RRSP vs TFSA vs Payoff Mortgage

[everfeb]

PRABA>>>Check this out with a financial advisor....I think, but could be wrong, that unless your RRSP withdrawal above the free $25,000 moves you into a higher tax bracket, your tax RATE would stay where it is now. However, your income would show up as being higher so you would pay additional income tax on the amount you withdraw from your RRSP above the $25,000.
If you can buy real estate with a $25,000 down payment, why wouldn't you do that? Mortgage rates are probably as low now as you are ever going to see and the lower your mortgage rate the more you will save (make) long term.

[JagrBomb]

PRABA>>>Check this out with a financial advisor....I think, but could be wrong, that unless your RRSP withdrawal above the free $25,000 moves you into a higher tax bracket, your tax RATE would stay where it is now. However, your income would show up as being higher so you would pay additional income tax on the amount you withdraw from your RRSP above the $25,000.
If you can buy real estate with a $25,000 down payment, why wouldn't you do that? Mortgage rates are probably as low now as you are ever going to see and the lower your mortgage rate the more you will save (make) long term.

from what i understand, i can withdraw $25K tax free from my RRSP without any ramifications , so long as I payback X% every year back into the RRSP.

however, i have more than 25K, and the extra cash in my RRSP would allow me to put a bigger downpayment. that being said, there is a 20% withdrawal fee for taking it out early from my RRSP. and as you said, that amount will now be counted as a taxable income so i'll be losing even more of it. i will still be in the same tax bracket, but i don't see a way around losing a significant portion of the extra contributed RRSP dollars I have.

[butch]

I also used some rrsp to pay for my wifes second year of college under the ''lifelong learning plan''

they give you 10 years to pay back rrsp as opposed to 15 for the HBP

[everfeb]

from what i understand, i can withdraw $25K tax free from my RRSP without any ramifications , so long as I payback X% every year back into the RRSP.

however, i have more than 25K, and the extra cash in my RRSP would allow me to put a bigger downpayment. that being said, there is a 20% withdrawal fee for taking it out early from my RRSP. and as you said, that amount will now be counted as a taxable income so i'll be losing even more of it. i will still be in the same tax bracket, but i don't see a way around losing a significant portion of the extra contributed RRSP dollars I have.

Again, check this out with a financial advisor. I don't think it's a 20% WITHDRAWAL fee where you lose 20% of your investments. Do think it's a WITHHOLDING Charge sent to CRA which is applied to your taxes at tax time. It's like you are prepaying some of your Income Tax. Check it out though. In my case, last year lets say I withdrew $10,000 from my RRSP. 20%-$2000 was withheld from me by the bank holding my RRSP and they forwarded that 20% to Canada Revenue Agency.. So I got in my pocket $8000. Come tax time the $10,000 is entered as income but the $2000 is entered as income tax deducted. Thus only the $8,000 I put in my pocket is taxable. Except for things like the first time home buyers plan, sooner or later you pay income tax on RRSP withdrawals. It's a tax deferral plan, not a tax avoidance plan. I'm not positive on this but the withdrawal from the RRSP should probably be done as late in the year as is possible. By doing it early in the tax year you lose the amount of income (profit) the with held amount may have earned the rest of the year. By doing it later in the year you gain the income (profit) from the amount that wasn't with held early in the year.
I appreciate that the bigger the down payment the lower the monthly mortgage payment. But how much would the difference in monthly payments be with a $25,000 vs a say $35000 down payment. And take into account the (up front) tax to be paid on any amount withdrawn from RRSP above $25,000.
BTW...I'd be checking all this out with an advisor who is not involved in your RRSP OR the purchase of the home as they could have their own agendas and not necessarily be looking out for YOUR best interests. Might cost you a few bucks now but maybe use an accountant for this.

[Canadiens2099]

Thanks again to everyone who contributed on this thread. Lots of great insight! Much appreciated!

[blayze]

How much money are we talking about here? Couple thousand? Hundreds of thousands?
What's your tax bracket?
What's the interest rate on your mortgage?

Can't really answer your question without knowing the answer to these quesitons.

In short... if you make a ton of money (ie: are in a high tax bracket) and you don't need to use it for the foreseeable future then max out the RRSP contribution first, which will net you by far the most money in the form of tax savings.

If we're talking chump change then I'd just dump it into the TFSA or pay off the mortgage depending on your mortgage rate.

There are all kinds of strategies for TFSAs, each with pros and cons, but in my opinion the best thing to invest in is growth stocks or dividend-paying growth ETFs. This way you have the chance to save on a ton on capital gains tax if the stock is a home run. You can also put it in high interest yielding investments like commercial bonds and high dividend stocks, but the TFSA is so small that limits your ability to generate any serious interest income.

[Bra]

How much money are we talking about here? Couple thousand? Hundreds of thousands?
What's your tax bracket?
What's the interest rate on your mortgage?

Can't really answer your question without knowing the answer to these quesitons.

In short... if you make a ton of money (ie: are in a high tax bracket) and you don't need to use it for the foreseeable future then max out the RRSP contribution first, which will net you by far the most money in the form of tax savings.

If we're talking chump change then I'd just dump it into the TFSA or pay off the mortgage depending on your mortgage rate.

There are all kinds of strategies for TFSAs, each with pros and cons, but in my opinion the best thing to invest in is growth stocks or dividend-paying growth ETFs. This way you have the chance to save on a ton on capital gains tax if the stock is a home run. You can also put it in high interest yielding investments like commercial bonds and high dividend stocks, but the TFSA is so small that limits your ability to generate any serious interest income.

Like

[JagrBomb]

Again, check this out with a financial advisor. I don't think it's a 20% WITHDRAWAL fee where you lose 20% of your investments. Do think it's a WITHHOLDING Charge sent to CRA which is applied to your taxes at tax time. It's like you are prepaying some of your Income Tax. Check it out though. In my case, last year lets say I withdrew $10,000 from my RRSP. 20%-$2000 was withheld from me by the bank holding my RRSP and they forwarded that 20% to Canada Revenue Agency.. So I got in my pocket $8000. Come tax time the $10,000 is entered as income but the $2000 is entered as income tax deducted. Thus only the $8,000 I put in my pocket is taxable. Except for things like the first time home buyers plan, sooner or later you pay income tax on RRSP withdrawals. It's a tax deferral plan, not a tax avoidance plan. I'm not positive on this but the withdrawal from the RRSP should probably be done as late in the year as is possible. By doing it early in the tax year you lose the amount of income (profit) the with held amount may have earned the rest of the year. By doing it later in the year you gain the income (profit) from the amount that wasn't with held early in the year.
I appreciate that the bigger the down payment the lower the monthly mortgage payment. But how much would the difference in monthly payments be with a $25,000 vs a say $35000 down payment. And take into account the (up front) tax to be paid on any amount withdrawn from RRSP above $25,000.
BTW...I'd be checking all this out with an advisor who is not involved in your RRSP OR the purchase of the home as they could have their own agendas and not necessarily be looking out for YOUR best interests. Might cost you a few bucks now but maybe use an accountant for this.

i'll definitely check it out, thanks for the tip!

[everfeb]

"i'll definitely check it out, thanks for the tip!" NP Praba..good luck.

You too Canadiens2099...you got a lot of good info here.

[dooley89]

If you're a first time home buyer, you can withdraw $20K from your RRSP tax-free. At least that $20K amount was true 7 years ago when I did it. It may have gone up since.

Only downside is that you have to return the withdrawal over 15 years using your RRSP contributions as repayment.

Essentially, it's a tax-and-interest free loan to your current self from your future self.

We just did that two years ago, put 20k in just to take it out (for the deductions).

[Laendarian]

i'll definitely check it out, thanks for the tip!

A couple things.

1. if you are planning to use your RRSP's as a 1st time home buyer than you can take up to $25k penalty free and you have to pay it back over 15 years ($1666 per year at max withdrawal). I would definitely suggest you do this if you are in a position where it will eliminate your need to pay CMHC (or bump you to a lesser tier of CMHC)

2. RRSP and TFSA are both very useful, ultimately it depends on how you want to use them. The bonus with RRSP is that it gives you a tax break now and defers your taxes until retirement. The cole's notes of how this works is that lets say you make $75k and you pay taxes on that $75k throughout the year. At the end of the year you contribute $10k to your RRSP's, this will essentially drop your income from $75k to $65k for the year and as such you will recoup any of the taxes you paid on the delta from $65-$75k (last $10k)

3. TFSA is all after tax dollars, however any gains you make on this are tax exempt and you can deposit and withdraw freely without any tax penalties. I believe it was mentioned before but contrary to popular belief you can invest TFSA's just like RRSP's and buy funds or securities which makes the potential for growth more appealing (putting it in a traditional TFSA savings account is close to worthless)

In my case I made sure I put enough on my mortgage to avoid CMHC fees, but I didn't go crazy as the interest rates on mortgages are very low right now and you can make more money investing the additional capital in funds. Then I typically load up on my RRSP's throughout the year and at the deadline and take my return and dump that into a TFSA. this is a great strategy for me, but I do max out my RRSP's and TFSA each year so it's useful to utilize both. If you have a small amount you want to invest you are probably better off consolidating in one strategy (i'd start with RRSP) to maximize your buying power.

[gainerama]

I got all three but a lot of it will depend on how much disposable income you have available to use. I used to be personal banker in my previous life and in my opinion, if you can afford it, you should try to do RRSP savings and mortgage at the same time. Reason being is if you fall behind in one, it is really hard to catch back up at a much later date and both are critical in the later stages of your life. TFSA is nice to have but I also think that it's a luxury that only higher income people can afford to dabble with.

With regard to RRSP, they are useful for the immediate tax break but make no mistake, the government will get every penny of tax back at a later date, there's no way around it. I have a good amount in RRSP but I don't have it completely maxed out yet to the limit, it's not a high enough priority since I already feel that I'm saving at a comfortable level.

With regard to mortgage and debt repayments, I made this the highest priority as I've seen too many times in my old career with countless people wrecking their future by getting in too deep without a plan or not knowing how to manage a budget. I have no credit or loan debts, my principle residence is free and clear and the only true debt I have is a mortgage on a rental property that use for generating negative income. I know mortgage rates are really low, but I can't tell you how much peace of mind you get when you know that you don't really owe anyone anything.

With regard to TFSA, I got this mainly as a high risk day-trading account. It's a luxury where as RRSP are more of a necessity. Since I got a bit of play money that I can gamble with, I use this as a play account and nothing more.

My priorities would be:
debt repayment / emergency fund
RRSP

TFSA

Lots of ways to kill the cat, but for sure the best thing is to see a financial planner to make sure all the bases are covered.

[Loch]

I like a balance between RRSP/TFSA because if the worst happens financially (ie, you have to go bankrupt due to say, a leaky condo assessment) the RRSP funds have a protection whereas the TFSA does not.

Oh, and if you (or someone you know) is in a situation of owing big pile of money they can't afford and is thinking of gutting the RRSPs, talk to a bankruptcy trustee before liquidating those RRSPs.

[Canadiens2099]

More great insight, thanks guys.

[Dobber]

Sit on your RRSP until it can actually take you down a tax bracket. No point in using it otherwise, since your allowable RRSP adds onto each year. Max out TFSA each year since it's only $5000 now (thank you Trudeau). Keep some aside for a rainy day/other stuff. Put what you can after that on the ol' mortgage. A good investment analyst/financial person would get you more than 3% on your TFSA for sure