Episode 49: Should I Invest In a RRSP or TFSA? 

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In this episode of the Canadian Wealth Secrets Podcast, we delve into the weeds to discuss which government tax incentivized investment vehicle in Canada will best serve our Invested Student audience: the Tax-Free Savings Account (TFSA) or the Registered Retirement Savings Plan (RRSP). 

We will take some time to dig into some specific cases including those in “golden handcuff” careers with Defined Benefit Pension Plan (DBPP) in your job and whether or not you should be putting all of your investment eggs into the RRSP basket or whether looking to the TFSA as a better place to build on that defined benefit pension plan.

We’ll also share why we’re big fans of using the TFSA for your longer term, growth-focused investments, while keeping the RRSP for your safer and steady assets. However, we won’t hold back on sharing why an RRSP can feel a bit like an “investment jail,” especially if you’re thinking your income tax bracket during retirement might be the same or higher than it is currently.

Finally, we’ll be talking about the impact inflation might have on your income tax bracket during retirement and some creative ways to fund your RRSPs by unlocking some of the dead equity in your primary residence in a way similar to that of The Smith Maneuver, but with some differences in where you receive the tax deduction.

Sit back and get ready to take a trip through the TFSA vs. RRSP maze with a promise to give you some great tips for every circumstance. 

What you’ll learn:

  • What is a Registered Retirement Savings Plan (RRSP) and how does a RRSP work?
  • What is a Tax Free Savings Account (TFSA) and how does a TFSA work?
  • Why those in “golden handcuff” careers with a Defined Benefit Pension Plan (DBPP) might hold off on dumping all of their investment funds into their RRSP;
  • Why a TFSA is the better spot for your growth-focused investments and your RRSP for safer, more conservative investments; 
  • Why an RRSP might be considered a “jail” for your investment funds, especially if you feel that your tax bracket may be the same or higher in retirement; 
  • How inflation alone may push you up into higher tax brackets by retirement even if your income has only increased by a Cost of Inflation Allowance (COLA); 
  • Why an RRSP is a fantastic idea for those interested in putting the “dead equity” from their primary residence to work; and,
  • Is it better to use equity from your home to fund your RRSP or to apply The Smith Maneuver?

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    00:00:00:10 – 00:00:16:11
    Kyle Pearce
    Tax free savings account is not just a savings account. It’s actually an investment account. I wish they would have called it that because a lot of people think it’s just like, Oh, I can only put it in and earn 1% a year or 3% a year. They might have some sort of deal or because inflation has been where it’s at.

    00:00:16:17 – 00:00:39:21
    Kyle Pearce
    Interest rates are high. Maybe you can get four or 5% for this next year, but that number will ultimately come down over time as inflation gets stomped out. So there are some differences there. But like you said, John, something that’s really important for us to note is that it really makes a difference if you’re thinking about RRSPs, for someone who is, let’s say, pension less.

    00:00:40:02 – 00:01:02:13
    Kyle Pearce
    I would argue if you’re pension less, you probably should be using both. Right. Let’s be honest. If you don’t have a pension, then you probably want to be trying to contribute as much as you can to both.

    00:01:02:15 – 00:01:09:00
    Kyle Pearce
    Welcome to the Investing Teacher podcast with Kyle Pearce, Matt Biggley and Jon Orr.

    00:01:09:03 – 00:01:16:24
    Jon Orr
    Get ready to be Todd as we share our successes and failures encounter during our real life lessons. Learning how to build generational wealth from the ground up.

    00:01:17:01 – 00:01:37:07
    Kyle Pearce
    Welcome. Invest It’s Students to another episode of the Canadian Wealth Secrets podcast to our dearest friend Matt Begley is out and about. We just got off the phone with him, actually. We had a group called Going On a Group Conversation. We’ve got properties closing. We just closed a property this past Friday, a single family home. Actually. We’re going to be having an episode about that.

    00:01:37:11 – 00:01:57:01
    Kyle Pearce
    We also have another way. Yeah. Coming up on Tuesday. So we’re in a little bit of a cash scramble trying to figure out which Holding Corp needs to send money to where. And now Matt is on his way out to look at some properties or actually I think show some properties that are his listings out in the Leamington Ontario area.

    00:01:57:03 – 00:02:19:23
    Kyle Pearce
    So he is unable to join us. But John, we are ready. We’ve had some invested students who have been reaching out to us and sort of asking about we’re always talking about real estate is very near and dear to our hearts. We’ve talked a little bit about how we’ve done a lot of work in terms of understanding the stock market, learning, technical and fundamental analysis as well as options trading strategies.

    00:02:19:23 – 00:02:45:17
    Kyle Pearce
    So we’re talking about things that would be considered alternative asset classes compared to probably the norm, not even probably we know this statistically because most people are firing money into pensions. Some are optional, some are mandated by their employer. Amazing. If that’s the case, those are great to have nice and easy. But then for everybody else, they’re kind of typically going to a financial advisor of some sort at the big bank.

    00:02:45:19 – 00:03:26:09
    Kyle Pearce
    Maybe it’s someone in a private office, some of these big names out there that you see, we won’t mention any of those. And really what they’re doing is they tend to invest in things like mutual funds or maybe even segregated funds, things like that. And what we want to do is we want to address a question that a lot of people have, because there’s this assumption out there that because we talk about real estate a lot and because we talk about some of these more, we’ll call them alternative asset classes or maybe alternative investments, styles like options trading that there’s no fit for this little thing here in Canada called the RRSP or the tax

    00:03:26:09 – 00:03:48:21
    Kyle Pearce
    free savings account. But we want to really highlight that actually these tools can be beneficial. However, it’s really important to underscore stand these tools. So we’re not going to say not to use these tools. However, we want to make sure that you know how the tools work and how you can best use these tools for your particular situation.

    00:03:48:21 – 00:04:05:16
    Kyle Pearce
    Whether you have goals to head into real estate or all these options, trading strategies or any of these other approaches to investing, we want to make sure that you maximize your opportunity because these are two buckets that the government is sort of gifting to you. And we’re going to take a deep dive into it today.

    00:04:05:19 – 00:04:27:06
    Jon Orr
    Yeah, there are tax structures to just help you strategize where you want to. Where do you want to pay the tax? How can I defer tax or do I pay tax now and then earn on the interest? I think this is the question that many people have is should I load up and maximize my RSP contributions or should I maximize my tax free savings account contributions?

    00:04:27:06 – 00:04:46:17
    Jon Orr
    What should I be doing here? And I think before tax free savings accounts and we did an episode on tax free savings account in our earlier episodes and that tax free savings account as a relatively new tax container or structure isn’t been part of, say, our parents generation when they were our age or younger, trying to do this planning.

    00:04:46:17 – 00:05:05:13
    Jon Orr
    And I remember Karla about I always refer back to my dad when he’s thinking about this kind of stuff. And he said that he wished that he had the option to start a tax free savings account when he was younger because he’s now paying all this tax on his RRSPs and he’s pulling them out. He’s like, But when I was young, I didn’t have that option to make one.

    00:05:05:13 – 00:05:36:09
    Jon Orr
    I wish I had dumped as much as I could in there. So there’s this idea is like, should I be contributing to RRSPs? Because the general theory, this is what I was told, right? And this is what a lot of people think, is that when I retire, when I’m ready to start pulling the RSP money out of its container as income, I’m probably going to be in a lower tax bracket and therefore I’m going to be paying less overall tax on the money that’s built up, built all the way up and put it in tax.

    00:05:36:14 – 00:05:54:07
    Jon Orr
    I got a tax break or a tax credit when I put that money in there and now it’s built up and now I have to pay tax every time I pull it out. And so there is like that, hey, I’m going to be probably in a lower tax bracket than if I put it in. Now, that’s the kind of general theory that most people have is why we would contribute to an RSP, because I’m going to save on the tax.

    00:05:54:07 – 00:06:13:12
    Jon Orr
    Now you get that room back on your taxes every year. That feels nice right now. It’s like, hey, we got a little bit of extra money back. Now, the other idea with the tax free savings account is you’re contributing after tax money. But when you pull that out 30 years from now or 20 years from now, or even ten years from now or even just next year, whatever that gain is, that is all tax free.

    00:06:13:12 – 00:06:51:09
    Jon Orr
    That’s what tax free savings account means. So the idea is like, which one is which? And Kyle, I know that for the last number of years we’ve been thinking about no RRSP, It’s all tax free savings account because our goal has been to be richer when we are older and have more money. So why would I want to if my goal isn’t to make less money every year, is to make more money every year, and when I retire, I hope to be pulling more money than I am now because that’s the goal of being in business, of getting our, say, passive income streams going, getting our entrepreneurial side hustles going, getting our investments rolling that

    00:06:51:09 – 00:07:07:06
    Jon Orr
    we hope to have more. And therefore I can pull by as much as I want and then therefore I don’t have to pay tax. And that’s why we’ve kind of thinking about tax free savings account as that primary container. But that’s the question we want to debate here today. So we’ve got some scenarios to run through. We’ve got some ideas to talk about.

    00:07:07:06 – 00:07:12:24
    Jon Orr
    But what is your take right now? Because I know that I’m still like, hey, let’s go all in on tax free savings accounts versus our space.

    00:07:13:05 – 00:07:40:21
    Kyle Pearce
    Yeah, for sure. And again, depending on what your goals are, that’s really going to be critical. So we always say to people, Hey, get on a call with us so we can actually hear your situation. We understand your particular case. You can do that over at Canadian Wealth Secrets dot com forward slash discovery and we’ll hop on a call will actually run you through a bunch of questions that are really important to help you kind of decide what is the right next step for you because guess what every year might be different, right?

    00:07:40:21 – 00:08:19:11
    Kyle Pearce
    Every scenario is, of course, different. So this might change from year to year for you. So it does really depend. So two things worth mentioning. Okay, RRSP, these are registered retirement savings plans. You individually get 18% of your previous year’s income up to 30,000 and change for for 2023. That’s about as high as you can go. Whereas for a tax free savings account, we’ve had these things going since about 2009 and you could from 2009 to 2012, contribute 5000 a year.

    00:08:19:11 – 00:08:45:21
    Kyle Pearce
    So when you think about that, that’s like you’d have six times as much room in an RSP than you do in a tax free savings account. We just compare one year to the other. Now for 2023, they’ve increased this amount to 6500 per year for the tax free savings account. The RSP is again 18% or a maximum of 30,000 and change, whichever one is lower.

    00:08:45:23 – 00:09:13:21
    Kyle Pearce
    So there is that to consider. All right. So you actually don’t have as much will say for many people, probably people listening to this podcast, you’re probably not going to have as much room in your tax free savings account as you do in your RSP. It’s important to note that for both of those containers, you can invest in the markets, you can invest in different things, you can invest in other arm’s length investments through, for example, trusts of some sort.

    00:09:13:21 – 00:09:31:15
    Kyle Pearce
    So you could buy into, let’s say, development deals and things. So there are ways that you can do that. Your bank is not going to help you with any of that because they’re not going to make money on it. So they’re going to say you’re on your own, but you can do that. Tax free savings account is not just a savings account, it’s actually an investment account.

    00:09:31:15 – 00:09:53:01
    Kyle Pearce
    I wish they would have called it that because a lot of people think it’s just like, Oh, I can only put it in and earn 1% a year or 3% a year. They might have some sort of deal. Or because inflation has been where it’s at, interest rates are high. Maybe you can get four or 5% for this next year, but that number will ultimately come down over time as inflation gets stomped out.

    00:09:53:03 – 00:10:17:09
    Kyle Pearce
    So there are some differences there. But like you said, John, something that’s really important for us to note is that it really makes a difference. You’re thinking about RRSPs for someone who is, let’s say, pension less. I would argue if you’re pension less, you probably should be using both, right? Let’s be honest. If you don’t have a pension, then you probably want to be trying to contribute as much as you can to both.

    00:10:17:11 – 00:10:57:12
    Kyle Pearce
    Now, there are caveats to that because if my RSP, if like us, we were teachers when I first started teaching, I was making $38,000. Might have been even a little less. And I knew that within the next ten years I would be making about $100,000, the top of the grid, the experience grid. So if you’re in a career like that where you have some sort of grid where you’re earning really low amounts now and you know, you can see that you will be earning higher amounts later, it probably makes sense for you to pump the brakes on the RSP and start thinking about maxing out your tax free savings account.

    00:10:57:18 – 00:11:25:22
    Kyle Pearce
    You might even choose to start pumping it into an unregistered account because the reality is, if I’m in the low tax bracket and I put money into my RSP, I’m going to get my tax deduction now and they’re going to save that money. I put in there until retirement. For me to be taxed. So what what we’re going to do is we’re basically going to trade for a low amount of money to potentially have to pay a lot of money later.

    00:11:25:22 – 00:11:58:01
    Kyle Pearce
    So like you said, John, I’m looking on if I was making $100,000 in my golden handcuffs job, some of you might be nodding your head and you’re in the same spot. Other people are high net worth individuals. They’re making one 5200 to 50 plus. That is a much different scenario than someone who’s making $40,000 is in a low tax bracket but wants to max out their RSP and hopes that between now and retirement that they’re actually in a much better financial spot then they’re almost guaranteed the wrong word.

    00:11:58:01 – 00:12:22:08
    Kyle Pearce
    But they’re almost their vision is saying, I am going to make more money. I’m going to be in a higher tax bracket than I am today. And if that’s the case, you really have to rethink whether now’s the time for your RSP. We’re not saying not to invest. We’re just saying, do we save that contribution room until you’re in a much higher tax bracket to consider using for later?

    00:12:22:10 – 00:12:37:21
    Jon Orr
    Got it. Now, Kyle, we were looking at some numbers here and is do you feel like I think people want to know is okay, so let’s say I’m in the higher tax bracket, I’m in the hundred K range and it’s like, okay, now should I contribute here and should I contribute here? Is there a case where it actually doesn’t matter?

    00:12:38:02 – 00:13:05:23
    Kyle Pearce
    Absolutely. And I would say, again, every scenario is different, but I’m going to argue that for me, if we use this scenario in our previous golden handcuffs job earning about $100,000 and we were in a situation where our pension, if you worked all the way till you are 85 factor in this particular industry education here in Ontario, you were going to make about $60,000 in pension money.

    00:13:06:00 – 00:13:29:04
    Kyle Pearce
    So if I’m making 100,000 now and I contribute, let’s say my 18%, mind you, your pension actually knocks down how much you can put into an RSP. It actually takes some of that contribution room. So that’s good to note for everyone. So for teachers, for example, I’m guessing same for firefighters and nurses and other public employees, you’re probably going to be dealing with the same.

    00:13:29:04 – 00:13:55:00
    Kyle Pearce
    So that number is going to get knocked down. But let’s say it’s 10,000 that you put in. So I have 100,000. I made this year. I take 10,000. I put it into my RRSP. I’m going to get a tax deduction on that last 10,000. So the bracket I’m in when I approach $100,000 is around 30%. Here in Ontario, when you combine provincial and federal.

    00:13:55:02 – 00:14:26:02
    Kyle Pearce
    Okay, So that means like I put 10,000 in, I’m going to get 3000 back as a tax rebate or a tax refund. When I do my taxes that year. Right. So I get that 3000 back. It’s like, wow, that’s amazing. I put 10,000 in. I got 3000 back. It’s like I only invested $7,000. That’s amazing. But here’s the interesting part, is that as that money grows all the way to retirement, let’s say I’m 20 years off from retirement.

    00:14:26:02 – 00:14:26:18
    Kyle Pearce
    That money is.

    00:14:26:18 – 00:14:27:22
    Jon Orr
    Growing at the ten.

    00:14:27:24 – 00:14:59:12
    Kyle Pearce
    Yeah, it’s going to grow the ten, which is fantastic. We love that. We want that to happen. But the problem when we compare taking that 10,000 and putting it into the tax free savings account as a comparison is that if anything changes down the road. So for example, if I already am getting a $60,000 pension, if I go to take out any additional money in any year, what’s going to happen to me is I’m actually going to be in that same tax bracket because it’s like about 28%.

    00:14:59:12 – 00:15:23:02
    Kyle Pearce
    It jumps to about 30% from the 55 per thousand mark up to 100,000. So you’re still in the same tax bracket. You’ve got a lot of money stuck in this fund and you still got to pay the tax on it. Now, the part that really concerns me is are we confident that the tax rates are actually going to stay consistent to where they are today?

    00:15:23:04 – 00:15:58:18
    Kyle Pearce
    Are they going to decrease? Hey, we’re going to pay less in taxes, we’re going to be more like the US, or will taxes actually increase? Now, I don’t know about you, but with all the money printing that we do on a regular basis, but then in particular after COVID and all the things that are going on there, I just heard about the Supreme Court building had a billion renovation budget and sadly, they’re over budget and they don’t know what the new budget is going to be with all this money printing, I’m guessing that taxes are more likely to go up then down.

    00:15:58:20 – 00:16:26:07
    Kyle Pearce
    And of course, with inflation, guess what happens when we earn more money because we’re adjusting inflation? The tax brackets typically stay the same. So you could actually just through inflation, get bumped up a tax bracket based on COLA. Right. This idea, this cost of living allowance piece or just inflation or salary raises over time. So the reality is if I have my choice, I’m going to pay my tax.

    00:16:26:08 – 00:16:49:14
    Kyle Pearce
    Now, even if I’m in that $100,000 price point where this might change as maybe if you’re in the max tax bracket right now. Right. Let’s say you’re in 50% land and you’re legit or giving up 50% of your income because of taxes. I can see how we’d make a case for doing that and bringing it into an RSP.

    00:16:49:20 – 00:17:10:23
    Kyle Pearce
    However, keeping in mind that there is that risk, you’re in a little bit of money jail, right? Because if I go to take that money out all at once, they’re going to count all of that money as income. And guess what? You’re going to be back in that highest tax bracket anyway. So there’s a lot of flexibility that we get out of the tax free savings account, where you pay your tax.

    00:17:10:23 – 00:17:41:02
    Kyle Pearce
    Now, you put it into that account, you let this thing grow as best you can, right? So you actually want to put assets in there that you anticipate to grow more So than conservative assets, Right? You want that bucket to grow as much as possible in your more conservative assets to maybe grow in your RSP. So there’s a little quick tip for them for some to think about, because if let’s say that money grows, I put 100,000 in tax free savings and then all of a sudden, 20 years later, it grows to 400,000.

    00:17:41:04 – 00:18:05:02
    Kyle Pearce
    Hey, I got 400,000. I can take it out and do whatever I want with it without any tax implication. If I take 400,000 out at any one time of my RRSP, I’m going to be giving half to the government. And that is definitely not something that you myself, Matt or anyone listening are really interested in doing, and I can guarantee that.

    00:18:05:04 – 00:18:25:12
    Jon Orr
    Yeah, I think that’s my biggest takeaway here, Kyle, is to think about you called it money jail. If you want to have freedom and flexibility to say buy a big purchase, buy a condo when you’re older, maybe loan it or give it as a gift to your child when they’re putting a down payment down on their home. That’s all freely flexible and a tax free savings account.

    00:18:25:12 – 00:18:42:12
    Jon Orr
    However, you’re going to pay whatever the dollar like in that calendar year, when you pull it out of an RSP, you’re going to have to pay whatever the tax liability to your estate or your account to you based off whatever else you’ve pulled that year, and it will put you in a particular tax bracket. And that can be limiting.

    00:18:42:12 – 00:18:58:15
    Jon Orr
    And especially you made the case pulling all that money automatically puts you in the highest tax bracket and you’re going to lose a good chunk of it right off the bat, more so than what you have lost or paid. If you back when you first put that money in there because you were in a lower tax bracket.

    00:18:58:17 – 00:19:18:23
    Kyle Pearce
    Now, I want to give some quick wins here before we wrap. Maybe these consider them big takeaways. Here is again, first and foremost, every scenario is different. So we’re not saying one is out of the box better than the other. There are risks associated with putting money into that RSP. However, when I say risks, I mean risks of higher taxes, right?

    00:19:18:23 – 00:19:40:10
    Kyle Pearce
    So I mean, not necessarily that it’s more risky from an investment standpoint. So some quick wins here. First off, when does it make sense for an RSP to actually be considered? First off, I think a lot of people, when they look at an RSP, they think about the refund they’re going to get or don’t get clouded as that’s the only reason why you’re doing this.

    00:19:40:10 – 00:20:01:15
    Kyle Pearce
    All right. And I’m sure, hey, doing that is better than doing nothing, that’s for sure. But when it makes sense for many people is, hey, you don’t have a pension, right? So getting some money and leveraging and using that space can be helpful. Okay. I would first use that tax free savings account space and whatever else you can put in Europe.

    00:20:01:16 – 00:20:24:12
    Kyle Pearce
    Amazing. That’s awesome. If you have an incorporated business, you probably want to be taking your money and you want to be investing it into your business, not necessarily in the day to day of your business, but using it to invest within the corporation. If you have an incorporated business, there are things you can do over there. So if you don’t have that structure, then again an RSP looks more favorable.

    00:20:24:15 – 00:20:51:15
    Kyle Pearce
    Okay, Another thing is when is an RSP great. Using an RSP to your advantage through the Smith maneuver can be a fantastic, fantastic approach. We did an episode on episode 44 all about the Smith Maneuver. If you’re interested in learning a little more about that, again reach out to us Canadian Wealth Secrets dot com forward slash discovery We can give you a scenario and see whether it makes sense for you given your situation.

    00:21:38:12 – 00:22:06:01
    Kyle Pearce
    Ultimately, at the end of the day, every scenario is different and we would encourage you to once again reach out, have a conversation and hey, we do a lot of services. John’s got his mortgage license. He helps people with setting up home equity lines of credit or refinancing and doing things that are really helpful or creative. I myself, I am licensed as a wealth planner and what I can do is actually offer you some support in all of these ideas here.

    00:22:06:03 – 00:22:23:16
    Kyle Pearce
    So reach out to us. Invest in teacher Akam forward slash discovery. And of course, if you’re in the Windsor-essex area and you are looking to determine how much your house is worth, how big of a line of credit could I get on this house? You want to reach out to Matt Bigley and Matt can help you out as well.

    00:22:23:17 – 00:22:41:06
    Kyle Pearce
    Again, you can find us over on the Canadian Wealth Secrets dot com website. And hey, we’re hoping that this discussion about our RRSPs and tax free savings account has been helpful for you as you do some planning as we look to wind down 2023 and get ready for that tax season.

    00:22:41:08 – 00:23:07:12
    Jon Orr
    Thanks, everyone, for listening. You can find the links that Karl just mentioned over on Best of Teacher dot com for such episode 49. Its teacher dot com for its episode 49. All right, everyone. Class dismissed.

    00:23:07:14 – 00:23:17:19
    Kyle Pearce
    This content is for informational purposes only. You should not construe any such information or other material as tax, legal investment, financial or other advice.

    00:23:17:21 – 00:23:33:18
    Jon Orr
    Just a reminder, Matt is a licensed realtor in the province of Ontario with Deer Brook Realty. John is a mortgage agent with Brix Mortgage. License number m23006803. And Kyle is a license, life and accident and sickness insurance agent with corporate advisors and the PAM financial team.

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