get all the detailed information below.
1. In short, you should contribute to RRSP for some tax benefits. But do NOT put too much money in RRSP. You should always put a small amount money to RRSP when you are in a high tax bracket. Then let the account growth. It is better to calculate how much you will withdraw from RRSP. For example, $30000/Year after retirement. Then get the number how much you required in your account when you retired. Calculate how much you should contribute today to your RRSP account.
2. Also contribute as many as to Tax Free Saving Account starting from 2009. You do not pay any tax for growth in TFSA. Also it will not affect your income-tested benefit from government no matter how much money you withdraw.
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I had a question that captial gain is half taxed while RRSP withdraw is 100% taxed. Does that mean we should put capital gain outside RRSP?
I read with this article:
How Investing Taxes Work - Capital Gains Tax
which talks to put capital gain investment outside RRSP.
Later I read this article,
Is an RRSP contribution better than a non-registered investment or a mortgage payment?
which said,
You pay income tax in both cases, but outside the RRSP you also pay the capital gains tax. The non-RRSP version is subject to double taxation. Let's calculate it: RRSP:
$1000 pre-tax to invest becomes a $1000 RRSP contribution.
Over 15 years it grows to 1.1^15 * $1000 = $4177.
Income tax on withdrawl is $4177 * 36% = $1503.81
You have $2673.44 to spend.
Non-Registered:
$1000 pre-tax income incurs $1000 * 36% = $360 in income tax.
$640 to invest for 15 years = $740 * 1.1^15 = $2673.44
Pay capital gains tax of ($2673.44 - $640)/2 * .36 = 366.02
You have $2307.42 to spend.
Notice that in both cases you had $2673.44 after income tax and compounding, but in the non-RRSP case you also had to pay the capital gains tax. It was the capital gains tax, the double taxaction, that caused the non-RRSP investment to lose to the RRSP. Almost everyone who argues that the non-RRSP is better ignores the fact that the non-RRSP payment was made with after tax dollars, in other words, they ignore the double taxation.
So we do need to put capital gain inside RRSP.
How about dividend credit? Read the following from the same article,
Case 2: RRSP versus High Yield Canadian Dividend Stock
Dividends from Canadian corporations are very favourably taxed. Someone with a $50k/year employment income would ordinarily pay only about 8% tax on dividend payments versus a 36% marginal tax rate, due to the very favourable Federal dividend tax credit. When you invest in an RRSP the money you withdraw is taxed at your marginal tax rate in retirement--you don't benefit from the dividend tax credit. Wouldn't it be better to invest outside an RRSP to gain access to the dividend tax credit?
No!
Once again, you pay the income tax either way. The dividend tax, as small as it may be, represents double taxation. The RRSP will beat the non-RRSP investment by the 8% (or whatever) dividend tax you pay. Let's calculate it, for an equity that returns all of its revenue as a 10% dividend (it might be a preferred share), assuming the dividends are re-invested: RRSP:$1000 pre-tax to invest becomes a $1000 RRSP contribution.
Over 15 years it grows to 1.1^15 * $1000 = $4177.
You withdraw it and pay $4177 * 36% = $1503.81 in tax.
You have $2673.44 to spend.
Non-Registered:
$1000 pre-tax income incurs $1000 * 36% = $360 in income tax.
The after tax yield on the 10% dividend taxed at 8% is 9.2%
Your investment grows to $640 * 1.092^15 =$2396.18
You have $2396.18 to spend
So for Canadian dividend company, we also need to put them in RRSP.
In a short, RRSP is better.
It seems that you should not contribute RRSP when you are in a lower tax bracket when you expect you have a higher tax bracket when you retired.
In addition, too much RRSP will reduce the Old Age Security and Guaranteed Income Supplement.
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1 comments:
Hmm..if a person was in the lowest tax bracket, wouldn't it be advantageous for them to hold income from eligible dividends outside of an RRSP? Those dividends are only taxed at 15% (federal) but your credit is then 27.5%! So you really need to look at the situation in full beforehand.
And like you mentioned, it's important to note that RRSP's could decrease a persons eligibility for OAS, GIS and spouse allowance. But on the other hand, if all investments are held outside of an RRSP, you miss out on the Pension Income Amount of (max) $2000 on your schedule 1.
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