14 responses

  1. Norman
    February 20, 2013

    This is an eye-opener article, Mike. Thank you for sharing this.

    Norman,

    Reply

  2. Lydia
    February 20, 2013

    Awesome post!

    Reply

  3. Daftster
    February 20, 2013

    sorry, i don’t get this: (how did we get to that tax value?)
    The amount of tax she will pay on $102,000 of income (we’re going to pretend that there are no changes in tax rates in the 10 years) will be $27,647.

    Reply

  4. Mike Holman
    February 20, 2013

    @Dafster – I used the taxtips calculator for Ontario http://taxtips.ca/calculators/taxcalculator.htm and entered $102,000 as employment income which gives $27,647 as tax paid.

    Now I realize I should have entered the amount under RRSP/RRIF withdrawals which results in taxes of $28,531. I’ll edit the article when I have time, but the numbers still support my point.

    Reply

  5. Michael James
    February 20, 2013

    You’re right that the TFSA vs. RRSP decision is based on comparing the average tax rate saved on the contributions and the average tax rate on withdrawals; talking about marginal rates is just an approximation for small amounts. It’s interesting that you think of the marginal rate in retirement as the rate after considering the RRSP/RRIF income. I would have thought people would focus on the marginal rate before the extra income. So, I would have warned people that things aren’t as rosy as they seem if the average tax rate on withdrawals is higher than the starting marginal rate. In any case, I think we get to the same place in the end.

    Reply

  6. Ayashah
    February 20, 2013

    Thank you! This was very well explained and I am saving it to pass on.

    Reply

  7. leonard
    February 20, 2013

    It seems to me that withdrawals will be taxed at the taxpayer’s average rate ONLY if the taxpayer has NO other income. Assuming that the
    withdrawal is taxed last, Part of of Joe’s 58,000 will be taxed at Joe’s
    marginal tax rate, and the remainder at the next lowest rate(s).

    If we pretend that Sue has no other income during her sabbatical year
    the 102,000 will appear to be taxed at her average tax rate, but it
    is still taxed at various rates and part of her income will be taxed
    at her marginal rate . No ?

    Reply

  8. Mike Holman
    February 20, 2013

    @leonard – Yes, that’s what my examples show. In Sue’s case, she has no other income and the withdrawal will be taxed at the average tax rate which of course is made up of the various tax rates inherent in earning $102,000.

    In Joe’s example I calculated the average tax rate of the RRSP withdrawal only which includes his marginal rate, but doesn’t include the bottom tax brackets since they are used up by his pensions.

    Reply

  9. Diane
    February 20, 2013

    I note that you say this article really only applies to “middle class earners” and RRSPs can actually be detrimental to “low income earners” What is the range of income that you consider as “middle class earners” VS “low income”? and how are low income earners negatively affected.?

    Reply

  10. Mike Holman
    February 20, 2013

    @Dianne – This article compares RRSP vs TFSA:

    https://moneysmartsblog.com/tfsa-vs-rrsp-which-account-is-best-for-your-retirement-funds/

    and it shows the different income levels.

    Low income earners can be negatively affected because RRSP/RRIF withdrawals count against income-tested government programs such as GIS.

    Reply

  11. Jambo411
    February 22, 2013

    We wife has an RRSP and is in the lowest tax bracket. GIS is based on family income and I have a pension so there is still a tax benefit of a lower average tax. If she holds off on CPP until 65 she can withdraw about $11,000 per annum at zero tax, much better than the 22% paid at her marginal rate. Once CPP and OAS and bumps her income to $23,000 her average tax will still be lower.

    Reply

  12. Bet Crooks
    February 22, 2013

    These examples are great! And of course the benefits of earning income tax-free on the RRSP money for years just makes the situation better. Your two caveats are well placed though, although I suspect most people with a good work pension will have such a high PA that they wouldn’t be able to contribute much to an RRSP anyway.

    Reply

  13. Pierre Comtois
    March 6, 2013

    Don’t forget that income from RRSPs is 100% taxable and that in some cases (middle income earners with pensions) will take it on the chin if they have too much RRSPs. Worth looking at non-registered baskets where investment taxable income is only 50% and where the tax can even be deferred for twenty years.

    Reply

  14. SK
    January 17, 2017

    Should we also consider the OAS clawback? My understanding is that when post retirement income is between about $72,000 and $118,000 every dollar above the threshold means 15 cents will be clawed back. How much would “Joe” lose to the clawback that he wouldn’t have lost if lower RRSP/ RRIF income kept him below the threshold?

    Reply

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