maximize RRSP limit or do TFSA? What should young people do?

[walkonby]

Just wondering what advice I can get from some sc members.

For a young person ( under 25 ) working FT, what would the advantage be of depositing the full amount into their RRSP's
( their available RRSP contribution room that shows on the CRA's NOA? )
In previous years they had never put in that maximum. ( only a smaller amount )

Would they get a massive refund the following year for contributing largely to the RRSP or does it get broken up?
( I mean can they only claim so much of that deposit or can it all be claimed? )

Also how would the amount of available contribution room change in the following year if the maximum room was used in the previous year? Would that contribution room amount now be much lower?

Also, the TFSA's ....what is the rule of thumb ( again for someone under 25 ), is it better to put their money in there?

[GoodBoy]

Hard to fully reply from my phone. This site may be a start

http://www.moneysense.ca/save/retire...ions-answered/

The amount of rrsp room is on the NOA.

This site also talks about carrying forward unused room.

http://www.getsmarteraboutmoney.ca/e...x#.WQDSOyZOmEc

My personal opinion is max out both RRSP and TFSA if he can. I did and I retired very early as a result.

[Shwa Girl]

Yes. Money Sense magazine. Ditto.
I like the article asking if TFSA or RRSP is right for you
http://www.moneysense.ca/save/invest...right-for-you/

[blueeyetea]

It depends on their tax bracket. It makes a difference to move money into an RRSP when you earn over $50K or $60K a year, and then, only if you take the refund and reinvest it back into the rrsp. Here's a good article that explains it. Here's another one.

I think this young person should focus on how to save first. He still has to come up with $1000 in savings first before he can take advantage of the tax rebate of $200 if he goes the rrsp route.

[GoodBoy]

It depends on their tax bracket. It makes a difference to move money into an RRSP when you earn over $50K or $60K a year, and then, only if you take the refund and reinvest it back into the rrsp. Here's a good article that explains it. Here's another one.

I think this young person should focus on how to save first. He still has to come up with $1000 in savings first before he can take advantage of the tax rebate of $200 if he goes the rrsp route.

$1000 savings for $200 tax rebate for RRSP? Please explain. Never heard that one in all my years. Please explain @blueeyetea

As for the salary level or reinvesting that is variable per person. He could take a refund and put it into a TFSA. Each person is different.

[Ciel]

@walkonby -the RRSP contribution is deducted from total income to lower one's net income. The earlier one starts their RRSP (hoping your offspring knows which investments to place money into), the better the compounding interest works for them long-term.
If there is money to put into a TFSA, it would be one way to save money as emergency funds, repair money if the car goes funny or just in case work does not work out, to cover a certain number of months of living costs (if one knows their monthly budget), or to pay for healthcare if work benefits don't cover it). Just cannot put the money back in again in same year once original $5000 is put in. The young person can definitely choose investments for his/her TFSA but might want to consider liquidity (how fast investment can be cashed) if a sudden need to pay for something arises).

[walkonby]

thank you all very much for the advice and articles. I think we have figured out the best plan. It will be to maximize the RRSP for 2017, then reinvest the tax refund into the RRSP for the next year. If there are any surplus $$ they will go into the TFSA.

[brunt]

If one were to expect ones marginal tax rate to remain constant, then there is little difference between RRSP and TFSA as far as net taxes are concerned.

RRSPs are a vehicle for deferring taxes - that is, you get a deduction now, but pay taxes when you withdraw in the future. TFSAs simply invest after tax monies. If you do the math, both give you the exactly same return if your tax rate stays constant.

If you expect your tax rate to be higher now than it will be in the future, then RRSPs are the way to go. If your rate is lower now than when you withdraw, then TFSAs are the way to go.

For instance, if you were just a handful of years from retirement, and expect your tax rate to drop, then RRSP is clearly the way to go. If you are just starting out and expect your tax rate to increase in the next few years, then TFSA would be better so that you can accumulate RRSP room for when it counts for more.

However, there is one frequently overlooked fact that is the critical difference between the two. If you ever find yourself short on cash so that you have to temporarily dip into your retirement savings, withdrawals from TFSAs can be replaced, withdrawals from RRSPs cannot (other than the Home Buyer Plan or the Lifetime Learning Plan). Just remember that you cannot repay your TFSA withdrawals until the next year.

[blueeyetea]

$1000 savings for $200 tax rebate for RRSP? Please explain. Never heard that one in all my years. Please explain @blueeyeteaAs for the salary level or reinvesting that is variable per person. He could take a refund and put it into a TFSA. Each person is different.

What you live on, i.e., what your paycheque is, is what's left after taxes and deductions have been withheld by your employer. In other words, you earn $800/week, but your actual cheque is $650. If you save up $1,000 to put into an RRSP in 2016, this money is "after-tax". Since RRSP contributions are "tax deductible", when you do your tax declaration in the Spring of 2017, you will be refunded by the Government the $200 in taxes you previously paid in taxes on that money.

True, that the $200 refund can be pushed to the TSFA, but if you roll it into an RRSP, you get reimbursed for taxes you didn't pay ($40), which again can be reinvested into the RRSP. That refund helps lower your total taxable income.

[Tommycoupons]

RRSP's are good for young people to save up to 25k for the deposit of a first home once this gigantic housing bubble bursts. TFSA are good if you want to make money on the stock market and not pay capital gains.

[tjthemanto]

thank you all very much for the advice and articles. I think we have figured out the best plan. It will be to maximize the RRSP for 2017, then reinvest the tax refund into the RRSP for the next year. If there are any surplus $$ they will go into the TFSA.

If they have debt , like Credit card debt or Car loans or Student loans etc, its always better to pay that off first - before doing any RRSP or TFSA.

They probably don't have a mortgage at that age, but if they do - making lump sum payments towards the mortgage and paying it off faster is always better before doing RRSP or TFSA.

RRSP is just deferred taxes, eventually you will pay tax when you withdraw them.

Lot of seniors who lived frugally when they were young and contributed to RRSP, are finding that when they withdraw from RRSP in old age, the government considers them to be rich and reduces other benefits like OAS and GIS. And people who never did any RRSP, actually get more OAS and GIS in old age !

[GoodBoy]

Lot of seniors who lived frugally when they were young and contributed to RRSP, are finding that when they withdraw from RRSP in old age, the government considers them to be rich and reduces other benefits like OAS and GIS. And people who never did any RRSP, actually get more OAS and GIS in old age !

Then this is a case a bad planning or not having a good financial planner.

I retired very early and first thing I did was convert my RRSP to a RRIF and am taking out the minimum required ... a small amount every month but in the end I do not pay any or very minimal taxes.

If you wait to use your RRSP when age 71 comes about and you are forced to take money out then yes you will be taking out large sums potentially and will pay significant taxes potentially. It is all part of the planning process.

The way my financial planner has things set up, I will not pay any large amount of taxes for about 8 years.

[racerboy88]

If you are young go with the TFSA and invest your money. Talk to your financial planner if you have one.
The RRSP's aren't really worth it b/c when you withdraw it is considered income


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[GoodBoy]

Of course RRSPs are worth it! They are meant for retirement or for some to use as assistance on house purchases. To say they are not worth it is nonsensical. Each person is different ... maybe for you they are not worth it. Income is not an issue if you have no other income (i.e., retirement) or as used as part of an overall plan.

A young person can use them to save for future retirement and in the mean time reduce taxes during their working life. You also generally contribute more annually to an RRSP than a TFSA.

Each person needs to evaluate it for their own situation

If you are young go with the TFSA and invest your money. Talk to your financial planner if you have one.
The RRSP's aren't really worth it b/c when you withdraw it is considered income


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[brunt]

If you are young go with the TFSA and invest your money. Talk to your financial planner if you have one.
The RRSP's aren't really worth it b/c when you withdraw it is considered income

Incomplete analysis...

Yes, RRSP withdrawals are considered income. However, if you check out the math, this is exactly balanced by the fact that contributions are deductible. If your marginal rate is the same at time of contribution and withdrawal are the same, then the two are identical with respect to the impact of income tax.

Now I happen to have a mild preference for TFSA, but your point is not the reason.

RRSP's were great when I was going to university. I went co-op at Waterloo and had two school terms and one work term one year, and one school term and two work terms the next year. This meant that my income varied by a factor of two from year to year. At this time, RRSP room did not carry forward, so you wasted it if you did not take it. So I made contributions in my high income years and drew it out in low income years (timed right it only needed to be in for a week or so), evening out my income and making taxes lower overall.

This strategy can still work for you if you have wildly fluctuating income, as long as you don't mind wasting your contribution space by contributing then withdrawing, which as I mentioned previously is one of the biggest drawbacks of RRSP's (TFSA withdrawals can be replaced).

Another point that goes along with your general theme is that it may not make sense to put dividend or capital gain producing stocks in either an RRSP or TFSA as they are taxed better than regular income if held outside of a registered account. Inside an RRSP, accumulated dividends will be taxed as income upon withdrawal, as opposed to one half of that rate when held outside of a registered account.

As a rule of thumb, if you are going to hold interest bearing investments or non-Canadian dividend stocks anyway, then you are best to hold them in a registered account in order to at least gain from tax deferral (for RRSP) and non-taxed compounding. This is not a reason to buy these, but if you are going to own them anyway, you are better to put them in your registered account than you are to put in Canadian dividend stocks or financial instruments that will result in capital gains.

There are two very strong reasons to consider contributing to an RRSP that will almost always be a good idea:

1. If your marginal tax rate will be lower when you make withdrawals than when you make contributions. If your income varies widely (commission or taking maternity leave for instance), or if you expect your tax rate to be lower in retirement, then this might be an idea.
2. If your employer offers a percentage matching on your contributions. Say your employer matched 50%. Then even if you put your money in crappy GIC's, then in your first year you are going to make an easy 50% return on your investment. This is especially good if you are going to be making withdrawals relatively soon after making your contributions. Hard to beat that.

Now this having been said, I still in general prefer TFSA to RRSP. But it is not possible to say that one is universally better than the other.