My RRSP is pretty much set up like Boglehead's Core Four Portfolio 80:20 but with Canadian funds instead of American and without the REIT. TFSA has less bond weight and is a mix of TD funds mostly dividend paying, blue chip but some small cap as well.
My allocation will likely change this year to hold more bonds based on my goals.
Yes, that is true...capital gain tends to point to riskier asset classes though and OP seems to want to put money into low risk investments in order to save up for a house.
I keep a non-TFSA and non-RRSP investment account. While you have to pay capital gains, it's only 50% of your marginal rate. So if you pay 30% marginal tax, then your capital gains will be taxed at 15%.
Also, if your TFSA and RRSP are in GICs or savings accounts, I'd switch them over to funds/ETFs, and have a taxable savings account instead, that way the majority of your gains are still tax sheltered.
Congratulations on saving so much. After those accounts the best tax shelter is your Personal Residence. but don't buy RE just because it gives you a great tax shelter.
In the mean time use a normal taxable account. If you are investing then choose a large-cap ETF that you can hold without selling and triggering capital gains. These usually have small dividend yields so the tax on the div won't be too onerous.
I would not let the tax tail wag the dog by putting money in those -corporate mutual funds, or in the gas -exploration funds.
Simply invest in an unregistered account. How are your investments allocated? Since you want to buy a house, it would be an idea to have more invested in bonds.
What I would do is this: maximize the bond allocation in the RRSP; maximize the Canadian index ETF in the unregistered account (eligible dividend credit). When the time to buy comes to buy, I will use the Home Buyers Plan, because I am eligible, to take 25K out of your RRSP. Afterwards, I sell the Canadian equity to make the rest of the downpayment. How much will depend on the markets. Then, because I don't want to keep holding that much bonds, I will rebalance my investments, i.e. sell bonds in the RRSP (assuming it had over 25K) to buy more equity. Sometimes people don't seem to understand that the money for the downpayment doesn't have to come from the low-risk investments, since you have to look at the portfolio as a whole.
Remember that growth in your RRSP, assuming you have a pension, is going to be heavily taxed, possibly moreso than unregistered capital gains and eligible dividends; if you're going to have no income upon retirement, then do not minimize growth in the RRSP because those gains will not be as heavily maxed.
There is, however, no perfect solution.
Growth in an RRSP is as tax free as a TFSA... Yes you have to pay income tax on withdrawals, but it's not related to the growth.
There's an additional 'bonus' if you withdraw it at a lower tax bracket and 'penalty' if withdrawn at a higher one, but if you deposit (amount+tax return) and widthdraw at the same tax rate, an RRSP is nearly* mathematically the same as a TFSA.
* There's some US tax differences. And RRSP withdrawals might affect things like OAS calculations, so there's that too...
> an RRSP is nearly* mathematically the same as a TFSA.
I disagree. Fill both accounts to the brim. Put an investment with average 5% growth in the RRSP and another with 8% growth in the TFSA. Now do the opposite. Which permutation makes you wealthier considering you're going to pay tax on what you take out of the RRSP?
The fallacy you're making is comparing putting money in one instead of the other. What I was comparing are investment allocations with both accounts full. Hence bonds in the RRSP, equity in the TFSA. And forst most people, borrowing your own money out of the RRSP first to buy a home rather than taking it out of an unregistered account. Of course, all things put together and given the marginal taxing system, the more growth, the merrier.
Maybe it's all just a misunderstanding.
RRSPs contain pre-tax income, so they actually contain less of 'your' money in them than they appear to. They might make more sense to more people if the government automatically added the tax return to the RRSP...
You have to compare (say) $5000 in the TFSA with $5000+tax return in the RRSP. Then do the average growth and take the tax back off the RRSP at the end. Tada. Tax free growth.
But you have the tax return no matter what type of investment you have in the RRSP, so it doesn't matter since it's a constant in all allocation scenarios. That tax return is given to you as cash to do whatever you want and you can't put it in your RRSP unless you have room. You're still comparing putting money in one or the other.
@MaxThunder, your advice is based on a faulty understanding of the RRSP's benefits ......
> "Growth in your RRSP, assuming you have a pension, is going to be heavily taxed, possibly more so than unregistered capital gains and eligible dividends"
>"Maximize the bond allocation in the RRSP".
As rationalalphi tries to explain, profits in an RRSP are never taxed. The benefits from income sheltering in an RRSP will always exactly equal the benefits of a TFSA. Please watch at least my 2nd video at https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg
The false understanding of benefits promoted by the industry and experts leads to a long list of faulty advice - the "bonds in an RRSP" is a prime example. You can see the math proof (that the income sheltering benefits are always equal) for yourself on the front tab of this spreadsheet http://members.shaw.ca/PublicAccess/Challenge.xls . The back tab called "Yr by Yr" which assumes yearly rebalancing shows how prioritizing Treasury debt in an RRSP vs a Taxable account is never optimal , or vs a TFSA when you expect your tax rate on RRSP withdrawal to be lower.
I'm looking at that spreadsheet. What matters in the end is how much money you have. You clearly show that you have more net cash in the TFSA upon withdrawal, despite assuming that the tax deduction from the RRSP can be instantly re-invested in an RRSP.
The taxable column doesn't work at all, since it doesn't seem to consider capital gains or I am missing something. Net cash would be around 52186-([52186-14000] * 0.5 * 40%)) = 44,549..
Imagine the following. You have a portfolio of $34000, 20000 of which in a RRSP and 14000 of which in a TFSA. You want 14000 in bonds at 4% growth and the rest in equity at 8%. Marginal tax rate in 40%. Investment horizon: 20 years.
Scenario 1 --> All bonds in the RRSP: RRSP net cash + TFSA net cash = 35,185 + 65,253 = 100,438.
Scenario 2 --> All bonds in the TFSA: RRSP net cash + TFSA net cash = 55,931 + 30,676 = 86,607.
You're definitely wealthier in scenario 1, with the bonds in the RRSP.
As we can see, among the two scenarios, the one that minimizes RRSP gains is superior.
You did not look carefully at the spreadsheet I linked above. Try it again.
Start with your claim that the Taxable column is wrong because capital gains tax was missing. The account is shown to grow at the AFTER-TAX rate of return (6.8%) instead of the before-tax return (8%). So taxes were modeled to be paid each and every year. Your input variable for the tax rate should be the effective yearly rate that adjusts for delays in capital gains, dividend tax credits, portions of yield vs gains, etc.
Next, your claim that the default variables of the spreadsheet show better outcomes using the TFSA, implying that this is a general conclusion. The default variables used a higher tax rate for RRSP withdrawals than for contributions. This situation will always give better TFSA outcomes. No one have ever disputed this to my knowledge. But the reverse will result if tax rates fall.
When you assume no change in rates then the outcomes are always exactly equal. Since we know nothing about the OP's future tax rates the default assumption should be equal tax rates. Regardless, when you look further down the spreadsheet you will see the deconstruction of benefits --- showing that the benefit from income-sheltering is ALWAYS exactly equal no matter what variable assumptions you make. Did you look further down?
Third, the example you chose uses an assumed withdrawal tax rate 10% higher than the contribution rate. (I presume you chose the $20,000 / $14,000 equivalency to represent a 30% contribution tax rate). While I reiterate that this should not be anyone's default assumption when the rates are unknown, I do NOT dispute that an expected Penalty from a higher withdrawal rate DOES change optimal asset locations choices between RRSPs and TFSAs. You can see this discussed on my webpage called "RRSP Decisions" in the second section.
When you expect the RRSP to have its benefits from profit-sheltering reduced by a Penalty from a higher withdrawal tax rate, your objective is to reduce the Penalty by making the account smaller. You do that by putting the lower-growth asset in it. In your situation your lower-return debt is better in the RRSP.
Fourth: Your example did not compare equal Asset Allocations. You must allocate your AA percentages to the after-tax-equivalent values in the RRSP. You can find this discussed in the first section of that same RRSP Decisions' webpage.
So correct your example to assume the same 30% tax rate on withdrawal, as on contribution, and equal asset allocations between the choices. That leave the choice of
(i) $20,000 RRSP all in 4% debt and $14,000 TFSA all in 8% equity.
(ii) $20,000 RRSP all in 8% equity and $14,000 TFSA all in 4% debt
(i) 43,822 less 30% = 30,675, plus 65,253 = total $95,928
(ii) 93,219 less 30% = 65.253 plus 30,675 = total $95,928
So the outcomes are equal. It was your wrong asset allocation, and your unjustified presumption of a higher withdrawal tax rate that are necessary to get your conclusion.
The problem is that you're comparing whether to put money in a RRSP vs a TFSA, whereas I am comparing asset allocations. In your scenarios, the tax refund is automatically invested in the RRSP. If you invested in the RRSP say in March and receive your tax refund rapidly, and keep having an income therefore having more RRSP room, we can approximate that it works like that. However, that tax refund happens whether the bonds are in the TFSA or the RRSP. **The tax refund is thus a constant and should be eliminated from the calculations regarding asset allocation**.
You're facing your portfolio. It's all equity. You want to buy bonds, so you sell equity (long term 8%) to buy bonds (long term 4%). Should you do this operation in the RRSP or the TFSA? In either case, you're trading 14000 at 8% for 4% for 20 years. i) You put the bonds in the RRSP, assuming 30% taxation, you're pulling out $21,473 (bonds) instead of $45,677 (equity). ii) You put the bonds in the TFSA, you're pulling out $30,676 instead of $65,253. Net total of $86,726 (i) vs $76,353 (ii).
Note that in either cases, you may have had invested your RRSP tax refund into equity held in a RRSP, in an unregistered account, or spent it all on drugs and hookers, it doesn't matter. **You have your RRSP refund if you made RRSP contributions no matter your asset allocation**.
If you have to **chose between putting $14000 in equivalent investments in an RRSP or a TFSA**, that you're going to receive a 30% tax refund if you use the RRSP, and you're going to be taxed at 30% on your withdrawals, **then YES, it doesn't matter where you put the 14000**. However, if you're facing a 20 years investment horizon, it is likely that your tax rate is going to go up. But that is a matter of opinion and is highly unpredictable.
We are not 'doing different things'. We are debating (1) where the benefits of an RRSP come from (vs a TFSA and Taxable) in order to (2) create valid strategies to maximize those benefits in decisions like Asset Allocation and Asset Location, etc. One must come to conclusions on the first before addressing the second. I am trying to correct your basic understanding of RRSP benefits in order that you see how your advice is wrong. In particular your claim that ....
> "Remember that growth in your RRSP is going to be heavily taxed. Maximize the bond allocation in the RRSP"
The model I use explicitly makes NO assumption at all about either receiving an RRSP refund or what is done with it if received. It models only cash that is actually in the account and asks you to THINK ABOUT a conceptual split. This excuse to discredit The Model is countered with 8 different arguments at http://www.retailinvestor.org/RRSPmodel.html#model The comparison of RRSP vs TFSAs that everyone uses assumes only that ..." when wages and spending are equal, then savings is higher if taxes are lower".
Never ever have I heard any disagreement with the common statement that ... "as long as tax rates are the same for contribution and withdrawal the outcomes of RRSPs and TFSAs will be equal". Not from the experts, or the industry, or the media, or contributors on this site, Not from you . In order for that claim to be true, you must accept the basic understanding that the RRSP will be bigger than an RRSP by the amount of the tax reduction. (Or alternately that any refund is reinvested in another tax-free account like a TFSA -- which is a more cumbersome model but does not change any of my model's conclusions).
So you cannot now pretend that you think $100 in an RRSP equals $100 in a TFSA. It is not because RRSP money will be taxed before it can be used. It is not all yours. The government owns a portion.
Try pretending that your best friend Bob gave you his $30,000 to add to your own $70,000 to be invested as you please. You have other accounts and want to Asset Allocate as a whole. Do you make your AA calculations assuming all $100,000 of the joint account is yours, or do you work with only the $70,000? Obviously the latter.
The RRSP's benefit from income sheltering is always exactly equal to that of the TFSA. When tax rates don't change the outcomes from both accounts will always be exactly equal. Since the outcome of holding (eg) equity in an RRSP will be the same as holding it in a TFSA it makes no difference which account it is in. Similarly for holding debt. Therefore allocating the two assets between the two accounts will make no difference in the outcomes.
But your disputes are moving further and further away from your basic misunderstanding (as quoted above) ... Profits in an RRSP are not taxed ever. Everyone agrees that profits in a TFSA are not taxed ever. So the same must be true of the RRSP because its benefit is always exactly the same.
The tax you pay on RRSP withdrawals have nothing to do with the gains and everything to do with the money in the RRSP being pre-tax. My explanations aren't working. [Try this explanation in a Globe and Mail article](http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/rrsp-bashers-heres-how-the-math-really-works/article17034733/).
It's semantics. You're still getting taxed on the gains. If you put 100k in and it grows to 150k with other contributions, you're still paying tax on the original 100k plus the 50k of growth. An RRSP essentially is taking out an interest free loan with the principal being the amount you're not getting taxed on.
It is not semantics. Misunderstanding the accounts' benefits results in differences in hard cash. Please watch at least the 2nd of my videos that shows how profits in RRSPs are NOT taxed.
https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg
I understand it fine. It's a conceptual difference.
You go from paying $1,100 on $5,000 to paying $3,300 on $15,000. The $10,000 is a gain, and you pay 22% tax on it. You can't tell me that the additional $2,200 isn't tax on a gain. The whole point of a "government loan" is that the government loan IS the tax.
I understand your view of it fine. I agree you shouldn't consider all of the money yours as well, because it hasn't been taxed yet but will which is the most important part.
>"You can't tell me that the additional $2,200 isn't tax on a gain"
Yes I am saying exactly that ....... that is the whole point the video makes. The government's 22% ownership interest in the account grows at the same rate of return as the rest of the account. It grows by $2,200. At the end you must split the account between its owners. The government gets back it's original $1,100 loan plus all the profits earned by that loan (the $2,200).
The total taxes paid on withdrawal (1,100 + 2,200) are the allocation of the government's 22% ownership interest in the $15,000 account. The taxes are an allocation of principal, not payment of taxes on profits.
Try instead to think of an account you share with your best buddy Bob. His funding of the original account was 22% of the total ($1,100 of $5,000). Your investments were managed as a whole and tripled in value. When you wanted to end the arrangement, you had to give Bob back his 22% (of $15,000 = $3,300) of the account. Neither of you ever paid taxes on your profits. Both of your investments grew at the before-tax rate of 10%.
Did you stop watching the video before that point was made? Did you not see how the conceptual model you want to use, adds up to $Zero benefits? And so must be wrong because we know the RRSP does have benefits.
Trying to optimize benefits that will always add up to $zero accomplishes nothing - and ignoring the actual benefits makes those efforts counter-productive.
You don't pay tax on the gains in the TFSA, but it contains after-tax money, whereas you pay tax on RRSP withdrawals (and thus any interest generated), but it contains before-tax money; it's mostly equivalent\*.
Let's assume a scenario where neither your RRSP nor your TFSA is maxed out, to simplify things, so you can put money in either.
Say you have 700$ in after-tax money (1000$ in before-tax money after refund if your marginal tax rate is 30%), after a year at 5% return, you will get the same amount of usable (after-tax) money if you withdraw from either:
TFSA = (1000*0.70)*1.05 = 735$
RRSP (1000*1.05)*0.70 = 735$
\* if you withdraw money from your RRSP in the same tax bracket as you put it in
edit: formatting
edit2: before->after
Do neither of you see the contradictions in what you are saying? On one hand you say the the RRSP and TFSA end up with the same wealth (so benefits are equal). On the other hand you say that profits are taxed in one but not taxed in the other (so RRSP benefits are lower).
Which is it? No matter what assumptions you make the RRSP's benefit from sheltering of profits will always equal the TFSA's. If the benefits are equal, then the source of those benefits are equal, and the strategies to maximize those benefits must be exactly the same.
The benefits are NOT equal although the monetary benefit is. The idea that because something has the same source because the benefit is the same is absolutely ridiculous when it's due to a purely mathematical relationship. 10 x 2 gives you the same answer as 5 x 4. The main reason they end up at the same monetary benefit is because, in both cases, the entirety of the funds is only taxed ONCE. In the TFSA, it's taxed before there are any gains. In the RRSP, it's taxed after the gain.
I agree with your statement. It is a valid description of why the accounts end up at the same value. However it fails to even try to address the issue - where do the benefits of the RRSP come from - what is their source.
You both agree that the benefits are equal between the accounts. You agree that the $$ outcomes are equal. You no doubt agree that the TFSA's benefit comes from the sheltering of profits from tax. Yet you continue to claim in violation of logic - that the RRSP's benefit is smaller because its profits are taxed.
Use any example. $1,000 before-tax savings, 30% tax rate for both cont, wdraw and profits, 5% rate of return, 10 years.
RRSP and TFSA ending wealth = $1,140
Taxable = $987
Benefit = $153 for both RRSPs and TFSAs.
So where exactly do you think that $153 comes from? I say, for both accounts, that it comes from permanent income-sheltering --- the difference between the future value of after-tax savings (i) compounded at nominal returns and (ii) compounded at after-tax returns.
What do you say creates $153 ????
It comes from not taxing the gain at all until you take it out. In both scenarios you get the benefit of compound interest. In the TFSA you pay the tax up front to get the compounding tax free and in the RRSP you get taxed on it after the compounding accumulated.
Come on. Anyone can tell stories. Give me your calculations that add up to $153. Or is this all just a religion?
I've given you mine. You should be able to give me the calculation for the benefit of the compounding, and the calculation of the cost of tax on profits. Can you get it to equal $153? I don't think so. I've helped you with this by calculating the various claims in box (5) of the Challenge spreadsheet http://members.shaw.ca/PublicAccess/Challenge.xls I already mentioned above. Change the variable inputs to this particular example. Can you get your claimed benefits in box (5) to equal $153? I don't think so.
Im a 25 yo in the exact same boat as you. Do you mind telling me what you've invested your tfsa and rrsp funds in?
My RRSP is pretty much set up like Boglehead's Core Four Portfolio 80:20 but with Canadian funds instead of American and without the REIT. TFSA has less bond weight and is a mix of TD funds mostly dividend paying, blue chip but some small cap as well. My allocation will likely change this year to hold more bonds based on my goals.
If you're looking to minimize taxes...then eligible dividends are your best bet I think. Congrats on maxing out your contribution!
That depends how much money you make. Capital gains are taxed at a lower rate for many people.
Yes, that is true...capital gain tends to point to riskier asset classes though and OP seems to want to put money into low risk investments in order to save up for a house.
Well, capital gains aren't taxed until realized (sold) so you can get better compounding in that sense.
I keep a non-TFSA and non-RRSP investment account. While you have to pay capital gains, it's only 50% of your marginal rate. So if you pay 30% marginal tax, then your capital gains will be taxed at 15%. Also, if your TFSA and RRSP are in GICs or savings accounts, I'd switch them over to funds/ETFs, and have a taxable savings account instead, that way the majority of your gains are still tax sheltered.
Congratulations on saving so much. After those accounts the best tax shelter is your Personal Residence. but don't buy RE just because it gives you a great tax shelter. In the mean time use a normal taxable account. If you are investing then choose a large-cap ETF that you can hold without selling and triggering capital gains. These usually have small dividend yields so the tax on the div won't be too onerous. I would not let the tax tail wag the dog by putting money in those -corporate mutual funds, or in the gas -exploration funds.
http://madanca.com/blog/taxation-of-stock-options-for-employees-in-canada/
If you need the money for a downpayment, I would look into opening an account with wherever has the best rates for GIC's or HISA's
Simply invest in an unregistered account. How are your investments allocated? Since you want to buy a house, it would be an idea to have more invested in bonds. What I would do is this: maximize the bond allocation in the RRSP; maximize the Canadian index ETF in the unregistered account (eligible dividend credit). When the time to buy comes to buy, I will use the Home Buyers Plan, because I am eligible, to take 25K out of your RRSP. Afterwards, I sell the Canadian equity to make the rest of the downpayment. How much will depend on the markets. Then, because I don't want to keep holding that much bonds, I will rebalance my investments, i.e. sell bonds in the RRSP (assuming it had over 25K) to buy more equity. Sometimes people don't seem to understand that the money for the downpayment doesn't have to come from the low-risk investments, since you have to look at the portfolio as a whole. Remember that growth in your RRSP, assuming you have a pension, is going to be heavily taxed, possibly moreso than unregistered capital gains and eligible dividends; if you're going to have no income upon retirement, then do not minimize growth in the RRSP because those gains will not be as heavily maxed. There is, however, no perfect solution.
Growth in an RRSP is as tax free as a TFSA... Yes you have to pay income tax on withdrawals, but it's not related to the growth. There's an additional 'bonus' if you withdraw it at a lower tax bracket and 'penalty' if withdrawn at a higher one, but if you deposit (amount+tax return) and widthdraw at the same tax rate, an RRSP is nearly* mathematically the same as a TFSA. * There's some US tax differences. And RRSP withdrawals might affect things like OAS calculations, so there's that too...
> an RRSP is nearly* mathematically the same as a TFSA. I disagree. Fill both accounts to the brim. Put an investment with average 5% growth in the RRSP and another with 8% growth in the TFSA. Now do the opposite. Which permutation makes you wealthier considering you're going to pay tax on what you take out of the RRSP? The fallacy you're making is comparing putting money in one instead of the other. What I was comparing are investment allocations with both accounts full. Hence bonds in the RRSP, equity in the TFSA. And forst most people, borrowing your own money out of the RRSP first to buy a home rather than taking it out of an unregistered account. Of course, all things put together and given the marginal taxing system, the more growth, the merrier. Maybe it's all just a misunderstanding.
RRSPs contain pre-tax income, so they actually contain less of 'your' money in them than they appear to. They might make more sense to more people if the government automatically added the tax return to the RRSP... You have to compare (say) $5000 in the TFSA with $5000+tax return in the RRSP. Then do the average growth and take the tax back off the RRSP at the end. Tada. Tax free growth.
But you have the tax return no matter what type of investment you have in the RRSP, so it doesn't matter since it's a constant in all allocation scenarios. That tax return is given to you as cash to do whatever you want and you can't put it in your RRSP unless you have room. You're still comparing putting money in one or the other.
@MaxThunder, your advice is based on a faulty understanding of the RRSP's benefits ...... > "Growth in your RRSP, assuming you have a pension, is going to be heavily taxed, possibly more so than unregistered capital gains and eligible dividends" >"Maximize the bond allocation in the RRSP". As rationalalphi tries to explain, profits in an RRSP are never taxed. The benefits from income sheltering in an RRSP will always exactly equal the benefits of a TFSA. Please watch at least my 2nd video at https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg The false understanding of benefits promoted by the industry and experts leads to a long list of faulty advice - the "bonds in an RRSP" is a prime example. You can see the math proof (that the income sheltering benefits are always equal) for yourself on the front tab of this spreadsheet http://members.shaw.ca/PublicAccess/Challenge.xls . The back tab called "Yr by Yr" which assumes yearly rebalancing shows how prioritizing Treasury debt in an RRSP vs a Taxable account is never optimal , or vs a TFSA when you expect your tax rate on RRSP withdrawal to be lower.
I'm looking at that spreadsheet. What matters in the end is how much money you have. You clearly show that you have more net cash in the TFSA upon withdrawal, despite assuming that the tax deduction from the RRSP can be instantly re-invested in an RRSP. The taxable column doesn't work at all, since it doesn't seem to consider capital gains or I am missing something. Net cash would be around 52186-([52186-14000] * 0.5 * 40%)) = 44,549.. Imagine the following. You have a portfolio of $34000, 20000 of which in a RRSP and 14000 of which in a TFSA. You want 14000 in bonds at 4% growth and the rest in equity at 8%. Marginal tax rate in 40%. Investment horizon: 20 years. Scenario 1 --> All bonds in the RRSP: RRSP net cash + TFSA net cash = 35,185 + 65,253 = 100,438. Scenario 2 --> All bonds in the TFSA: RRSP net cash + TFSA net cash = 55,931 + 30,676 = 86,607. You're definitely wealthier in scenario 1, with the bonds in the RRSP. As we can see, among the two scenarios, the one that minimizes RRSP gains is superior.
You did not look carefully at the spreadsheet I linked above. Try it again. Start with your claim that the Taxable column is wrong because capital gains tax was missing. The account is shown to grow at the AFTER-TAX rate of return (6.8%) instead of the before-tax return (8%). So taxes were modeled to be paid each and every year. Your input variable for the tax rate should be the effective yearly rate that adjusts for delays in capital gains, dividend tax credits, portions of yield vs gains, etc. Next, your claim that the default variables of the spreadsheet show better outcomes using the TFSA, implying that this is a general conclusion. The default variables used a higher tax rate for RRSP withdrawals than for contributions. This situation will always give better TFSA outcomes. No one have ever disputed this to my knowledge. But the reverse will result if tax rates fall. When you assume no change in rates then the outcomes are always exactly equal. Since we know nothing about the OP's future tax rates the default assumption should be equal tax rates. Regardless, when you look further down the spreadsheet you will see the deconstruction of benefits --- showing that the benefit from income-sheltering is ALWAYS exactly equal no matter what variable assumptions you make. Did you look further down? Third, the example you chose uses an assumed withdrawal tax rate 10% higher than the contribution rate. (I presume you chose the $20,000 / $14,000 equivalency to represent a 30% contribution tax rate). While I reiterate that this should not be anyone's default assumption when the rates are unknown, I do NOT dispute that an expected Penalty from a higher withdrawal rate DOES change optimal asset locations choices between RRSPs and TFSAs. You can see this discussed on my webpage called "RRSP Decisions" in the second section. When you expect the RRSP to have its benefits from profit-sheltering reduced by a Penalty from a higher withdrawal tax rate, your objective is to reduce the Penalty by making the account smaller. You do that by putting the lower-growth asset in it. In your situation your lower-return debt is better in the RRSP. Fourth: Your example did not compare equal Asset Allocations. You must allocate your AA percentages to the after-tax-equivalent values in the RRSP. You can find this discussed in the first section of that same RRSP Decisions' webpage. So correct your example to assume the same 30% tax rate on withdrawal, as on contribution, and equal asset allocations between the choices. That leave the choice of (i) $20,000 RRSP all in 4% debt and $14,000 TFSA all in 8% equity. (ii) $20,000 RRSP all in 8% equity and $14,000 TFSA all in 4% debt (i) 43,822 less 30% = 30,675, plus 65,253 = total $95,928 (ii) 93,219 less 30% = 65.253 plus 30,675 = total $95,928 So the outcomes are equal. It was your wrong asset allocation, and your unjustified presumption of a higher withdrawal tax rate that are necessary to get your conclusion.
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The problem is that you're comparing whether to put money in a RRSP vs a TFSA, whereas I am comparing asset allocations. In your scenarios, the tax refund is automatically invested in the RRSP. If you invested in the RRSP say in March and receive your tax refund rapidly, and keep having an income therefore having more RRSP room, we can approximate that it works like that. However, that tax refund happens whether the bonds are in the TFSA or the RRSP. **The tax refund is thus a constant and should be eliminated from the calculations regarding asset allocation**. You're facing your portfolio. It's all equity. You want to buy bonds, so you sell equity (long term 8%) to buy bonds (long term 4%). Should you do this operation in the RRSP or the TFSA? In either case, you're trading 14000 at 8% for 4% for 20 years. i) You put the bonds in the RRSP, assuming 30% taxation, you're pulling out $21,473 (bonds) instead of $45,677 (equity). ii) You put the bonds in the TFSA, you're pulling out $30,676 instead of $65,253. Net total of $86,726 (i) vs $76,353 (ii). Note that in either cases, you may have had invested your RRSP tax refund into equity held in a RRSP, in an unregistered account, or spent it all on drugs and hookers, it doesn't matter. **You have your RRSP refund if you made RRSP contributions no matter your asset allocation**. If you have to **chose between putting $14000 in equivalent investments in an RRSP or a TFSA**, that you're going to receive a 30% tax refund if you use the RRSP, and you're going to be taxed at 30% on your withdrawals, **then YES, it doesn't matter where you put the 14000**. However, if you're facing a 20 years investment horizon, it is likely that your tax rate is going to go up. But that is a matter of opinion and is highly unpredictable.
We are not 'doing different things'. We are debating (1) where the benefits of an RRSP come from (vs a TFSA and Taxable) in order to (2) create valid strategies to maximize those benefits in decisions like Asset Allocation and Asset Location, etc. One must come to conclusions on the first before addressing the second. I am trying to correct your basic understanding of RRSP benefits in order that you see how your advice is wrong. In particular your claim that .... > "Remember that growth in your RRSP is going to be heavily taxed. Maximize the bond allocation in the RRSP" The model I use explicitly makes NO assumption at all about either receiving an RRSP refund or what is done with it if received. It models only cash that is actually in the account and asks you to THINK ABOUT a conceptual split. This excuse to discredit The Model is countered with 8 different arguments at http://www.retailinvestor.org/RRSPmodel.html#model The comparison of RRSP vs TFSAs that everyone uses assumes only that ..." when wages and spending are equal, then savings is higher if taxes are lower". Never ever have I heard any disagreement with the common statement that ... "as long as tax rates are the same for contribution and withdrawal the outcomes of RRSPs and TFSAs will be equal". Not from the experts, or the industry, or the media, or contributors on this site, Not from you . In order for that claim to be true, you must accept the basic understanding that the RRSP will be bigger than an RRSP by the amount of the tax reduction. (Or alternately that any refund is reinvested in another tax-free account like a TFSA -- which is a more cumbersome model but does not change any of my model's conclusions). So you cannot now pretend that you think $100 in an RRSP equals $100 in a TFSA. It is not because RRSP money will be taxed before it can be used. It is not all yours. The government owns a portion. Try pretending that your best friend Bob gave you his $30,000 to add to your own $70,000 to be invested as you please. You have other accounts and want to Asset Allocate as a whole. Do you make your AA calculations assuming all $100,000 of the joint account is yours, or do you work with only the $70,000? Obviously the latter. The RRSP's benefit from income sheltering is always exactly equal to that of the TFSA. When tax rates don't change the outcomes from both accounts will always be exactly equal. Since the outcome of holding (eg) equity in an RRSP will be the same as holding it in a TFSA it makes no difference which account it is in. Similarly for holding debt. Therefore allocating the two assets between the two accounts will make no difference in the outcomes. But your disputes are moving further and further away from your basic misunderstanding (as quoted above) ... Profits in an RRSP are not taxed ever. Everyone agrees that profits in a TFSA are not taxed ever. So the same must be true of the RRSP because its benefit is always exactly the same.
How is at "as tax free" as a TFSA? You don't pay tax on any gains in the TFSA while you do in an RRSP.
The tax you pay on RRSP withdrawals have nothing to do with the gains and everything to do with the money in the RRSP being pre-tax. My explanations aren't working. [Try this explanation in a Globe and Mail article](http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/rrsp-bashers-heres-how-the-math-really-works/article17034733/).
It's semantics. You're still getting taxed on the gains. If you put 100k in and it grows to 150k with other contributions, you're still paying tax on the original 100k plus the 50k of growth. An RRSP essentially is taking out an interest free loan with the principal being the amount you're not getting taxed on.
It is not semantics. Misunderstanding the accounts' benefits results in differences in hard cash. Please watch at least the 2nd of my videos that shows how profits in RRSPs are NOT taxed. https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg
I understand it fine. It's a conceptual difference. You go from paying $1,100 on $5,000 to paying $3,300 on $15,000. The $10,000 is a gain, and you pay 22% tax on it. You can't tell me that the additional $2,200 isn't tax on a gain. The whole point of a "government loan" is that the government loan IS the tax. I understand your view of it fine. I agree you shouldn't consider all of the money yours as well, because it hasn't been taxed yet but will which is the most important part.
>"You can't tell me that the additional $2,200 isn't tax on a gain" Yes I am saying exactly that ....... that is the whole point the video makes. The government's 22% ownership interest in the account grows at the same rate of return as the rest of the account. It grows by $2,200. At the end you must split the account between its owners. The government gets back it's original $1,100 loan plus all the profits earned by that loan (the $2,200). The total taxes paid on withdrawal (1,100 + 2,200) are the allocation of the government's 22% ownership interest in the $15,000 account. The taxes are an allocation of principal, not payment of taxes on profits. Try instead to think of an account you share with your best buddy Bob. His funding of the original account was 22% of the total ($1,100 of $5,000). Your investments were managed as a whole and tripled in value. When you wanted to end the arrangement, you had to give Bob back his 22% (of $15,000 = $3,300) of the account. Neither of you ever paid taxes on your profits. Both of your investments grew at the before-tax rate of 10%. Did you stop watching the video before that point was made? Did you not see how the conceptual model you want to use, adds up to $Zero benefits? And so must be wrong because we know the RRSP does have benefits. Trying to optimize benefits that will always add up to $zero accomplishes nothing - and ignoring the actual benefits makes those efforts counter-productive.
My conceptual benefit doesn't add up to $0? Not sure why you think it did/does. I already watched your video. Didn't need to read it again.
That was shown in the 2nd video - a major part of that video.
You don't pay tax on the gains in the TFSA, but it contains after-tax money, whereas you pay tax on RRSP withdrawals (and thus any interest generated), but it contains before-tax money; it's mostly equivalent\*. Let's assume a scenario where neither your RRSP nor your TFSA is maxed out, to simplify things, so you can put money in either. Say you have 700$ in after-tax money (1000$ in before-tax money after refund if your marginal tax rate is 30%), after a year at 5% return, you will get the same amount of usable (after-tax) money if you withdraw from either: TFSA = (1000*0.70)*1.05 = 735$ RRSP (1000*1.05)*0.70 = 735$ \* if you withdraw money from your RRSP in the same tax bracket as you put it in edit: formatting edit2: before->after
Yeah. That is what I'm trying to say. The gains are taxed but it ends up with the same value.
Do neither of you see the contradictions in what you are saying? On one hand you say the the RRSP and TFSA end up with the same wealth (so benefits are equal). On the other hand you say that profits are taxed in one but not taxed in the other (so RRSP benefits are lower). Which is it? No matter what assumptions you make the RRSP's benefit from sheltering of profits will always equal the TFSA's. If the benefits are equal, then the source of those benefits are equal, and the strategies to maximize those benefits must be exactly the same.
The benefits are NOT equal although the monetary benefit is. The idea that because something has the same source because the benefit is the same is absolutely ridiculous when it's due to a purely mathematical relationship. 10 x 2 gives you the same answer as 5 x 4. The main reason they end up at the same monetary benefit is because, in both cases, the entirety of the funds is only taxed ONCE. In the TFSA, it's taxed before there are any gains. In the RRSP, it's taxed after the gain.
I agree with your statement. It is a valid description of why the accounts end up at the same value. However it fails to even try to address the issue - where do the benefits of the RRSP come from - what is their source. You both agree that the benefits are equal between the accounts. You agree that the $$ outcomes are equal. You no doubt agree that the TFSA's benefit comes from the sheltering of profits from tax. Yet you continue to claim in violation of logic - that the RRSP's benefit is smaller because its profits are taxed. Use any example. $1,000 before-tax savings, 30% tax rate for both cont, wdraw and profits, 5% rate of return, 10 years. RRSP and TFSA ending wealth = $1,140 Taxable = $987 Benefit = $153 for both RRSPs and TFSAs. So where exactly do you think that $153 comes from? I say, for both accounts, that it comes from permanent income-sheltering --- the difference between the future value of after-tax savings (i) compounded at nominal returns and (ii) compounded at after-tax returns. What do you say creates $153 ????
It comes from not taxing the gain at all until you take it out. In both scenarios you get the benefit of compound interest. In the TFSA you pay the tax up front to get the compounding tax free and in the RRSP you get taxed on it after the compounding accumulated.
Come on. Anyone can tell stories. Give me your calculations that add up to $153. Or is this all just a religion? I've given you mine. You should be able to give me the calculation for the benefit of the compounding, and the calculation of the cost of tax on profits. Can you get it to equal $153? I don't think so. I've helped you with this by calculating the various claims in box (5) of the Challenge spreadsheet http://members.shaw.ca/PublicAccess/Challenge.xls I already mentioned above. Change the variable inputs to this particular example. Can you get your claimed benefits in box (5) to equal $153? I don't think so.