new thread for too much money in RRSP | RRSPs and RRIFs | Discussion forum

Agree with Bill. you can only plan in a broad sense. It's unlikely, however, that there will be major sudden changes that disadvantage seniors, because we are well-known to be a noisy group who exercise their franchise more dependably than other age groups. If anything, the trends have been in the opposite direction.
Seniors can benefit disproportionately from TFSA because they will more likely have savings. And Ontario is introducing a pension plan that will bump up income later on as well. I also think the government would like to get out of the OAS business entirely. A shake-up in all income-supplement programmes has been floated. So, many things could change.

Also, you can bump up your OAS and CPP considerably by delaying receipt to age 70 (36% and 42% respectively) Anybody who has $1+million in RSPs would be well advised to consider that seriously unless they have reason to expect a short life expectancy.

The other thing, and this is huge, really, is that the figure that really matters is how much of it you get to keep, not how much total income you have. RSP/RIF income, no matter how you slice it, is always taxed at marginal rate, and I see no reason why the government would change that. It is not beneficial for everyone to max it out. It depends on their overall tax and entitlement picture. Bear in mind too the impact of income splitting for RIF and CPP income.

Lastly, this is mostly a pipe dream scenario for most people. It's a useful calculation in a speculative way, but the vast majority will never have anywhere near these amounts in their RSPs. And, if they were the kind of people who likely would have them, they have the option of putting their money into other kinds of investments which might give them a better after-tax income.

If it's the OAS clawback that concerns you, I would have to say that in my opinion (and it's only an opinion), the OAS is probably the most vulnerable aspect of the income security scheme. The likelihood of it somehow being reworked seems high to me. Also, they can always change the threshholds, which would be another way of phasing it out.

Another complication: If you're young (let's say under 40), you really have no way of knowing yet what your income might be from a registered pension plan. Even people older than that have had some surprises, sometimes nasty ones. Many pension plans are not indexed or are not fully indexed, to inflation. That's another very important consideration.

Being over 65, I have had plenty of time to consider these questions, although perhaps not quite as comfortable as you, Jeff, in terms of wealth.

My current feeling, which is not the same perspective I had in my 30s, is that I would go lite on the RSPs. I wouldn't bow out entirely (although that depends on your situation).
So far, at least, the government has allowed people to accumulate contribution room. Assuming that continues to be the case, or at least that they don't take away the contribution room you have accumulated, there is no rush to contribute to an RSP. If you are like most people, your highest earning years will be towards the end of your working years. An RSP contribution at that time, based on accumulated contribution room, will give you a higher instant return and may reduce your tax bracket, and therefore more likely to be worth doing then than now. By waiting and putting in a large lump sum, you may be able to bring yourself down an entire federal tax bracket.
Further, the closer you are to retirement, the more information you will have about what your retirement income scenario is going to look like and whether it makes sense for you to have money in RSPs. I'd say that somewhere around 10 years before you expect to retire, you should decide if it's worth your while, and then spread it out over the coming years to best advantage. In addition, RSPs are suitable vehicles for investments on which you are likely to get fully taxed regardless, so they make sense as a place to put your "cash" portfolio - GICs and bonds. By happy coincidence, the older you get, the more of your assets you ought to be putting into GICs/bonds. So, the timing seems right to me on all counts. If you can foresee a financially secure retirement regardless, then take your chances with the stock market earlier in life, and do it outside of RSPs so that you can get the related tax advantages, then move it to RSPs later where you will have to pay the higher tax anyway.

I did not implement this strategy myself, because it didn't occur to me at the time. However, we did delay a significant portion of my spouse's contributions for various reasons. For a while, we thought we might not max out spouse's contributions at all. In the end, we decided to do so. This was a much easier decision at 60 than at 40 because we knew more about where we were at. As it turned out, spouse got a new job at approx. 50, which changed our situation significantly. So, having done it both ways, I think this way is better. At least, it was for us.

Note: I have no formal qualifications or training in this area. It's just my own opinion. Proceed with due caution!

One can contribute now, benefit from the tax sheltering, and use the RRSP contribution deduction later. The deduction for an RRSP contribution can be carried forward and applied in a future year when one is in a higher marginal tax bracket.

Also, one is not actually paying any tax on the income, capital gains, or dividends earned in an RRSP on one's after-tax portion of the total money. The Globe & Mail's John Heinzl explains that in Investor Clinic: Beware of these three RRSP myths:

The notion that you pay more tax on investment earnings with an RRSP is an illusion. If you assume a constant marginal tax rate and adjust for pretax and after-tax amounts, investments inside an RRSP will always outperform identical investments held outside an RRSP. (The same is true for tax-free savings accounts.)

Loonie, if you are over 65, then in your 30's there was no rsp contribution carry forward. It was 'use it or lose it'. We made decisions based on the rules at the time, and rules change. People our age should consider marrying a young person, then base our rrif withdrawals on the younger age. Now I just need to find a person mature enough to understand the benefits of this, and young enough to make it worthwhile.

I think one has to be cautious in appropriating information imparted in newspaper columns or that does not provide details of calculations.

Heinzl’s article does not provide the benefit of calculations. Neither does the Raymond James calculation show you how it was actually arrived at. Each person would have to look at their own circumstances to know what is best for them. Tax brackets, various kinds of clawbacks and disentitlements, as well as estate implications need to be looked at.

If you are going to invest in RSPs, you need to PLAN how you are going to get the money out again. Estate planning is a huge factor.

If you simply don't care what happens to the money after you're gone, fair enough; you can skip this part.

A great many people want their money to pass to their children, but there is no provision for that with RSP/RIFs except by cashing out, which is mandatory. Your RSP/RIF can, if you sign the beneficiary forms, and ONLY if you sign them, pass directly to your spouse without any immediate problems, but not to anyone else.

However, if you are single or the surviving spouse, the entirety of your RSP/RIF (which may now include the RSPs of both spouses) will be taxed at your marginal tax rate on death. If you have even a relatively average middle class 200,000 to 500,00 in your plan at that time, the taxes will be huge. Any amount over approx. 200,000 will be taxed at about 50% depending on province, certainly much more than your tax rate when you made the contributions - particularly if you started young when your income was relatively low - and more than Heinzl or James were counting on. The more you have in the RSP/RIF, the more this will hurt. If you have 1.3 million, as I believe was suggested earlier, the tax on 1.1million of it will be 50% - more in New Brunswick! This is a particularly big problem if you should die at, let's say 71, as the principal will be at its highest.
A great many families have discovered this too late, to their dismay. Some buy life insurance to cover it, but you need to do that relatively early to be sure of a good rate, not later on when you first notice it at 71 and find it too expensive or that you don't qualify. And of course you have to pay for the life insurance, which is also a non-deductible loss on the RSP income calculation, and I'm sure not included by Heinzl or James.

There's a reason the government, while introducing TFSAs, has not gotten rid of RRSPs. It would be interesting to know their side of the equation, including estate payouts.

For those who are interested in the impact of dividend income and capital gains on taxes, which is much more significant, complicated and divergent than I had imagined, I recommend reading Master your retirement: how to fulfill your dreams with peace of mind. 2nd edited by Doug Nelson (Winnipeg: Knowledge Bureau, 2011).. Evelyn Jacks founded this publishing house. If you happen to be in the lowest tax bracket on retirement, under approx. 45,000 (depending on province), your tax on eligible dividends will be NEGATIVE, as low as -11.89 in the Yukon. It is only in positive territory in MB, QC and NL. This may not account for the "gross-up" factor; I'm not sure. In the next bracket, it goes up to approx. 10%. http://taxtips.ca/marginaltaxrates.htm

I take Norman’s point that the deduction for RSP contribution can be taken at a later date. This may be a good mid-range strategy for lots of people. If for some reason you are unable to use it in future (illness, death, irretrievable job loss and low income), I believe there is a form you can submit to CRA to allow it to be withdrawn as previously-taxed money, although you would still have to pay tax on the income from your investment.

For those who want to read more on the arguments in favour of RRSP contributions, you could do worse than reading Gordon Pape’s books on the subject, and also his more recent book on retirement issues, although I find him relatively basic on most questions. I can't think of anything better at the moment.

In general, I am in favour of RSP contributions, but they aren't for everyone (e.g. not for low income people), and not for everyone at all times of their lives. I think, increasingly, that it's best to diversify - keep some in RSPs and some outside of it. RSPs are good places to put complicated investments that produce a variety of different classes of income that would otherwise be difficult to sort out and calculate, for instance.
But too much of them can create an estate nightmare. And, you never know what changes the government might bring in, so I think it's best to have one foot in each camp. It's also worth remembering the TFSA at this point. If nothing significant is done to change them, a person who is 18 now could have at least hundreds of thousands in TFSA by retirement. I think the TFSA would win out over both RSP and non-registered, even though Heinzl would want to point out that the contributions are in after-tax dollars. So, I would keep all 3 pots on the stove where possible after debts are paid off, and have done so.

iamjdg said

Thanks Norman1. Great article. So much too consider. What is your take on too much money in an RRSP? You can never have too much money in an RRSP? Max it out? But save the deductions for later? Or use them sparingly to drop you into the next lower tax bracket?

iamjdg said
This calculator is pretty interesting: http://raymondjames.ca/cwg/rrs....._rrsp.aspx
...
I guess this says you can never have too much money in your RRSP, max it out, as long as your TFSA is maxed out first.

I don't think that's true. The calculator shows that if one contributes early enough for the given investment return rates, then one is still ahead, even if the RRSP withdrawals end up being taxed at a higher tax rate than the contributions were deducted at.

Just being ahead doesn't mean that one could not be even further ahead if one had made the "optimal" amount of RRSP contributions instead of the maximum contributions.

Ed Rempel wrote an excellent article in The TaxLetter (February 2013) about determining one's optimal RRSP contributions, both amount and timing. It is not a five-minute exercise and is quite sensitive to both the contributions and the planned withdrawals. The contents of the article are online across these Million Dollar Journey site pages:

The Optimal RRSP/TFSA Contribution
7 Steps to Determine Your Optimal RRSP/TFSA Contribution Strategy
Case Study: Figuring Out Your Optimal RRSP/TFSA Contribution

Norman1 said

Loonie said

I think one has to be cautious in appropriating information imparted in newspaper columns or that does not provide details of calculations.

Heinzl’s article does not provide the benefit of calculations. Neither does the Raymond James calculation show you how it was actually arrived at. Each person would have to look at their own circumstances to know what is best for them. Tax brackets, various kinds of clawbacks and disentitlements, as well as estate implications need to be looked at.

Heinzl's article does provide calculations. See the section "Myth No. 2 All of your RRSP investment earnings are taxed".
ours.

No, he does not provide actual calculations. He provides conclusions. Proper calculations would show the impact of quite a number of factors. He has oversimplified.