they’re usually much too high, unless a person also has other large income sources to consider, or making a very large withdrawal. I’ve stated this numerous times.

      I just do multiple smaller withdrawals at the lower withholding rates, keeping these in the range of what my actual tax rate will be. Fortunately I’m not paying a fee for each deregistration.

      Reply
      1. I was wondering about that. Do you do $5,000 RRSP withdrawals at a time? Other?

        I’ve been advising my parents to do that, no more than $10,000 at a time not because of withholding taxes per se (because you have to pay anyhow eventually), more about being strategic and ensuring you don’t withdraw tax-deferred money until you really have to. It has time to grow still/compound as long as you are invested.

        ?

        Mark

        Reply
        1. Yes, I’ve done multiple withdrawals annually for both under 5K and under 15K to get a rate closer to my expected real avg rate I calculate using tax tips. Usually I owe something at tax time but that’s planned. For 2020 we’re both getting a refund due to low withdrawals by me (also planned). I also mentioned to May I tell broker how much tax I want withheld from my minimum LIF withdrawal.

          I’m pulling out money/in kind investments to fund lifestyle, top up unregistered and TFSA’s. My RRSP is currently at record high after 7 years of doing this. Waiting for Mr. Market to change that. LOL

          Overall I totally agree with what you’re saying about being strategic for maximum benefit while considering tax implications over the long term.

          Reply
          1. Thanks. That’s good insight. Too funny really – you’re retired and RRSP is now at an all-time record high. Wow. Makes you realize if you keep RRSP withdrawals around 3-4% (re: SWR) then you really do “have enough” 🙂

            Reply
            1. You’re welcome.

              Well, luck in retirement timing with unusually robust markets is a key driver and our avg withdrawal rate to date is 2.23%. We’ll see what the future brings.

              Reply
                    1. Ha, with your plans and assets you’ll be using an even lower percentage.

                      Doing fine so far here and CPP/OAS will give another shot in the arm in the years to come.

                      FYI my revised VPW (conservative model) suggests a withdrawal rate of 4.3% for 2020 and for 2021, rising to 4.4% in 2022. The default assumptions suggest 4.8%, 4.9, 5.0 for those three years.

                      Doesn’t really matter. Very loose guide. I have little idea what we’ll do in the coming years.

          2. Rbull, you say: Usually I owe something at tax time

            Keep in mind this from the CRA: “If you earn income that has no tax withheld or does not have enough tax withheld for more than one year, you may have to pay tax by instalments.”

            Reply
        2. May made the comment to a post I had written over 7 years ago.
          I have continued to do RRSP withdrawals of $25-30000 a year and have invested the money (and the tax when I got it back) into a cash account. I started a small sized RRIF, into which I transfer the money from my RRSP when I want to do a withdrawal, that way I do not pay any withdrawal fees, but also do not have much of a minimum that has to be taken out.
          So now I am at a point where I want the tax taken off, lol. I have a lot of investment income now, along with my measly CPP (taken early as no further contributions to increase it) which don’t have any tax taken off at source. I do not want to be in a place where I have to make the quarterly instalment payments to the CRA.
          This past December I took out a “loser” from my RRSP (Japan) and then re-bought the same thing in my cash account in the same amount as the withdrawal. Now any gains on that holding will be only 50 percent taxed, rather than 100 percent. Isn’t that a better option?
          I am also thinking that our tax rates are going to go up in the future, maybe by a lot. Better to get some money out now.

          Reply
          1. Thanks Barbara.

            That’s the thing with RRIFs right? People often forget they don’t need to RRIF their entire RRSP, they can choose a portion of that whenever. You must RRIF or consider an annuity (blah, blah 🙂 in the year you turn age 71.

            I’ve told my parents to RRIF, do the mins, to allow the RRIF assets to continue to grow.

            Yes, wish to avoid quarterly installments to CRA if you can help it but I’ve always said having a tax problem in retirement, all things considered, is a good problem to have!

            Capital gains as you know are always an efficient form of tax for growth from that perspective is good in a taxable account too.

            Tax rates have to go up, over time, I see no reason why they cannot to save our economy….we’re in a mess.

            Reply
            1. Yes, I wouldn’t mind paying quarterly installments if I had regular income. But I wouldn’t want to be asked to do so, if I had taken some large capital gains two years in a row and then none were expected for awhile.
              They tell me that my Spousal RSP will have to be set up as a separate RRIF. I was hoping to simplify things going forward and have it all in one.

              Reply
              1. Yes, I hear ya. I know I’ll need to pay taxes this year come tax time – just a matter of how much. I’m fortunate that way and would rather pay it in the spring that get it withheld too much at the source.

                Not a fan of giving the government more of my money as part of a free loan….

                Reply
      2. “Fortunately I’m not paying a fee for each deregistration.”

        This is where I got stuck. My TDDI accounts charged for withdrawals. In the long run it really just gave another reason to convert to RIFs on both of my equity accounts. I went with minimums and a 20% tax withholding. Just pulled that out of a hat, no real thought process to picking 20%. For now, the payments are just going into the non-reg equity account at Questrade to avoid commissions. The GIC ladder RRSP at the credit union is just going to sit there until I have to do something about it or if I see an opportunity to withdraw. Not sure what opportunity that might be as our income is pretty well fixed with the cessation of farm income.

        Still haven’t made up my mind of taking/not taking CPP in June. Might come down to a coin flip.

        Reply
        1. Sounds like that makes sense, getting some funds out of registered cheaply and orderly. Your method of making decisions seems to work great for you.

          I was pretty consistent with my withdrawals until this year and dropped it to about 40% of normal due to COVID. Dunno about this year.

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          1. lol…I should call it the “Procrastinators Theory of Everything”.

            I did a top to bottom sell off of all individual equities in my RRSP and LIRRSP on March 3 with a slow buy back of most of them over the next 2-3 weeks. Juiced the numbers for the year by a huge amount and kicked the dividend income up a decent notch. 100% luck as there was zero planning. Just went with the gut. Made one real dumb mistake that I’m kicking myself for but all in all it worked out pretty well.

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              1. hahaha….sold my BEP.UN yesterday in the RRIF and picked up some more PPL and XEI. Pretty well doubles the dividend income over the BEP.UN.

                BEP.UN was my huge faux pas in March. I had it in the two accounts (RRSP/231 and LIRSP/785), sold them all with the eventual intention to buy back the total equivalent dollar amount, but in one account. Somehow I messed up and only bought back the total dollar amount from the RRSP account.

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                1. XEI is a good, historical income fund. Yields 4% or just more I recall.

                  I’m keeping my BIPC and BEPC for the coming decades. Low yield can also mean higher growth 🙂

                  Reply
                  1. I had gotten rid of the C splits earlier, they were not DRIPping anyways and looked like clutter in the accounts. I still have the BIP.UN in my LIF as well as TFSA, and the wife still has her 701 BEP.UN in her RRSP. I just saw BEP.UN getting near a 180% gain in that account according to TDDI so I sold it when it hit $61.60 and split it out. I still love BEP.UN, just saw this as an opportunity to increase yield in the RRIF. XEI is *okay* I guess. I don’t spend much time analyzing this stuff.

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                    1. Ya, I mean, I have no plans to use XEI or another income fund myself but I won’t rule it out. 🙂

                      Love BIPC and BEPC, no intentions to sell but you might want to confirm if you’re with TD since they might honour the DRIP for both. BMO doesn’t allow many USD DRIPs, at least they didn’t use to. I recall RBC honours a few hundred DRIPs.

                    2. I’m sure the BIPC and BEPC would have DRIPped but if I remember correctly, the dividend dollar amount was not sufficient to buy a whole share. I’d have to go back in the records to confirm that is true. In any event, I sold them to clean up the portfolio.

        2. With RRIF, at TD or other, you shouldn’t have fees for RRIF income Lloyd – have you called to complain or confirm?

          I could see some brokerages charging a small fee for RRSP withdrawals – not great but banks are gonna bank!

          Ha. Coin flip on CPP. Lucky position to be in when you don’t need the $$$ 🙂

          Reply
          1. The RRIF and LIF are new this year. I had RRSP, LIRSP and any withdrawals were going to be at $150 per. So I converted to start pulling $$ out and avoid the fees. I should have explained that better, sorry.

            Reply
            1. Lloyd, you only needed to open the RRIF with a small amount of funds. Then you can just transfer over money for free, when you want to do a free withdrawal. It took me a couple of times paying that withdrawal fee from the RRSP to figure that out. My RRIF balance is very low, so the minimum withdrawal, which I get paid out once a year in July, is low. Makes for much greater flexibility if you are under 71.

              Reply
              1. Yup. Wasn’t worth the effort to separate stuff more than I already have. Only my equity RRSP/LIRSP at TDDI were converted. My GIC RRSP at the credit union is still there and will likely stay that way. The wife’s equity RRSP is still DRIPping away and her GIC RRSP is compounding away for the next five years.

                My farm income has basically ceased so I’m using RRIF/LRRIF income to make sure I use up all the lower tax bracket envelope. I will likely encroach into the 20.5% bracket but I’m fine with that. I don’t mind paying taxes, it’s a personal thing. (I detest paying bank fees though).

                The dividends in the RIFs exceed the minimum payment (so far) and likely will for probably the next 3-5 years. Will cross that bridge when I get to it.

                Reply
  12. Mark, in reference to your point on withholding taxes for early withdrawals, one thing people have to be aware of when they withdraw from their RRSP is that there are statutory rates applied; often the statutory rates are lower than your actual marginal rate, causing substantial income tax to be owed at tax time. ie: you withdraw $50k and the tax withheld is only $15k, if you are in the high rate of tax (partially caused by the $50k being added to your income), you could still owe $8k.

    Reply
    1. Good point, Mark! And it get’s even worse when people think they are beating the tax system by making several small withdrawals from their RRSP so that the withholding tax is very low. They really get hit when they calculate their taxes in April and realize they owe not just the withholding taxes they evaded before, but even more on top of that.

      Reply
      1. Exactly Mark’s (Blunt Bean Counter’s) point as well. I think folks that don’t understand the tax implications of an RRSP, are in for a big shock, especially seniors thinking they will get to “keep it all”. This is why I prefer to call this a tax deferred account, you are only putting off the inevitable… 🙂

        Reply

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