Hi Preet! Glad you could join us today.
Hi Gillian - thanks for having me.
So Preet, are you getting swamped with RRSP questions at this time of year? Or are people thinking more about the SuperBowl?
It's really starting to ramp up now...
But many people start to scramble after the Superbowl. :)
What would you say is the top question people are asking you about their RRSP?
One of the top questions is "RRSP or TFSA", followed by "How many more acronyms do I not even know about?"
So how about it? Is one more important than the other? And for those who might not know, can you briefly explain what a TFSA is?
Sure. A TFSA stands for Tax Free Savings Account - which is a bit of a misnomer because you can put almost anything you want inside one (savings, mutual funds, ETFs, stocks, etc.)...
A TFSA is a bit different from an RRSP in that you don't receive an income deduction for making a contribution to a TFSA, money inside still grows tax fee, but it also isn't taxed at withdrawal (like an RRSP might be).
So they are both tax-sheltered accounts...
One advantage of a TFSA is that later in life you might be drawing from it in retirement but withdrawals do not count towards income tested benefits like OAS.
Let's take our first reader question.
Hi BlackJack - good question. First thing is to always make sure to pick an investment for the merit of the investment first, then taxation second, but...
When a US stock is held in a non-registered account, the withholding tax on dividends is 15%...
Dividends from US companies have no tax withheld if a Canadian holds it in an RRSP due to a tax treaty between both countries.
As it stands right now, TFSAs are subject to the withholding of dividends (same 15% rate) for US companies.
There are some exceptions for the RRSP - such as if the US listed stock is an ADR (American Depositary Receipt) - meaning it trades in the US, but is incorporated outside of the US.
Now Martin has a question about residency requirements for RRSPs.
Martin- are you considered a non-resident?
While we wait for a response from Martin, here's a follow-up to that RRSP vs. TFSA question earlier.
If you have contribution room on your Canadian Notice of Assessment, you should be able to make contributions to your RRSP and those contributions should reduce your Canadian income, and therefore tax owing.
@BlackJack - different countries have different tax treaties with Canada - I used to have a link to all of them, let me try to dig it up quickly.
Wait, that link didn't paste right...
@Albert - You can have an unlimited number of RRSP accounts, but you cannot exceed your allowable contributions by more than $2,000 without incurring a 1% per month penalty. Also, multiple account fees might be excessive.
So if you had $50,000 in room, you could in theory have 50,000 RRSP accounts with $1 of contributions to each.
Here is info for BlackJack on who to call for specific info for the tax treaties:
Hi Mark A - it CAN make sense to do that from a mathematical point of view, but it's important to note that a 100% equity allocation will be very volatile, and when the overall equity to fixed income allocation is right but you only see 100% equity in one account and 100% fixed income in another account, some people can be tempted to rethink the 100% equity account because of the wild ride...
I wrote this when TFSAs first came out:
So for example, if you put $1,000 into each of the RRSP and TFSA account and lets assume a 40% tax bracket now and 30 years from now, then we also need to factor re-investment of the $400 RRSP refund. Let’s assume it goes back to the RRSP for a total RRSP contribution of $1,400. The $1,400 RRSP amount is fixed income and grows at 5% for 30 years. That grows to $6,050.72. The $1,000 TFSA in in equities and grows at 10%, and after 30 years is worth $17,449.40. If you took out all money, you would have no tax on the TFSA withdrawal, and $2,420.29 in tax on the RRSP withdrawal for a net after-tax amount of $21,079.83.
If it was the other way around, then you would have $1,000 in the TFSA earning 5% as fixed income being worth $4,321.94 in 30 years. The $1,400 RRSP contribution would have grown to $24,429.16 at 10% over 30 years. The TFSA withdrawal is still tax free, but the RRSP withdrawal at 40% tax would leave you with $14,657.49 which when added to $4,321.94 would leave you with a grand after tax total of $18,979.44. This is $2,100.39 in savings. Therefore, so long as you don’t violate your overall asset allocation, it makes sense to put as much of the equities into the TFSA as possible and as much of the fixed income in the RRSP as possible. Extrapolate this out for contributions over 30 years and the difference might add up to $30,000 in savings.
However, note that rebalancing could be complicated as transferring from an RRSP to TFSA or vice versa would be a paperwork nightmare, not to mention you wouldn't want to take money out of the RRSP, incur tax doing so, and then put it into a TFSA, etc.
Preet, Catherine has a question along similar lines with respect to RRSP and TFSA saving ...
Hi Catherine, a couple of notes...
If you were not aware, contributions to an RRSP must be in for 90 days in order to be claimed for a deduction, so try to make your last contributions at least three months before using the HBP, otherwise the deduction on those contributions could be denied...
I agree that a dividend fund when your horizon is two years is generally a bad idea and switching to something with much lower risk is a good idea...