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Question is: Should one invest in an RRSP or TSFA if you only have the $ to do one?

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Apr 22, 2010
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Archanfel wrote: Actually, it's the other way around. You shouldn't use RRSP if your retirement income is higher.

You need to cash out your RRSP sooner or later. You are actually forced to cash them out after your 71st birthday.

Assume you save $5500 a year, at 6% return. Let's say you start at 20 and save for 45 years. You would have $1.24 million. Assume you cash it out over 10 years, that's $124K/year, so you will need to pay a lot of taxes on it. That's assuming you don't have other incomes. Knowing RFDers, most people would become slumlords by then. :)
Sorry meant lower! Thanks for the clarification, so the retirement income tax is determined by how much you have saved in your RRSP BY AGE 71 and at the time you WITHDRAW it and the duration you plan to cash it out, that will determine your tax bracket?

So if I made like 70K annually now and by the time I retire, the cashed out RRSP amount that I take out annually is higher than my 70K income, then that's a no go
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Infinitii wrote: Very stupid question but when people say use RRSP when your retirement income is HIGHER than your current income then it's the way to go. But when you retire, wouldn't you have 0 income? How is retirement income determined so one can assess if they want to use RRSP?
OAS, GIS, CPP, employer pension, and RRSP withdrawals all count as income, so you will not have 0 income.
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Shojin wrote: OP,

Let's say my marginal tax rate was 47% today and I only have $5500 to invest yearly, for say the next 25 years. Let's also say my likely marginal tax rate at retirement is 30%. Would a TFSA still be a better choice today? (and yes I if I were to make RRSP contributions I would reinvest all of the refund).
Of course. It always is if you know for sure your retirement tax rate will be lower and you bump up your contribution as you plan to do. But, that is often not the case with people who receive pensions. The calculations:

Future Value ('FV') of RRSP with $10,377 invested annually, which would generate a $10,377 x 47% = $4,877 annual refund and therefore a net disbursement of $10,377 - $4,877 = $5,500 for 25 years = $569,349 pre-tax less any interest you would have paid if you needed to borrow the extra $4,877 until refund time each year. If borrowed for 2 months at 5% each year or 20% (credit card borrowing) that would be a cost of $1,000 and $4,000.

$569,349 less 30% tax on withdrawal = $398,544

FV of TSFA with $5,500 invested annually for 25 years = $301,755.

That will always be the case if you bump up your contribution and use the refund to erase the bump up.

If the tax rate during contribution and withdrawal remain the same the RRSP is always going to equal the TSFA FV regardless of the term, interest rate or amount invested per year (less a small deduction for any borrowing costs). For my friend this is the case as his excellent company pension (as I have repeated many times but no people seem to ignore that important aspect of my scenario) would push his RRSP withdrawals into the same tax rate as his contributions and at the same time carry the attribute of being forced on him every year instead of being allowed to further accumulate tax free as in the TSFA. He has no intention or desire to retire in a way that would result in him having no income for a while so that he could withdraw any RRSP money with very little tax.

But even if the difference is not this dramatic but the RRSP yields a higher value that does not mean it is the best choice. If the difference is less dramatic due to your retirement marginal rate being closer to your contribution tax rate you may decide that you like the advantage of not being forced to withdraw from your RRSP and pay tax but instead be able to allow your money to grow in a TSFA tax free and withdraw funds when and if you see fit and then also be able to contribute those funds back to the TSFA at a later date if you so desire. You may do this if your company pension or other assets you have meet your needs.
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Archanfel wrote: You are making the assumption that the $2200 was invested in a unregistered account, which wouldn't be true since it will either be invested in RRSP account or in TFSA.
It was one of the scenarios, not an assumption. Believe me people do it.
Archanfel wrote: Assuming that your marginal tax rate is the same before and after retirement (very unlike), investing in RRSP and TFSA should be exactly same.
The future value is net after tax yes but there are disadvantages to an RRSP in this scenario, which I have pointed out. You must have missed that.
Archanfel wrote: The advantage of RRSP (aside from tax treaty with the US) is that the capital gain would likely be the only income that a retire person would have.
Withdrawal's from the RRSP are taxed as income not capital gain. Also, many retired people have pensions or other assets to derive income from so it is not true that their RRSP is the only income they have.
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Dec 11, 2008
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eonibm wrote: You say that I say 20% interest whereas I said 5% or 20% depending on where you get the money from. Yes some people would borrow and credit cards if they couldn't get it elsewhere. So you parse out part of what I said to make my statement sound ridiculous.
The simple fact is that there is no need to borrow at all, so why bring it into the discussion at all?
Saying that the math is unnecessary complicated indicates you don't understand basic future value calculations. At the same time you don't provide your 'simple' calculations.
I understand future value calculations perfectly, thank you very much. In scenario 1 you assume the person reinvests their refund into a non-registered account. Realistically they would go for scenario 5 and reinvest it into the RRSP. In scenario 5 you also add in a loan that's not needed. That's making it unnecessarily complicated. Also to simplify the equations you can simply look at one year, 20 yrs into the future, and the results you get would draw the same conclusions (note: I'm not saying you are wrong to do this--your math is correct under all the assumptions you make--just saying you can simplify things to make the same point, that might be easier for your friend to understand).
There so many other inaccuracies in your post it would take me pages to write them out.

It's clear that you would tell my friend to go with the RRSP, which is totally wrong. Many other people are in a similar situation. That's called reality, not skewing.
Really? What inaccuracies? Also, you seem to have completely ignored the 2 paragraphs where I state the TFSA is actually the better choice for most (not all) people who cannot max out both--but based on other reasons. I have actually told my own friends about how great a TFSA is and that they should take advantage. I would probably tell your friend to go for the TFSA as well (see my reasons in my previous post, that you skipped over), but I would also make sure to tell your friend how fantastic the RRSP is if used properly, and that they may actually be better off with the RRSP in certain cases. It's not as black and white as you seem to make it.
What this thread and specially your posts show is that a lot of people don't understand RRSP's & TSFAs.
Oh, the irony...I'd ask if your post was an April Fool's joke, but it's already the 2nd today, so...
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Archanfel wrote: You need to cash out your RRSP sooner or later. You are actually forced to cash them out after your 71st birthday.
Misleading. You are not forced to cash the RRSP out. You must transfer the assets to a RRIF and they need not be sold or turned into cash. The holdings can simply be transferred over and you can still own the same stocks, mutual funds, bonds, etc in the RRIF and sell them when you feel like it. What is forced is the withdrawals from the RRIF that must be made each year according to a % per year. You can convert your RRSP to a RRIF at any age from 65 to 70, but at 71 you are forced to convert your RRSP to a RRIF and from then on must withdraw a certain % each year according to this schedule: https://www.woodgundy.cibc.com/wg/refer ... rawal.html. There are no forced withdrawals from a TSFA and you can contribute funds withdrawn from a TSFA back into the TSFA in the following year if you want, which you cannot do with a RRIF.
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Mike15 wrote: Why would someone need to borrow money to fund $5,500 to an RRSP, but not need to borrow to fund $5,500 to their TFSA?
No one is saying to borrow the $5,500.
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mango_cake wrote: The simple fact is that there is no need to borrow at all, so why bring it into the discussion at all?
Again, you speak nonsense. Tell that to my friend who would not have the extra $ to bump up his contribution beyond $5,500 if he invested in an RRSP instead of a TSFA. That's why he would need to borrow if he went that route.
mango_cake wrote: In scenario 1 you assume the person reinvests their refund into a non-registered account.
I see people do this all the time so it is not an unrealistic scenario.
mango_cake wrote: In scenario 5 you also add in a loan that's not needed. That's making it unnecessarily complicated.
See my first comment. Obviously you live in a bubble and don't realize that not all people have the financial means you have and do indeed have to borrow. What is so hard about that for you to understand?
mango_cake wrote: Also to simplify the equations you can simply look at one year, 20 yrs into the future, and the results you get would draw the same conclusions (note: I'm not saying you are wrong to do this--your math is correct under all the assumptions you make--just saying you can simplify things to make the same point, that might be easier for your friend to understand).
He understands it quite well and doesn't think it's complicated at all. Sorry it's too complicated for you. It's a simple concept really.
mango_cake wrote: It's not as black and white as you seem to make it.
For every person there is a black and white scenario, as long as they are willing to rely on their estimate of what their tax rate will be when they retire. If not, then it's a bit grey. I never said that my friends scenario applies to everyone. Sheesh. That's why I provided different scenarios, pointed out the issues that would make it different for different people, how borrowing changes the calculation slightly, how some people don't bump up the RRSP contribution and reinvest the refund in taxable accounts, etc.

Many people have pointed out that they have learned things from this thread that they didn't realize before. I think I drawn a bit of light on issues that people need to consider when considering an RRSP vs TSFA. Sorry you haven't learned anything, but then you don't understand why some people need to borrow money.
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OP, what happens in the RRSP scenario where the refund is fully invested back into the RRSP, without utilizing any loans etc. (so no interest needs to be paid back).
i.e. Year 1: $5,500 RRSP - $2,200 refund
Year 2: $7,700 RRSP - $3,080 refund
Year 3: $8,580 RRSP - $3,432 refund
Year 4: ...

I'm interested to know what that comes out to. I don't know how to do this particular future value calculation.

On a side note. Regardless of what's better, I have to invest minimum 5% of my gross to RRSP, since I get an instant 50% return on that (from employer matching - i.e. 2.5% of my gross).
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I will only invest in an RRSP if I plan to be in a lower tax bracket when I withdraw the money. For example, if I'm having a sabatical year for travel or when pursuing full time education. Of course, I will also invest to get the maximum RRSP contribution matched by my employer.
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eonibm wrote: Again, you speak nonsense. Tell that to my friend who would not have the extra $ to bump up his contribution beyond $5,500 if he invested in an RRSP instead of a TSFA. That's why he would need to borrow if he went that route.

See my first comment. Obviously you live in a bubble and don't realize that not all people have the financial means you have and do indeed have to borrow. What is so hard about that for you to understand?
I already stated this before: he does not need to borrow $. He already has the $5500. He just has to put this into the RRSP, get the refund, then reinvest the refund. No need to borrow in advance. There are plenty of situations where people need to borrow--this is not one of them.
I see people do this all the time so it is not an unrealistic scenario.
Realistic for many people, yes. I'm just saying, you are only presenting one side of the issue, which is unfair to the RRSP. There are many other advantages and assumptions you can make that will make the RRSP more beneficial (e.g. employer matching, no withholding taxes on US/foreign dividends, tax penalties which may make it more difficult for some people to withdraw and spend their retirement savings, etc). What about all the realistic scenarios on the other side of things?
He understands it quite well and doesn't think it's complicated at all. Sorry it's too complicated for you. It's a simple concept really.
Don't get so defensive, I said your math was correct (under all the assumptions you made). I just pointed out that some of your assumptions made things unnecessarily complicated, and suggested there was an easier way to make the same point. You don't have to take me up on that suggestion.
For every person there is a black and white scenario, as long as they are willing to rely on their estimate of what their tax rate will be when they retire. If not, then it's a bit grey. I never said that my friends scenario applies to everyone. Sheesh. That's why I provided different scenarios, pointed out the issues that would make it different for different people, how borrowing changes the calculation slightly, how some people don't bump up the RRSP contribution and reinvest the refund in taxable accounts, etc.
You never included tax rate changes in your calculations, though--you seem to be saying that tax rates stay the same and yet TFSA is still better than RRSP, which is what I take issue with. Also, the problem is, you did not show all the many scenarios in which someone would benefit much more from an RRSP vs. a TFSA. All your assumptions are skewed towards the TFSA only. So it's unfair and one-sided. I'm only pointing all of this out because I don't want someone to read your post and decide a TFSA >>> RRSP, when in reality, an RRSP may be better in their case, but you didn't present that side of things. You did a great job showing the possible pitfalls of an RRSP--I agree with that part completely--but then you stopped there, instead of describing how to best utilize the RRSP in ways to maximize return (that could well be better than the TFSA for other people).

I'll just end it at that because it's clear none of my points are getting through to you...
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kenchau wrote: OP, what happens in the RRSP scenario where the refund is fully invested back into the RRSP, without utilizing any loans etc. (so no interest needs to be paid back).
i.e. Year 1: $5,500 RRSP - $2,200 refund
Year 2: $7,700 RRSP - $3,080 refund
Year 3: $8,580 RRSP - $3,432 refund
Year 4: ...

I'm interested to know what that comes out to. I don't know how to do this particular future value calculation.

On a side note. Regardless of what's better, I have to invest minimum 5% of my gross to RRSP, since I get an instant 50% return on that (from employer matching - i.e. 2.5% of my gross).
Well this is indeed a more complicated calculation because it is not the future value of an annuity of equal payments but one of an annuity rising payments that do not rise not rising linearly but increasing from $7,700 in the beginning and maxing out at $9,167 around year 12 instead of $9,167 throughout (ie the bump up scenario) so you have to do each individual calculation separately. It's going to be probably about $15,000K or so less.

You are better off using any extra cash you have, or borrow and pay back with the refund, enough money to bump up the refund to $9,167 right from the beginning. Any interest you might pay is far less than what you lose by not doing so and reinvesting the refund when you get it.
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mango_cake wrote: I already stated this before: he does not need to borrow $. He already has the $5500. He just has to put this into the RRSP, get the refund, then reinvest the refund. No need to borrow in advance. There are plenty of situations where people need to borrow--this is not one of them.
No he doesn't have to if he's willing to end up with less future value than he would if he did borrow and was able then to put in the $9,167 each year right from the beginning instead of having it build up slowly to that over 12 years. Do the calculations and you'll see. It's not a negligible amount!
mango_cake wrote: Realistic for many people, yes. I'm just saying, you are only presenting one side of the issue, which is unfair to the RRSP. There are many other advantages and assumptions you can make that will make the RRSP more beneficial (e.g. employer matching, no withholding taxes on US/foreign dividends, tax penalties which may make it more difficult for some people to withdraw and spend their retirement savings, etc). What about all the realistic scenarios on the other side of things?
There are many scenarios. I am talking about the one I am presenting.
mango_cake wrote: Don't get so defensive, I said your math was correct (under all the assumptions you made). I just pointed out that some of your assumptions made things unnecessarily complicated, and suggested there was an easier way to make the same point. You don't have to take me up on that suggestion.
Because it is not necessary and if I did then people would ask for more clarification that would result in me ending up at the same place anyway. Believe me I know what happens when one writes posts and does not provide more explanation or clarity.
mango_cake wrote: You never included tax rate changes in your calculations, though--you seem to be saying that tax rates stay the same and yet TFSA is still better than RRSP, which is what I take issue with. Also, the problem is, you did not show all the many scenarios in which someone would benefit much more from an RRSP vs. a TFSA. All your assumptions are skewed towards the TFSA only. So it's unfair and one-sided. I'm only pointing all of this out because I don't want someone to read your post and decide a TFSA >>> RRSP, when in reality, an RRSP may be better in their case, but you didn't present that side of things. You did a great job showing the possible pitfalls of an RRSP--I agree with that part completely--but then you stopped there, instead of describing how to best utilize the RRSP in ways to maximize return (that could well be better than the TFSA for other people).
That's why they are called an 'assumptions', which I clearly outlined in my first post. You should give people a little more credit. I think they realize that if the assumptions don't apply to them they can't just accept that the conclusion does. Please.

And, if you want to present every possible scenario there wouldn't be enough threads in this forum to do so. The possibilities are endless At least with the framework I have presented people will be able to decide for themselves whether it applies to them or not and what they have to calculate differently as a result of the assumptions not applying to them. The purpose of me writing this thread was to discuss a particular set of scenarios. Feel free to write some threads about the advantages of RRSPs if you want but it seems you are more interested in arguing points which you prove to be wrong about in the end.

I'll just end it at that because it's clear none of my points are getting through to you...
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kenchau wrote: i.e. Year 1: $5,500 RRSP - $2,200 refund
Year 2: $7,700 RRSP - $3,080 refund
Year 3: $8,580 RRSP - $3,432 refund
Year 4: ...

I'm interested to know what that comes out to. I don't know how to do this particular future value calculation.

On a side note. Regardless of what's better, I have to invest minimum 5% of my gross to RRSP, since I get an instant 50% return on that (from employer matching - i.e. 2.5% of my gross).
You don't have to wait a whole year to contribute the refund back to the RRSP. You can make your contribution in late February, file your taxes that same day, get the refund in a week to ten days, and contribute the refund right away.
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bubak wrote: You don't have to wait a whole year to contribute the refund back to the RRSP. You can make your contribution in late February, file your taxes that same day, get the refund in a week to ten days, and contribute the refund right away.
He is not saying you have to wait. Quite the opposite. He shows the $2,200 refund in the same year as the contribution, ie Year 1, and so on. It's just that if you bump up the contribution to $9,167 each year, then the refund which is 40% in this scenario brings down your net out-of-pocket to $5,500 each and every year, rather than waiting until year 12 until it has built up to $9,167 under his scenario. You end up having more money in the end because of the timing difference yet invest the same amount of money.
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eonibm wrote: Well this is indeed a more complicated calculation because it is not the future value of an annuity of equal payments but one of an annuity rising payments that do not rise not rising linearly but increasing from $7,700 in the beginning and maxing out at $9,167 around year 12 instead of $9,167 throughout (ie the bump up scenario) so you have to do each individual calculation separately. It's going to be probably about $15,000K or so less.

You are better off using any extra cash you have, or borrow and pay back with the refund, enough money to bump up the refund to $9,167 right from the beginning. Any interest you might pay is far less than what you lose by not doing so and reinvesting the refund when you get it.
Okay, so I just worked it out on Excel. First I just wanted to mention, that $202,321 figure, incorporates making another contribution in the 20th year but no interest earned after that. So assuming we wouldn't contribute a final $5,500 only to withdraw it right away, I added a year of interest, which brings it to $214,460. Or could have subtracted $5,500 from original figure instead, I suppose.

So TFSA would be $214,460.

For my RRSP scenario of recontributing it right away. I used 6% interest earned on the starting annual balance and then 5% interest on the re-contribution of the refund (assume two months delay, so one sixth lost in interest, therefore 5% for simplicity).

It ends up at $348,601. So do I just multiply that by 40%?==> $139,440....leaving $209,161 (if at 40% tax bracket)?
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eonibm wrote: It was one of the scenarios, not an assumption. Believe me people do it.
People do it because they do not have the room in RRSP or TFSA. However, in your scenario, your TFSA space is wide open. There's no reason to put something in unregistered if you have space in either TFSA or RRSP since you will always lose, even if RRSP withdraws are not taxed as capital gains.
The future value is net after tax yes but there are disadvantages to an RRSP in this scenario, which I have pointed out. You must have missed that.
That's not true if the tax refund is invested in RRSP or TFSA.

Here is the equation for it, assuming you are investing X (before tax), the return is R, investment period is n and your tax rate is T now and T' after retirement, then

RRSP has a future value of

X * (1+R)^n * (1-T')

TFSA has a future value of

X * (1-T) *(1+R)^n

The two values are the same if T = T'.
Withdrawal's from the RRSP are taxed as income not capital gain. Also, many retired people have pensions or other assets to derive income from so it is not true that their RRSP is the only income they have.
It doesn't matter since you never paid tax in the original investment in the first place. See my equation above.

It also doesn't matter if people have other assets as long as T' < T.
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kenchau wrote: Okay, so I just worked it out on Excel. First I just wanted to mention, that $202,321 figure, incorporates making another contribution in the 20th year but no interest earned after that. So assuming we wouldn't contribute a final $5,500 only to withdraw it right away, I added a year of interest, which brings it to $214,460. Or could have subtracted $5,500 from original figure instead, I suppose.

So TFSA would be $214,460.

For my RRSP scenario of recontributing it right away. I used 6% interest earned on the starting annual balance and then 5% interest on the re-contribution of the refund (assume two months delay, so one sixth lost in interest, therefore 5% for simplicity).

It ends up at $348,601. So do I just multiply that by 40%?==> $139,440....leaving $209,161 (if at 40% tax bracket)?
You would not get two months delay since you should have filed a TD1.
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I strongly believe that people should learn how this is done mathematically rather than rely on a single example using Excel.

Given a pre-tax amount of X, marginal tax rate of T, investment return of R, investment period of n and average tax rate of T' after retirement.

For a single investment in RRSP, your future value would be

X * (1+R)^n * (1-T') = X * (1-T') * (1+R)^n

For a single investment in TFSA, you future value would be

X * (1-T) * (1+R)^n

For yearly contribution in RRSP, your future value would be

X * ((1+R)^(n+1) - (1+R))/R * (1-T') = X * (1-T') * ((1+R)^(n+1) - (1+R))/R

For yearly contribution in TFSA, your future value would be

X * (1-T) ((1+R)^(n+1) - (1+R))/R

As you can see, in any of the cases, the tax is a single term in the formula which you can move around. The only thing matters is which is bigger, T or T'. X, R and n have nothing to do with the comparison.

Excel sometimes hide this basic fact from users. A common mistake is to think RRSP's tax effect is bigger even with the same rate since you would have more money. In reality, whether you lose 40% now or you lose 40% after retirement are mathematically the same.
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Sep 10, 2010
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Quickly, the only thing that will make a difference between TFSA and RRSP is tax rates now, and in the future.

All else equal, tax rate today > tax rate in future - RRSP. Tax rate today < tax rate in future = TFSA.

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