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TFSA or RRSP for age 60 plus?

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[OP]
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Jul 3, 2007
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TFSA or RRSP for age 60 plus?

Hello all,

My inlaws started to recieve their cpp (they took it a couple of years early). They want to save this money in an rrsp or tfsa. They are both still working. What account makes more sense for a 61 and 62 year old person?
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Aug 25, 2005
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If they are still making money and paying a lot of tax, RRSP might make sense to help reduce taxes for the year.

If they need accessibility to the money, TFSA is a better option.
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Sep 16, 2015
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The only reason to take CPP early is because you have health issues that could dramatically shorten your life. If you delay taking CPP from 65 to 70, you'll end up with 42% more per month for life.
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Compare their marginal tax rate currently with what they expect it to be when they retire. If there is a difference in it being lower later go the RRSP route. If it will be the same go the TFSA route.
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RRSP contributions DEFER taxes to a future year. You have less income in the year of contribution and have more income in the year of withdrawal when you (hopefully) are reporting less income and therefore in a different tax bracket. Ultimately you also pay tax on investment income. And it is only really beneficial if you contribute $ to your RRSP AND the tax benefits (this is a compounding amount as additional contributions have additional benefits).

TFSA's have no tax on investment income.

So the problem requires assumptions on current tax bracket, future tax bracket and year's until withdrawal (how long will the $ be invested).

If they NEED more $ now (and its OK to have less later), RRSP. If they are investing for retirement TFSA.

So if they are investing CPP which is excess $ to them, TFSA is the way to go.
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Taking CPP early and then putting the money into a TFSA or RRSP to avoid tax is silly. Delaying the CPP to a later year is already effectively a tax-free investment.
[OP]
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Jul 3, 2007
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May be silly but they didn't listen to my advice and what's done is done. They want to save the money that they are receiving and want to put it in an rrsp. I thought that a tfsa would be better as their goal is to save money and its not to avoid taxes. They want to save in something low risk.

Ps thank you all for your advice

Also what led to taking it early was 2 deaths in the family. They were both in their 50s.
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johntdsb wrote: May be silly but they didn't listen to my advice and what's done is done. They want to save the money that they are receiving and want to put it in an rrsp. I thought that a tfsa would be better as their goal is to save money and its not to avoid taxes. They want to save in something low risk.

Ps thank you all for your advice

Also what led to taking it early was 2 deaths in the family. They were both in their 50s.
If they haven't maxed out their TFSA contribution, then yes, it would probably be better to invest/save in a TFSA since there are fewer strings attached. A TFSA isn't necessarily a low risk savings account - you can hold different types of investments in a TFSA, including high-risk stocks. But since capital gains are taxed half as much as interest income, people generally prefer to hold interest-bearing investments in tax free accounts over capital gains earners.

You will certainly lose out on CPP and other pensions in case of early death, but of course it's unpredictable, and you may not care as much as your heirs. If you have a short-term need for the money and fear that early death is more likely for you, might as well take the money early. But if you don't need the money right away and have no particular reason to expect that you will die younger than average, it's better to postpone pensions like CPP as long as possible and gamble that you will live longer than average. If you do live longer than average, it's all up-side. As you sit in your wheelchair at age 105 grimly hanging on another year, one of the motivating factors may be that you are coming out further ahead on CPP every year. :)
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JWL wrote: RRSP contributions DEFER taxes to a future year. You have less income in the year of contribution and have more income in the year of withdrawal when you (hopefully) are reporting less income and therefore in a different tax bracket. Ultimately you also pay tax on investment income. And it is only really beneficial if you contribute $ to your RRSP AND the tax benefits (this is a compounding amount as additional contributions have additional benefits).

TFSA's have no tax on investment income.

So the problem requires assumptions on current tax bracket, future tax bracket and year's until withdrawal (how long will the $ be invested).

If they NEED more $ now (and its OK to have less later), RRSP. If they are investing for retirement TFSA.

So if they are investing CPP which is excess $ to them, TFSA is the way to go.
Technically speaking, the gains on your own money are actually tax free. But you've identified it correctly that people need to invest the tax deduction, or remember that not all of the RRSP money is actually theirs. Most people don't think of RRSP money in this way - they think of it as all their own money, that then gets taxed.

From a purely technical perspective, if you are at a 30% tax bracket, a $5,000 RRSP contribution is made up of $3,500 your own money, and $1,500 tax deferral. If this RRSP then triples in value to $15,000 and is taxed at the same 30% tax bracket, you are left with $10,500. This is the same as the $3,500 of your own money tripling in value, and not being taxed; can also say that the $1,500 of tax deferral also tripled in value to $4,500, which is what the government gets in taxes. So the government comes along for your investing ride, gets its share of the growth, but always gets its share in the end. TFSA works in a similar way - the above example would be $3,500 of after tax money invested, and triples to $10,500 but you do not pay any taxes at withdrawal.

If you are at a higher tax bracket in retirement compared to contribution, then you do pay a tax penalty at withdrawal, equal to the difference in marginal tax rates. If you are in a lower tax bracket in retirement, then you get a bonus at withdrawal, equal to the difference in marginal rates.

This was a hard concept for me to make myself understand - because I would contribute to my RRSP and think that all of that money was mine; and then spend the "tax refund" on something else!!
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mastaj wrote: Technically speaking,......
Well explained.
As I noted if you withdraw at a lower tax rate RRSP would be better BUT ONLY IF you invest the tax full refund = cash available / (1 - tax rate). Very very very few people understandthe concept (as you noted) let alone have the discipline to do it. Hence my recommendation to go with TFSA.
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JWL wrote: Well explained.
As I noted if you withdraw at a lower tax rate RRSP would be better BUT ONLY IF you invest the tax full refund = cash available / (1 - tax rate). Very very very few people understandthe concept (as you noted) let alone have the discipline to do it. Hence my recommendation to go with TFSA.

Is that really true?

Here is an example. Assumptions 40% marginal tax rate. Growth rate 10%/yr.

TFSA: Earn $10k. Tax @40% = $4k. Invest $6k after-tax in TFSA. One year later, $6k x 1.1 = $6.6k, no tax on withdrawal.

RRSP: Earn $10k. Tax @ 40% = $4k. Tax refund @ 40% = $4k, Net (out of pocket) contribution $6k, same as TFSA. Gross contribution: $10k. One year later, $10k x 1.1 = $11k. 40% tax on withdrawal = $4.4k. Net withdrawal after tax = $11k - $4.4k = $6.6k, same as TFSA.

If tax rate on withdrawal is same as tax rate on contribution, TFSA = RRSP.

Now imagine the RRSP holder retired, and on withdrawal their marginal tax rate dropped to 30%. Tax on withdrawal @30% = $3.3k. Net withdrawal after tax = $11k - $3.3k = $7.7k, $1.1k more than TFSA. This is especially easy to forecast for people getting close to retirement that should have a good idea of how their income will change in retirement.

This is a simple 1 year example, but the same advantage persists over multiple years. With the RRSP you are out of pocket the tax between contribution and tax refund, unless you contribute through a workplace group RRSP that does not withhold tax on contributions. That amount may be a big deal for a lot of people.

You don’t have to invest the RRSP refund. Investor will come out ahead if they do invest it, or pay down a mortgage, but it is not necessary to make RRSP = TFSA at same tax rate for contribution and withdrawal.

True, a TFSA is more flexible if the account holder does not plan on using the RRSP as retirement income, or is uncertain if they may need it before retirement. Over their investing lifetime, most people should probably make use of both.
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jaybeeg wrote: The only reason to take CPP early is because you have health issues that could dramatically shorten your life. If you delay taking CPP from 65 to 70, you'll end up with 42% more per month for life.
Unless it bumps you into a high enough tax bracket that your OAS is reduced. Why wait until age 70 to receive a larger amount, simply to get OAS clawed back by 15%.
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Deepwater wrote: Is that really true? ......
Yes. We are saying the same thing, just expressing it slightly different ways.

In your first scenario, I'd express it as the person having $6,000 (after-tax), They can invest it in TFSA or invest the $6K and the circular refunds in an RRSP. The amount they'd have to invest in the RRSP is $6000/(1-40%) = $10,000. The latter you've accurately described as the pre-tax amount. I've expressed in terms of cash on hand (the after-tax amounts) which I think this reflects the OP's scenario since the parents are receiving CPP after tax.

To summarize I think we agree that:
Investing the pre-tax amount in an RRSP or the after tax amount in a TFSA, with no change in tax rate gives the same result financially. TFSA is more flexible.
Investing the pre-tax amount in an RRSP or the after tax amount in a TFSA, with a lower future tax rate when RRSP $ are withdrawn, the RRSP is better.

I agree that most people in retirement will have lower income and higher deductions, resulting in a lower tax rate (assuming tax rate increases don't offset the lower tax bracket).

So in OP's scenario, if the parents were paid $10K in CPP and received $6K after tax, if they invest $10K in their RRSP ("borrowing" $4K and paying it off with $4K refund) they would likely be better off in the long run if their future tax rate is lower.
Last edited by JWL on Feb 28th, 2021 9:26 am, edited 1 time in total.
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Sauerkraut wrote: Unless it bumps you into a high enough tax bracket that your OAS is reduced. Why wait until age 70 to receive a larger amount, simply to get OAS clawed back by 15%.
That can be offset by taking withdrawals from RRSP between retirement and mandatory RRIF withdrawals at age 71, which may drive RRIF value and income low enough that OAS would not get clawed back.

Also if you look at the 42% extra by taking CPP at 70, compared to the 15% of OAS clawed back, which would be larger? Really have to run some analysis to know.

Deciding when to take CPP is not so much about trying to guess what age to take it to get the maximum under normal lifespan and economic conditions. Rather it is getting more guaranteed, inflation indexed lifetime income to protect yourself from running out of money in case of bad investment returns or high inflation later in life, or failure to die in a timely manner.
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Remember that after age 65, income from a RIF can be offset by the $2000 pension tax credit. So even if your marginal rate is the same as when you made the RSP contributions, you likely will be further ahead than with the TFSA. But you will need to put enough into the RIF (ie from the RSP) to make it worthwhile.
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johntdsb wrote: Hello all,

My inlaws started to recieve their cpp (they took it a couple of years early). They want to save this money in an rrsp or tfsa. They are both still working. What account makes more sense for a 61 and 62 year old person?
Depending on how easily they want the money in the future (without tax implications), I would recommend a TFSA over an RRSP.

I'm not sure why your in-laws decided to opt and receive their CPP if they are still working (unless they are working reduced hours). If they are earning the same salary and decided to opt to receive their CPP, they are just increasing the amount of taxes that they will pay the current year

If they are working for a company that offers a pension plan, at their age, I would suggest not investing in the RRSP.

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