Tag Archives: RRSPs

I’ve maxed out my TFSA and RRSP. Now what?

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By Mark Seed

Special to the Financial Independence Hub

Seriously, what a great problem to have!

Some readers have maxed out their TFSA and RRSP. Now what?

Here are some recent reader questions and comments (adapted for site):

Reader 1:

“I’ve finally been able to max out my TFSA and RRSP. I’m 41. Now what? Should I consider investing in a taxable account? If so, what should I own?”

Reader 2:

“Mark, I’ve been reading your site for years. I’ve put a priority on paying down our mortgage for many years now, and striving to max out our kids’ Registered Education Savings Plan (RESP) every year for their financial future. Those have been priorities number one and two for years.

When the TFSA came along, I thought it would be an excellent place to keep our family emergency fund for our house repairs and small renovations in a tax-free way but I’ve since realized by reading your site that I should have thought of this as an investment account (like you did) since day 1. I now invest in low-cost ETFs inside this account and I’ve never looked back!  I have a six-figure portfolio thanks to you!

Now, with the mortgage balance down the high-five figures; RESPs maxed for our two kids and now our TFSAs maxed out as well – I’m thinking we should work on maxing out the RRSPs like you have and eventually get into taxable investing if we can.

Thoughts on my approach?”

Reader 3:

“Mark, I have been an avid reader of your blog for the last two years but this is my first intervention 🙂 Better later than never! My question today is how I can diversify my portfolio even more?

I’ve maxed out my registered accounts (RRSP: $32,000 in VEQT and TFSA: $75,000 also in VEQT) and invested significant chunks of money in a non-registered account ($50,000 in VEQT). I’m also helping my cousin with his RESP. I’ve also got an emergency fund with Tangerine.

At only 29, and single, I think I am off to a good start but it would be nice to find more ways to diversify my investments. I still have another $10,000 that I want to invest. What are some options?

  • Real estate? (not sure about this)  Maybe Real Estate Investment Trusts (REITs)?
  • Crowdfunding?
  • Peer-to-peer lending? (seems risky)
  • Other?

Looking forward to your thoughts Mark!”

Wow, great stuff readers.

I mean, people thinking about investing inside your taxable accounts after your registered accounts are maxed; readers paying down their mortgage while diligently investing; folks wondering how to invest in a taxable account now that their emergency fund, TFSA and RRSP are managed and full: amazing stuff!

Get invested and stay invested!

Now, what should these readers do???

Continue Reading…

Make that last-minute RRSP contribution a conservative one

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Every year around this time, people like me pound their fists on the proverbial table for ordinary Canadians to make an RRSP contribution.  Spoiler alert: that’s what’s going to happen here, too.

What’s different in this post is that I’m going to go a little bit further than others in making my plea … but only a little bit.  I’m not going to recommend a specific security or product. I am, however, going to recommend a specific asset class: income.

So many people tell me that the reason they don’t contribute is that they don’t know what to invest in.  I gently point out to them that deciding about how to invest your little tax-deduction generator is not a pre-condition of contributing.  Just put the money into your RRSP based on the room available on your most recent notice of Assessment before Monday March 2, already.  Generate a refund …. or at least a reduction in the amount owing.

Many people make RRSP contributions in the second half of February and contribute nothing else throughout the remainder of the year.  For them, this is an annual tradition where they make a one-time contribution into whatever catches their fancy and pay precious little attention for the next 52 weeks or so.

Most people should be investing in Bonds this year

If this sounds like you … and if you already have a somewhat balanced portfolio that has some combination of stocks and bonds in it, then I suspect that the stock portion of your portfolio did very well in 2019 and the bond portion did relatively less well.   That simple reality is why most people should be investing in bonds this year.

Let’s say you’re a traditional balanced investor with a target of 60% in stocks and 40% in bonds.  If you started out a year ago with that asset allocation and your stocks were up 20% while your bonds were up 3% over the past year, then you could re-balance using the contribution. Continue Reading…

RRSPs are not a Scam: A Guide for the Anti-RRSP crowd

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The anti-RRSP crowd must come from one of two schools of thought:

1.) They believe their tax rate will be higher in the withdrawal phase than in the contribution phase, or;

2.) They forgot about the deduction they received when they made the contribution in the first place.

No other options prior to TFSA

RRSPs are misunderstood today for several reasons. For one thing, older investors had no other options prior to the TFSA, so they might have contributed to their RRSP in their lower-income earning years without realizing this wasn’t the optimal approach.

Related: The beginner’s guide to RRSPs

RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when hopefully you’ll be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

Taxing withdrawals

A second reason why RRSPs are misunderstood is because of the concept of taxing withdrawals. The TFSA is easy to understand. Contribute $6,000 today, let your investment grow tax-free, and withdraw the money tax-free whenever you so choose.

With RRSPs you have to consider what is going to benefit you most from a tax perspective. Are you in your highest income earning years today? Will you be in a lower tax bracket in retirement? The same? Higher?

The RRSP and TFSA work out to be the same if you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions. An important caveat is that you have to invest the tax refund for RRSPs to work out as designed.

Future federal tax rates

Another reason why investors might think RRSPs are a bum deal? They believe federal tax rates are higher today, or will be higher in the future when it’s time to withdraw from their RRSP.

Is this true? Not so far. I checked historical federal tax rates from 1998-2000 and compared them to the tax rates for 2018 and 2019.

Federal tax rates 2018-2019 federal-tax-rate-1998-2000

The charts show that tax rates have actually decreased significantly for the middle class over the last two decades.

Someone who made $40,000 in 1998 would have paid $6,639 in federal taxes, or 16.6 per cent. After adjusting the income for inflation, someone who earned $59,759 in 2019 would pay $7,820 in federal taxes, or just 13.1 per cent.

Minimum RRIF withdrawals

It became clear over the last decade that the minimum RRIF withdrawal rules needed an overhaul. No one liked being forced to withdraw a certain percentage of their nest egg every year, especially when that percentage didn’t jive with today’s lower return environment and longer lifespans. Continue Reading…

Think you’re the only one without a retirement plan? Don’t press the panic button

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By Jordan Damiani, CFP, TEP, RRC 

Special to the Financial Independence Hub

Like many Canadians with retirement on the short-to-midterm horizon, you may have spent more than one sleepness night worrying that you’re not prepared.

In fact, at least half of Canadians over the age of 50 think they’re not on track with their retirement planning and about the same number of non-retirees don’t have a financial plan.

Experience suggests that people may be afraid that they won’t have enough money to retire, but in reality, they may not even know the true answer. I take the view that not having a formal plan in place doesn’t necessarily equate to not being on track to retire. There are many steps you can take in the critical count-down years to retirement that will reframe your planning and investment approach and alleviate anxiety and stress.

Take inventory of present Financial Situation

I recommend assessing your last six months of credit, debit and cash spending: grouping your expenses into categories. To project for the future it’s important to understand where your money is being spent today. This activity will help to identify where better savings could be achieved. Completing a net-worth statement is also important to determine what you own vs what you owe.

Understanding your pension entitlements is also a key stress reliever. Pension plans will typically offer retirement projections. At 65, CPP has a maximum benefit of $1175.83 monthly and $613.53 for Old Age Security. It’s important to call Service Canada to get an accurate CPP projection to find out what you are eligible to receive. Similarly, OAS is tied to Canadian residency, with 40 years being a requirement for the maximum eligible payout.

Goal Setting and Strategic Planning

After taking inventory, the next step would be determining what income you actually need in order to retire. Completing a pre-and post-retirement budget is an exercise that will help determine the after-tax figure to target. Likely the targeted income would be tiered with a higher spend being projected for the first 10-15 years of retirement ($5000-$10,000 a year for travel) and lower lifestyle costs thereafter, with some planning as a buffer against long-term care costs. Continue Reading…

Age 60, retirement on a lower income – can I do it?

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By Mark Seed

Special to the Financial Independence Hub

Retirement plans come in all shapes and sizes but retirement on a lower income is possible.

Not every Canadian has a house in Toronto or Vancouver they can cash-in on.

Gold-plated pension plans are dwindling.

There are people living in multi-family dwellings striving to make retirement ends meet.

Not every person is in a relationship.

Retirement on a lower income is (and is going to be) a reality for many Canadians. 

Here is a case study to find out if this reader might have enough to retire on a lower income.

(Note: information below has been adapted for this post; assumptions below made for illustrative purposes.)

Hi Mark,

I enjoy reading your path to financial independence and it has inspired me to invest better.  I’ve ditched my high cost mutual funds and I’m now invested in lower costs ETFs inside my RRSP.  I think that should help my retirement plan. 

So, do you think I’m ready to retire at 60?

Here is a bit about me:

  • Single, live in Nova Scotia. No children.
  • Own my home, no debt. I paid off my house by myself about 10 years ago.  No plans to move.  It might be worth $300,000 or so.
  • 1 car is paid for, a 2014 Hyundai SUV. Not sure what that is worth but I don’t plan on buying a new car anytime soon.
  • I have close to $50,000 saved inside my TFSA, all cash, I use that as my emergency fund.
  • I have about $250,000 saved inside my RRSP, invested in 3-4 ETFs now.
  • I have some pension-like income coming to me thanks to my time with a former employer. A LIRA is worth about $140,000 now.  I keep all of that invested in low-cost ETF VCN – one of the low-cost funds in your list here (so thanks for your help!)

I’m thinking of stopping work later this summer, taking Canada Pension Plan (CPP) soon and I will start Old Age Security (OAS) as soon as I can at age 65.

I plan to spend about $3,000 to $4,000 per month (after tax) including travel to Florida, maybe once or twice per year to stay with friends who have a condo there for a week or so at a time.

So …. do you think I’m ready to retire at 60?  Any insights are appreciated.  Thanks for your time.

Steven G.

Thanks for your email Steven G.  It seems like you’ve done well with the emergency fund, killing debt, and investing in lower-cost products to help build your wealth.

Whether you can retire soon (I think you can with some adjustments by the way … see below) will require a host of assumptions to be made in addition to your details above.  This is because all plans, including any for retirement, are looking to make decisions about our future that is always unknown.

To help me make some educated decisions if you can retire on your own with a lower income, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca.

Owen has provided some professional insight to other My Own Advisor readers in these posts here:

What is a LIRA, how should you invest in a LIRA?

My mother is in her early 90s, she just sold her home, now what to do with the money?

This couple wants to spend $50,000 per year in retirement, did they save enough?

Can we join the early retirement FIRE club now, at age 52?

Owen, thoughts?

Owen Winkelmolen analysis

Mark, I echo what you wrote above.  When it comes to retirement planning there are a few important considerations that we always want to review.  You’ll see those assumptions for Steven below.  There are also tax considerations.  Taxes will be one of the largest expenses for many retirees and Steven’s case is no different. In fact, living in Nova Scotia unfortunately means that Steven will be paying the highest tax rate in the country for his income level.  Let’s look at some assumptions first so we can run some math:

  • Assume income (today) of $60,000 per year (pre-tax).
  • OAS: Assume full OAS at age 65 $7,217/year.
  • CPP: Assume 35 years of full CPP contributions (ages 25-60) and a few years with partial contributions
    • CPP at age 60 = $8,580/year.
    • CPP at age 65 = $13,967/year (assumes future contributions in line with $60,000 income and includes new enhanced CPP benefits as of 2019).
  • Assume ETF portfolio with average fees 0.16%. Good job on VCN Steven!
  • Assume $85,000 in available RRSP contribution room.
  • Assume $13,500 in available TFSA contribution room.
  • Assume birthdate Aug 1, 1959.
  • Assume assertive risk investor profile.

Based on Steven’s current employment income, I’ve gone ahead and estimated that he will be paying around $14,000 in income tax each year (give or take depending on tax credits, etc.) At this income level Steven is paying the highest tax rate out of any province in Canada. Ouch … but reality. Continue Reading…