RRSP/TFSA and retirement questions

Quadlog wrote: ↑ I'm 51 and didn't do a lot of saving but I'm coming into an inheritance soon and want to get busy so I can retire at 65. Roughly $400K net to me and I have a ridiculous amount of RRSP space at least for me at around $236K right now.

My wife and I have separate assets and I have absolutely no debt whatsoever. I just recently started up the company RRSP plan with CanadaLife and it's 5% matching contributions. With no debt and our lifestyle and no debt I can save 40% of my net pay for savings as well.

I plan on immediately maxing out my TFSA to the $81,500 limit with GIC's but the RRSP contribution is confusing. My salary is around 84,000 per year and I was planning on putting in 35K this year and then just keep rolling my refund back into RRSP's until I retire. I'm risk adverse so I used 4% as my return calcs and it's sizable when I retire.

Is there software that can calculate the sweet spot for me with respect to contributions? It seems there there is a point where the tax savings really drop off and my calculated refund doesn't increase that much.

Other than RRSP's and GIC's are there any other low risk or guaranteed investments that I should look at? My TFSA will be maxed and have it so I'll use up all my RRSP room and just sitting on cash in the bank seems like a bad idea - at least huge sums.

I'm a late bloomer to retirement savings so I just planned on investing and saving every dime I can. Sorry for the meandering post of financial ineptitude.

what is your total income each year? check out taxtips.ca for your marginal tax rate.

It's $84,000 a year. I found a tool that said my optimal contribution is about $38,000 a year which is easily doable. It looks like I'm going to run out of RRSP space and TFSA space and just have a lot of cash on hand so I have to figure out what to do with it - maybe a property somewhere warm like Costa Rica - not sure.

I'm not a knowledgeable or savy investor so I'm not risking picking individual stocks and I'm not rich enough to find additional ways to shield myself from Revenue Canada....lol.

I'm not sure if you know already, but there are two parts to RRSP contributions.
if you have, say, 200 000 of RRSP contribution room, you can deposit 200 000 into a RRSP immediately.
Then on the tax return for this year (the 2022 tax return filed by April 30 2023) you declare that you contributed 200 000 in 2022.
However, you do NOT have to claim the DEDUCTION all at once. You can claim, say 25 000 deduction for 2022, and carry forward 175 000 to claim in future years.
This is done on Schedule 7.
https://www.canada.ca/content/dam/cra-a ... s7-21e.pdf
You can use tax software each year to decide how much to deduct that year, if you wish. Each year, you report how much you carried forward, how much you want to deduct and how much you are still carrying forward for the future.
This allows the interest/dividends/capital gains your money earns to grow tax-sheltered in your RRSP right from now.

But maybe don't contribute the full 200 000 in 2022. Contribute some and wait till next year to decide. There's not a big rush to do this. Just take a few steps at a time.

You do want to be careful you don't end up paying more income tax in retirement than you saved by contributing to your RRSP.

For some people, it is better to invest the money outside of a RRSP in a regular 'cash/non-registered' account. The interest, dividends and distributions are taxed each year; the capital gains are taxed if you sell shares etc for a profit; but you can get at the money any time you need it.

Also consider putting some of the money into something that is more likely to grow in value.

While you may want most of your money in GICs, you might want to risk some of it in some stocks such as shares in a big bank (BMO, CIBC, RBC, etc) and/or in a big company like Bell or Telus. They pay dividends, usually 3-5%, usually 4 times each year. Those dividends are usually paid even if the value of the stock goes down. (not always, but usually) And the value of the shares may go up. For example, my grandmother bought shares in CIBC for what is now about $10 (split adjusted) and each share is now worth over $100 to my mother who inherited them. In addition, they have been paying hundreds of dollars of dividends over the years.

I suggest to my relatives that if you don't want to risk all of your money, consider risking your "vacation and eating out" money. So if 10% of their money is spent on vacations and new electronics and eating out, they should consider investing 10% in the stock market. Then if they lose it, they won't be able to go on vacations when they retire. But they also won't be poor.

Take your time. It's all strange at the beginning. The most important thing is not to rush. Try a few steps. Learn some more. Try some more things. It eventually will make sense.

OP, RRSP contributions only make tax sense if you expect to have a higher tax rate during contribution as compared to when you decumulate the account. The annual additions have to make sense to ensure this outcome remains valid. I suggest you study the mechanics of how RRSP account works and decide how to slowly build up the account.

https://www.retailinvestor.org/RRSPmodel.html

will888 wrote: ↑ OP, RRSP contributions only make tax sense if you expect to have a higher tax rate during contribution as compared to when you decumulate the account. The annual additions have to make sense to ensure this outcome remains valid. I suggest you study the mechanics of how RRSP account works and decide how to slowly build up the account.

https://www.retailinvestor.org/RRSPmodel.html

It's false that RRSP contributions only make sense when you contribute at a higher bracket than when you withdraw, and the link you confirms this. If you look at the chart in that link (https://www.retailinvestor.org/RRSPmodel.html#mechanics) it shows that someone contributing and withdrawing at the same 30% bracket receives the same benefit from RRSP as they would from TFSA.

What potentially makes RRSP worse than TFSA in an equal contribution / withdrawal tax bracket scenario is its lack of flexibility on withdrawals (taxable income / RRIF minimum withdrawals / permanent room loss, etc) and the fact that many people retiring without much invested / pensions / etc will end up having their benefits reduced by the taxable RRSP withdrawals. (such as GIS)

I agree with you that is often better to build the RRSP slowly. It may be in OP's best interest to contribute enough to their RRSP each year to bottom out their current federal bracket (around 30k to bring them from ~80k to ~50k), use the rest to max TFSA, and then put remainders to the unsheltered, then transfer accordingly each year from unsheltered to RRSP. This will trigger capital gains / loses but it's better than contributing money to the RRSP and not taking the deduction. https://www.retailinvestor.org/rrsp.html#delay

If you have 236k RRSP room, that sounds like you don't have much in terms of company pension / company RRSP so far. In that case, I don't see how you can be withdrawing at a higher tax rate than contributing. I would put in the 230k in the RRSP lumpsum and claim the deduction over 8-9 years at 25-30k per year (leave some room to continue your 5% matched contribution). Only big risk is if you never work again and don't have any earned income to offset the deductions. The above only makes sense in any case if you decide to invest the money and it actually produces returns that are normally taxable (say interest, gains, or dividends). If you are just going to park it in cash or equivalent, then just contribute as you go.

My man, max everything out. This is a no brainer.

Put the rest into dividend stocks or ETFs (because I'm boring and play it safe and lazy) and then just use rrsp deductions claims to get that shit tax free too.

JoshG345356 wrote: ↑ It's false that RRSP contributions only make sense when you contribute at a higher bracket than when you withdraw, and the link you confirms this. If you look at the chart in that link (https://www.retailinvestor.org/RRSPmodel.html#mechanics) it shows that someone contributing and withdrawing at the same 30% bracket receives the same benefit from RRSP as they would from TFSA.

What potentially makes RRSP worse than TFSA in an equal contribution / withdrawal tax bracket scenario is its lack of flexibility on withdrawals (taxable income / RRIF minimum withdrawals / permanent room loss, etc) and the fact that many people retiring without much invested / pensions / etc will end up having their benefits reduced by the taxable RRSP withdrawals. (such as GIS)

I agree with you that is often better to build the RRSP slowly. It may be in OP's best interest to contribute enough to their RRSP each year to bottom out their current federal bracket (around 30k to bring them from ~80k to ~50k), use the rest to max TFSA, and then put remainders to the unsheltered, then transfer accordingly each year from unsheltered to RRSP. This will trigger capital gains / loses but it's better than contributing money to the RRSP and not taking the deduction. https://www.retailinvestor.org/rrsp.html#delay

Technically equal is okay but practically it is not. In retirement there are a number of income tested credits that amount to surtax. It is best to build a bit of margin. In OPs case, if there is any attempt at a quick catchup, the marginal tax rate of the contribution could go into the lowest bracket.

will888 wrote: ↑ Technically equal is okay but practically it is not. In retirement there are a number of income tested credits that amount to surtax. It is best to build a bit of margin. In OPs case, if there is any attempt at a quick catchup, the marginal tax rate of the contribution could go into the lowest bracket.

Yup agreed. That's why I mentioned the GIS clawback (unlikely OAS clawbacks are a concern for OP), which as you said is basically a 50% tax as $1 of income removes $0.50 of GIS, and bottoming out their current federal bracket (rather than going into the lowest bracket).

Also OP may benefit from withdrawing some RRSP after they retire, but before starting their benefits to reduce future tax liability.