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

[maggiespice]

Mattress, I say, Mattress!!! LOL! Just kidding. I personally have both RRSP and TFSA.

I really like the RRSP because I can't get my filthy little hands on it! The implications to withdraw RRSP's are too great.

TFSA, well, for me this is OK, but way too easy to use, but this can be positive as well in time of emergency.

[blueeyetea]

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 !

Someone needs to be earning more than $68,000 a year for the OAS to be clawed back. Not many Canadians earn this level of income in their retirement, without being wealthy to start with.

To quality for the GIS, a couple can't be earning than $24,000 a year.

[GoodBoy]

Someone needs to be earning more than $68,000 a year for the OAS to be clawed back. Not many Canadians earn this level of income in their retirement, without being wealthy to start with.

To quality for the GIS, a couple can't be earning than $24,000 a year.

Your numbers are not 100% correct and have other variables - best for those interested to have a look at the CRA website. The OAS clawback occurs at a higher level for one. The GIS income varies depending on a number of factors.

As for 'not many Canadians' ... I think that is no longer the case as more and more have that level and are not considered wealthy.

Clawback is found here: https://www.canada.ca/en/services/be...overy-tax.html

GIS information is found here: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html

[EvilTofu]

You're basically asking us to predict whether you will be in higher or lower tax bracket when you retire. Rule of thumb is: pay the tax when you are in lower income bracket.

RRSP assumes you will be in lower tax bracket when you retire and thus saves tax. It is true for most working class pensioners. You may also borrow from RRSP for your house down payment tax-free should you pay it back within 5 years, so it is something to consider.

For my friends in banking and finance, they all say RRSP is a freaking scam. Partly because they are high income jet-setters who might move to another country anytime for better opportunities. Also because they expect to live in luxury when they retire. So it makes more sense to pay the tax now (TFSA).

Since you are under 25, you should also ask yourself if you would move to another country. As Canadian, you can apply for Working Holiday Visa to more than a dozen countries to live 1-3 years. If you like it there, you may apply for residency.

Most important rule of thumb in finance: Diversify. I put money in both.

[walkonby]

lots of interesting info in the latest posts, thank you all.

[brunt]

<snip>
RRSP assumes you will be in lower tax bracket when you retire and thus saves tax. It is true for most working class pensioners. You may also borrow from RRSP for your house down payment tax-free should you pay it back within 5 years, so it is something to consider.
<snip>

Your statement is indeed correct, but I thought that I would like to add this...

Yes, there exists a program in the RRSP (HBP - Home Buyer Program) whereby you can borrow up to $25,000 (per person in the couple) and pay it back (in equal amounts for 15 years to avoid taxation, by the way - link).

That having been said, you can borrow from a TFSA in any amount (up to what you have in there), for any reason, at any time, and pay it back at whatever schedule appeals to you (as long as your first repayment is in the next tax year) with no income tax implications whatsoever. So once again, TFSA wins.

So offhand, the HBP is fine if you are buying a house and already have money in your RRSPs. But it is no reason for putting money in an RRSP over a TFSA.

A bit of trivia on the HBP and RRSP rules, or at least the way the rules were three years ago. When you make a spousal contribution to an RRSP, you have to wait at least three (?) years from the last spousal contribution before you withdraw the money, or the income will be attributed back to the contributing spouse (typically the higher income one). However, due to a legislative oversight, if you borrow for the HBP and don't pay it back, then the income will not be attributed back to the contributing spouse. I know that's a pretty specific set of circumstances, but it could be useful to somebody out there.

[maggiespice]

I personally would never recommend anyone taking money out of their RRSP's to buy a home. I got caught into that trap and it was not good. I took money out and it was a merry-go-round. It took me years to pay it back.

The best thing to do with RRSP's, IMO, is once the money is there, place it in a SAFE investment vehicle and then forget you have it until you are old and grey. (I am not one to gamble with my hard earned money so I play it safe with my investments.)

[annedougherty]

I personally would never recommend anyone taking money out of their RRSP's to buy a home. I got caught into that trap and it was not good. I took money out and it was a merry-go-round. It took me years to pay it back.

The best thing to do with RRSP's, IMO, is once the money is there, place it in a SAFE investment vehicle and then forget you have it until you are old and grey. (I am not one to gamble with my hard earned money so I play it safe with my investments.)

It's supposed to take years to pay back?!


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[Frugalbigmama]

I personally would never recommend anyone taking money out of their RRSP's to buy a home. I got caught into that trap and it was not good. I took money out and it was a merry-go-round. It took me years to pay it back.

The best thing to do with RRSP's, IMO, is once the money is there, place it in a SAFE investment vehicle and then forget you have it until you are old and grey. (I am not one to gamble with my hard earned money so I play it safe with my investments.)

Agreed. I would have to be in pretty rough shape to touch my RRSP before I retire. Even with some of my TFSA money I lock it in GIC's so it appears untouchable (I can but pretend I can't )

[maggiespice]

[QUOTE It's supposed to take years to pay back?! [/QUOTE]


If you ever taken money out of your RRSP's to buy a home, you would totally get why it is such a trap. Whether you like it or not, whether you can afford to or not, you HAVE to put that money back each year. Believe me, 15 years seems more like 50 years!

It was a complete burden every year to be forced to pay back something that was already yours in the first place. If you can't afford to buy a home without using your RRSP's, than there is something amiss with your financial strategy to begin with. This is the lesson that I had to learn.

[GoodBoy]

I see your point, but when you took it out your were not taxed so it makes sense you would have to pay it back and then be taxed on it later. Must pay the piper at some point, sadly.

I do agree with the comment on financial strategy.

IMHO people are overextending themselves just to get a house these days. Wrong approach. IMHO only of course.

[lucy16076]

RRSP if you need the tax credit, TFSA if you don't. But either way, leave it alone for years to come.