9-year old Carlie Weinreb lectures financial bloggers on when to use TFSA or RRSP
By Carlie Weinreb
Special to the Financial Independence Hub
I lectured about RRSPs and TFSAs this November 3rd at the CPA Mastering for Money Conference for 45 minutes. I was a bit nervous because I knew that Former Prime Minister Paul Martin was also speaking. My example was very detailed with lots of Excel spreadsheets.
I then had a sleepover at my friends house the next weekend after dance class. My friend’s parents heard I lectured to over 400 Chartered Professional Accountants about RRSPs and TFSAs. They asked “OK what’s better?” I said “Well, it depends on your income and a couple of other things.” I knew they were not satisfied. I could tell they wanted like a 15 second answer.
The following week I was lecturing at the Canadian Personal Finance Conference presenting on RRSP and TFSAs again but they gave me only 20 minutes. And most recently, I presented on RRSPs versus TFSAs at Microsoft. They only gave me ten minutes.
Want to pay less tax? The year-end brings with it your last chance for legitimate, allowable opportunities for tax planning that can lower your taxes payable to the Canada Revenue Agency (CRA) for 2016.
1.) Timing of Expenses
Taxpayers in business should accelerate expenses to make purchases that can be deducted this year rather than waiting for 2017. Employees can claim tax depreciation (CCA) on cars, planes, and musical instruments. Tradespersons and apprentices are permitted to deduct the cost of their tools up to a limit. Individuals planning on purchases should do so now to enjoy the benefit of depreciation claims this year.
Plan to purchase any capital property before the tax year-end to be able to claim CCA (at 50% of full rate) this year.
2.) RRSPs
RRSPs are a key tool for tax planning and allow Canadians to receive a deduction for the amount contributed, while also allowing the capital to accumulate tax-free until retirement.
Even though the deadline is March 1st, 2017, taxpayers should contribute to their RRSPs as soon as possible for compounded growth.
3.) Open TFSAs
While deposits to a Tax-free Savings Account (TFSA) are not tax deductible like RRSPs, accrued profits in the account are not subject to tax when earned or when withdrawn. Consider lending funds to a spouse or children to allow them to make their own TFSA contributions. Continue Reading…
While 70% of Americans say they saved for retirement in 2016, many are anxious about the level of their savings and the need to direct money towards other goals and expenses, says a Harris Poll of 2,000 American adults conducted by the personal finance site NerdWallet. You can find the full results here.
Other major financial concerns include lack of emergency funds (cited by 35%), health care expenses (also 35%)and credit-card debt (27%). Retirement remains the most commonly cited savings priority (mentioned by 28% surveyed) but only 29% feel confident they saved enough in 2016, while one in three aren’t saving for retirement at all (including 43% of Millennials aged 18 to 24). Lesser forms of financial anxiety in 2016 include making mortgage or rent payments (19%), stock market volatility (17%), student debt (14%), and paying income taxes (13%).
Next year may not be much better: of those with workplace pensions, only 32% plan to increase their contributions in 2017. Older Americans aged 45 to 54 are most likely to report concern about lack of retirement savings (40% surveyed), while only 20% are confident they saved enough this year.
Savers should favour tax-advantage accounts over savings accounts
Locked-in Retirement Accounts (LIRAs) differ from RRSPs in that you usually can’t “unlock” the funds in them before age 55.
I guess the annual RRSP season is just around the corner, based on some of my most recent writing assignments. Earlier in the week, for MoneySense.ca, I made the case for semi-retirees in their Sixties (like me!) for starting the process of withdrawing money from RRSPs early. Click on the headline Retirement Tax Tips. The Hub summary ran here under the headline The case for Early RRSP withdrawals.
As TriDelta Financial wealth advisor Matthew Ardrey told me for the FP article, you’re going to see a lot more about LIRAs in the coming years. Whether you’re leaving a classic Defined Benefit pension plan or a more market-tied Defined Contribution pension plan, the job market these days is in such flux that a lot of people are going to have to start learning about what happens when you leave an employer pension plan earlier than you might once have envisaged.
LIRAs will multiply as Boomers reach Findependence
Fram Oil Filters: “Pay me now or pay me later.” (YouTube.com)
My latest MoneySense Retired Money column was published earlier today: click on the headline Retirement Tax Tips for full version.
As I say at the end of the column, after decades of the RRSP contribution habit, I admit it goes against the grain to start decumulating. And even more so, it’s counterintuitive to pay taxes on investment funds before you HAVE to.
However, to paraphrase the famous Fram Oil Filters TV commercial, you can pay me now or you can pay me more later — much more later. (For the famous 1972 “Pay me now or pay me later” Fram Filter ad, click on this YouTube link.)
Since tax is one of the biggest, if not THE biggest expense in retirement, I’d rather pay a little tax now prematurely than a lot of tax later.
Live on early RRSP withdrawals and defer CPP benefits
Emeritus’s Doug Dammer
So what has this got to do with RRSPs and taxes? As the column points out in detail, citing Emeritus Retirement Solutions’ Doug Dahmer, at some point those great tax refunds from decades of RRSP contributions eventually come back to haunt you. Usually that’s when you turn 71 and are forced to start making annual, and taxable, withdrawals from Registered Retirement Income Funds or RRIFs. (you can opt instead to annuitize or to cash out and pay a ton of tax upfront).
In practice, most will choose to take RRIF withdrawals starting at the end of the year you turn 71, but if you also have a good employer pension, the usual government pensions and other income sources, there’s a good chance some of those withdrawals will be at or near the top marginal tax rate, which these days ranges from 46% to more than 50%, depending on your income and the province in which you reside. And as the MoneySense column mentions, if you’re in the OAS clawback zone, you may have to add a further 15% to the government’s haul.
But if you’re semi-retired and “basking” in a relatively low tax bracket in your Sixties, you may be able to start withdrawing RRSP funds earlier than necessary, which may make sense if it’s only being taxed at 20 or 30%. Plus, as Dahmer suggests, by living on some of this relatively low taxed early RRSP funds you can defer the receipt of Canada Pension Plan (CPP) benefits and possibly Old Age Security benefits to as late as 70.
Every year you can defer taking CPP by living instead on early RRSP withdrawals, the CPP benefit will be 8.4% higher. Dahmer poses the rhetorical question whether your RRSP can generate an annual return of 8.4%. These days you certainly can’t generate that return with fixed-income and after all, we’re talking about people who by now should have a good percentage (perhaps 50%) in fixed-income. You may or may not get 8.4% from stocks but if you do, you’re also subjecting your portfolio to possible capital losses.
Posted By 
Posted By 
