@bandyadelaja Sure if you don't care about your family left behind. Or are a socialist who loves paying avoidable excessive taxes.
TIL - If your tax rate at contribution and withdrawal is the same, your take home from pretax RRSP contribution is the same as TFSA at withdrawal
- Thread starter melsha
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shellyssaved
New member
@shellyssaved Very cool. I’ll review the pdf more later on. Lots of decent permutations in there to look at.
@shellyssaved I disagree. @reddragon4444 has it right, but it's difficult to explain...although it's easier if you consider retiring early without pensions or other income, which is exactly my situation. If I'm making $120K year (in Ontario for this simulation), and I pay $20K into my RRSP for 6 years, then I retire early and have no income of any sort but withdraw $120K from my RRSP, it plays out like this:
In each of the 6 years (using today's rates), I'd owe $29,682 in taxes. But I made a $20K RRSP payment, so I actually owe taxes on $100K of income, or $21,590. I'm deferring about $8k in taxes. Do that 6 times, I've deferred about $48,000.
Now in year seven, I withdraw $120K from my RRSP as my only income and I owe...$29,682 in taxes! So I've made almost $20K on the exchange.
The reason is that the money I'm deferring on taxes while working is coming all from the top 1 or possibly 2 tranches of taxes that I owe. But the money I'm withdrawing is coming from all of them - from the personal exception to the lowest brackets up to the $120k bracket. My EFFECTIVE taxes in retirement are much lower than my MARGINAL taxes while working, and that's the best possible combo.
In each of the 6 years (using today's rates), I'd owe $29,682 in taxes. But I made a $20K RRSP payment, so I actually owe taxes on $100K of income, or $21,590. I'm deferring about $8k in taxes. Do that 6 times, I've deferred about $48,000.
Now in year seven, I withdraw $120K from my RRSP as my only income and I owe...$29,682 in taxes! So I've made almost $20K on the exchange.
The reason is that the money I'm deferring on taxes while working is coming all from the top 1 or possibly 2 tranches of taxes that I owe. But the money I'm withdrawing is coming from all of them - from the personal exception to the lowest brackets up to the $120k bracket. My EFFECTIVE taxes in retirement are much lower than my MARGINAL taxes while working, and that's the best possible combo.
shellyssaved
New member
@momofone1 Okay. I think I see what you're saying. There's a foundational misunderstanding here between what I'm saying and what you're saying (if I'm reading your comment correctly). In your example you are taking money out of an RRSP when your marginal tax rate would otherwise be zero. That is not what I'm saying nor is that what the article I linked to suggests. In your example you'd be taking money out when your tax rate is lower (zero in the scenario described) which would be lower than the contribution amount.
@shellyssaved I disagree with the concept of "taking money out of your RRSP when your marginal tax rate would otherwise be zero" as being some weird and unusual concept. You need money in retirement. Some of the money you might have access to in retirement is not considered income. Your RRSP is income. Some other things in retirement are income. If your situation is like mine, and you play your cards right, you can avoid stacking RRSP income on top of other income.
I don't have the option to count a work pension as income, as I have no work pension. I don't have the option to NOT count my CPP as income (nor does anyone else). So when regular income ends, and before gov't pension income begins, there's this great big 'dead space' where you can optimize. And leveraging a big RRSP during those 5, 10, 15 years can make a HUGE difference.
I don't have the option to count a work pension as income, as I have no work pension. I don't have the option to NOT count my CPP as income (nor does anyone else). So when regular income ends, and before gov't pension income begins, there's this great big 'dead space' where you can optimize. And leveraging a big RRSP during those 5, 10, 15 years can make a HUGE difference.
shellyssaved
New member
@momofone1 But we're not talking about the same thing here, that's the problem. I'm not saying RRSPs aren't a great resource. I'm simply saying that, mathematically, if you make the same income before retirement as you do after retirement (or, more specifically, that you're in the same tax bracket), the benefits of the RRSP and TFSA are identical. That's what the article I posted says. It also breaks down the math.
@shellyssaved No, sorry, that's false....in some if not many situations. edit: let me backtrack. It CAN be true, but I don't think it reflects the reality of most Canadians. It all depends on what you have as income in retirement.
If you have the same employment income in retirement than you had before, then you're not retired!
If you have the same pension income in retirement that you had before you're retired, then you probably don't have much of an RRSP, and this discussion is almost moot.
But if you retire with no pension and no employment income, then you can let your TFSA and your registered investments sit while you draw down your RRSPs at an extremely favourable rate. Think of the possible years people can have between stopping work and gov't pensions, especially if you push CPP and OAS to 70, and stop work at 60...or 55....or earlier.
If you have the same employment income in retirement than you had before, then you're not retired!
If you have the same pension income in retirement that you had before you're retired, then you probably don't have much of an RRSP, and this discussion is almost moot.
But if you retire with no pension and no employment income, then you can let your TFSA and your registered investments sit while you draw down your RRSPs at an extremely favourable rate. Think of the possible years people can have between stopping work and gov't pensions, especially if you push CPP and OAS to 70, and stop work at 60...or 55....or earlier.
@momofone1
Not the same employment income, just the same taxable income.
Your CPP/OAS counts as taxable income, people with a work pension have it counted as taxable income, RRSP (or RRIF) withdrawals count as taxable income.
Somebody with no work pension will probably be in a lower tax bracket, but somebody with all of the above who contributed "too much" to their RRSP could easily find that adding all that up puts them in a higher bracket than when they were working.
Not the same employment income, just the same taxable income.
Your CPP/OAS counts as taxable income, people with a work pension have it counted as taxable income, RRSP (or RRIF) withdrawals count as taxable income.
Somebody with no work pension will probably be in a lower tax bracket, but somebody with all of the above who contributed "too much" to their RRSP could easily find that adding all that up puts them in a higher bracket than when they were working.
reddragon4444
New member
@shellyssaved and that is the mistake
if you are in the same tax bracket and all your income in retirement is RRSP (for a simplification)
then the TFSA and RRSP are NOT equal
the math works only when you consider the 'additional' dollar concept and at the same time have a large RRSP (or other income source) where you know that any more money coming out would be at the same MTR as when you put it in . Then and ONLY then are they equal.
should I put this new dollar into TFSA or RRSP @ 40% MTR and I know that I will already have so much money in retirement that I will be @ 40% MTR already
but that is almost never the case
if you know you have that much, then sure yes it doesn't matter too much,
but then you can put it in an retire 2 years earlier and draw more money out at a lower rate
if you are in the same tax bracket and all your income in retirement is RRSP (for a simplification)
then the TFSA and RRSP are NOT equal
the math works only when you consider the 'additional' dollar concept and at the same time have a large RRSP (or other income source) where you know that any more money coming out would be at the same MTR as when you put it in . Then and ONLY then are they equal.
should I put this new dollar into TFSA or RRSP @ 40% MTR and I know that I will already have so much money in retirement that I will be @ 40% MTR already
but that is almost never the case
if you know you have that much, then sure yes it doesn't matter too much,
but then you can put it in an retire 2 years earlier and draw more money out at a lower rate
reddragon4444
New member
@momofone1 YES! YES! YES!
now balance your RRSP's perfectly
split with partner, so only take $60k each and the MTR and ATR is even lower which of course helps even more!
and after 65 you get pension Income Tax Credit (not much) and age credit
so the ATR is even lower (MTR is still the same ...) helps even more
now at 70 it starts to hurt since you have CPP/OAS, but your 55-65 worked, 65-70 works really well
so ideally you don't have a ridiculous amount in the RRSP at this point, still always want some to claim the pension credit, so don't melt it down completely
the point is to keep a very constant ATR and MTR over the 55-90 year range
so any RRSP $ coming out are at all the all the low rates, and sure some of it will be at your highst MTR rate
of course if your RRSP is huge and whatever you do you'll be in the 40+% bracket MTR in retirement, then yes the NEW dollars would be exactly what the post says... so sure once you know you're RRSP will be massive then you have to decide wether to contribute more or not ...
but that is like a $$$M RRSP problem
less of course if you are retiring @ 65 and less if at 70 ...
so it all depends on you situation,
the math is right, but there are lots of way extract RRSP $ and pay (well unless you have too much money, then none of this matters anyway!)
now balance your RRSP's perfectly
split with partner, so only take $60k each and the MTR and ATR is even lower which of course helps even more!
and after 65 you get pension Income Tax Credit (not much) and age credit
so the ATR is even lower (MTR is still the same ...) helps even more
now at 70 it starts to hurt since you have CPP/OAS, but your 55-65 worked, 65-70 works really well
so ideally you don't have a ridiculous amount in the RRSP at this point, still always want some to claim the pension credit, so don't melt it down completely
the point is to keep a very constant ATR and MTR over the 55-90 year range
so any RRSP $ coming out are at all the all the low rates, and sure some of it will be at your highst MTR rate
of course if your RRSP is huge and whatever you do you'll be in the 40+% bracket MTR in retirement, then yes the NEW dollars would be exactly what the post says... so sure once you know you're RRSP will be massive then you have to decide wether to contribute more or not ...
but that is like a $$$M RRSP problem
less of course if you are retiring @ 65 and less if at 70 ...
so it all depends on you situation,
the math is right, but there are lots of way extract RRSP $ and pay (well unless you have too much money, then none of this matters anyway!)
@reddragon4444 Exactly. I haven't run into too many people on reddit that think of this the same way I have, but I brought my advisor around when I got him doing the math, so I don't think I'm completely missing the boat here.
And to your wrap-up points....also exactly! When you reach the point where you can no longer profit from this delta in tax rates, you have enough money that it shouldn't bother you
And to your wrap-up points....also exactly! When you reach the point where you can no longer profit from this delta in tax rates, you have enough money that it shouldn't bother you
reddragon4444
New member
@shellyssaved this is just so wrong... you don't pull out at the marginal rate
yes every NEW RRSP dolloar will be pulled out at the marginal rate in retirement
but if you start at 0, then the first marginal rate is also 0%, etc ..
so unless you have a lot of other base income (pension, nonregistered dividends/cg/interest), or have a large RRSP already then you should think about the marginal rate, but otherwise, contribute away (unless of course you have debts, or need the money short term)
and you can time it for years you don't have that other income
and you can split it
yes every NEW RRSP dolloar will be pulled out at the marginal rate in retirement
but if you start at 0, then the first marginal rate is also 0%, etc ..
so unless you have a lot of other base income (pension, nonregistered dividends/cg/interest), or have a large RRSP already then you should think about the marginal rate, but otherwise, contribute away (unless of course you have debts, or need the money short term)
and you can time it for years you don't have that other income
and you can split it
shellyssaved
New member
@reddragon4444 Hmmm... I'm not following what you're saying. What specifically do you disagree with in the article? I'm a CFP and have verified the math in the article (it's quite easy to do).
vernonmolina
New member
@shellyssaved The math in the article is correct. What @reddragon4444 is saying is that it is highly unlikely someone will be in the same marginal tax rate (before withdrawing from the rrsp) during retirement as when they contributed to the rrsp. If you contributed at say a 30% marginal tax rate to your RRSP while earning a salary, it takes a huge rrsp withdrawal to reach a 30% average tax rate in retirement without other salary income.
In AB for example (using 2023 income tax calculator from wealthsimple):
Let's say you contribute at a marginal tax rate of 30.5% which is for salary between $53K and $107K. But to achieve an average tax rate of 30.5% from a rrsp withdrawal (with no other income), you'd need to withdraw $197K.
The point is most people wouldn't have that extra $53K of non-rrsp income during retirement to bump the rrsp withdrawal into the 30.5% tax bracket.
In AB for example (using 2023 income tax calculator from wealthsimple):
Let's say you contribute at a marginal tax rate of 30.5% which is for salary between $53K and $107K. But to achieve an average tax rate of 30.5% from a rrsp withdrawal (with no other income), you'd need to withdraw $197K.
The point is most people wouldn't have that extra $53K of non-rrsp income during retirement to bump the rrsp withdrawal into the 30.5% tax bracket.
sagarjackey
New member
@sagarjackey This is a very good point. So even for those in lower tax brackets prioritizing RRSP could lead to other benefits in some cases.
@melsha There is a flip side where prioritizing TFSA can lead to other benefits though. For instance if you are paying for your expenses with a TFSA you can potentially have an extremely low income year in retirement to maximize some of your income dependent benefits.
If you are using RRSPs you will push your income above thresholds and no longer qualify for those benefits.
If you are using RRSPs you will push your income above thresholds and no longer qualify for those benefits.
@sagarjackey But it’s CCB benefit now for trade off on OAS GIS. You need to calculate in the retirement lifetime loss on the income based assistance.