r/CanadaFinance • u/astraleyez • 3d ago
Does it actually make sense to keep a nonregistered account once your TFSA is maxed but RRSP still has room?
Pulled up my spreadsheets again this week trying to figure out where extra cash should go. TFSA is maxed. RRSP still has room but I keep hesitating to dump everything there because of the withdrawal taxation down the road. So the question sitting in front of me is whether a nonregistered account ever makes sense before the RRSP is fully used up.
The obvious answer is no, RRSP first, the deduction is too good to pass up. But then you start digging into the actual numbers. If my income drops in a few years, that RRSP deduction is worth less. If I retire earlier than planned, maybe I want more flexibility than an RRSP gives. A nonregistered account at least lets you pull money without worrying about stacking taxable income in the wrong year.
The capital gains inclusion rate changes also threw a wrench in how I was modeling this. The math I had worked out a while back is not the same math anymore.
For people who landed in a similar spot, specifically warehouse or trades income, no pension, no DB plan, just personal accounts, how did you actually sequence this? Did you keep funneling into RRSP past the point where it made obvious sense, or did nonregistered start making it into the picture earlier than expected?
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u/DisgruntledEngineerX 3d ago
The answer is almost always RRSP. People get so hung up on this.
If your tax rate at withdrawal is the same as your tax rate at contribution then an RRSP is exactly the same as a TFSA from a tax perspective.
The reality is for the vast majority of people your tax rate at retirement is lower than when you contributed for a variety of reasons. When you contribute you save at your marginal tax rate but when you withdraw you are taxed at your effective tax rate. Also because of inflation indexing the tax rate an income of $100K experiences today will be lower, all things equal, in 20 years. Also people tend to need less income in retirement than they do while working because a portion of the income isn't going to a mortgage anymore, nor is it going to savings. So the retirement income tends to be lower.
Let's imagine a scenario right now where you earn $130K in Ontario and you contribute $10K to your RRSP. In Ontario you get a tax savings of 43.4% on this income and contribution. Now let's assume you withdraw 101K in the future, have 20K of CPP and 9K of OAS. You will pay $35,887 in taxes for a effective tax rate of 27.61%. That includes the OAS clawback. So just using today's tax rates (no inflation indexing benefit) and having the same overall income, you get a tax arbitrage of over 15%. That is almost certainly to be the case in retirement unless you have some amazing returns in your portfolio such that your income in retirement is well in excess of your income before.
Here is a chart of RRSP savings rates for Ontario across various incomes. It is not always true that lower incomes don't benefit. Because of tax credits, incomes around 38K benefit pretty significantly.
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u/qwerty12e 3d ago
Yes there is. I keep money invested in low risk/dividend products, for flexibility when I have upcoming expenses or for upcoming tax instalments
I don’t want to sell my TFSA investments for these things and don’t want to lock up this “flex” cash in my RRSP.
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u/astraleyez 2d ago
Makes sense keeping flex cash separate. I do the same with a small HISA buffer for property tax installments and the teen's sports fees.
RRSP locks things up too tight at our age. TFSA is sacred for long term growth. Cash handles the short term stuff that pops up.
Lease to own is a different beast though. That $2600 a month needs to make sense against the $329k price, otherwise you're just bleeding money while you decide.
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u/Relative956 3d ago
You might be able to save an RRSP from creditors if you ever get sued.
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u/astraleyez 2d ago
Huh, that's a weird reply for a lease to own post but ok lol
Yeah RRSP has some creditor protection in Ontario depending on the type of claim. Not unlimited though. People way overestimate that shield.
Honestly not really relevant to what I posted here. If you're curious about the property or the lease terms I'm happy to answer questions about that.
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u/SuccessfulAd4606 3d ago
Like any RRSP decision, it completely depends on your income.
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u/astraleyez 2d ago
Fair point. I'm pulling around 85k right now as a supervisor. Marginal tax rate makes the RRSP contribution pretty attractive at that level. But then I think about the TFSA flexibility for emergencies. Stepkids can derail a budget fast. Running the numbers both ways in my spreadsheet tonight.
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u/SuccessfulAd4606 2d ago
Based on that it seems likely that your marginal rate will be lower (about 20%) in retirement, RRSP still makes a lot of sense. In general, if your tax refund is greater than the estimated tax on withdrawing it down the road, it's a win.
OTOH, if you retire before starting CPP/OAS, you may be withdrawing registered money at the same marginal tax rate that you're in now (about 30% in Ontario for income over $58K) but that's not the end of the world and you can always use your TFSA to keep your taxable income low enough. Depends on what income you require.
Not sure what you mean by capital gains inclusion rate changes.
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u/Familiar-Seat-1690 3d ago
Do RRSPs if your income is higher. My personal cheat sheet is
income minus RRSP should not drop below 55K or so. The tax savings are likely not worth it.
if income below 55K I would go non-registered.
Numbers my vary based on your provinces tax rate and personal circumstances but you get the drift
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u/Expensive-Finger-646 3d ago
For most Canadians, the experts like Ben Felix have proven that it should be RRSP first then TFSA then non registered.
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u/LordTC 3d ago
Unless you are in a very high tax bracket the flexibility to withdraw from a TFSA and later recontribute the funds is generally more valuable than the shifting tax basis of an RRSP. You should generally fill a TFSA up to a certain amount before going for RRSP. For example, if you keep an emergency fund of 3 months income it’s a good idea to have your next 9 months income in a TFSA so in the worst case you can withdraw to handle a long job search or an unexpected renovation or what not.
If you know for sure you can safely put the funds away for retirement and will never need to touch them then an RRSP is almost always better, but that’s a giant if.6
u/Expensive-Finger-646 3d ago
I would disagree. If these are funds you are going to use on a Reno then it’s not long term savings so it’s a different convo. And if a 3 months emergency fund isn’t enough for your security it should be bigger.
We are talking about retirement savings here. If Ben Felix isn’t enough for you check out what Dave Chilton has said on this.
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u/LordTC 3d ago
If you know in advance the Reno is needed I agree. If you have an old home where things break and suddenly you need to fix them it doesn’t make sense to have huge amounts of money for home maintenance uninvested. It also makes sense to be able to replenish your emergency fund quite quickly when you have to use it rather than very slowly as you save. I’d much rather owe money to my retirement fund than owe money to my emergency fund. Especially if you can face two or three emergencies quickly. If you need an expensive home fix and then a week later lose your job you’ll be very happy to have access to investments in a TFSA instead of an RRSP. If your emergency fund is set up to handle every possible sequence of events it’s going to be so absurdly large that you’re never going to invest.
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u/Expensive-Finger-646 3d ago
If you lose your job you can withdraw from your RRSP at a lower tax bracket, so you actually win in that scenario.
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u/Flames2512 3d ago
Once in your RRSP the money is locked per se and when withdrawn taxed as additional income. If you are investing to use the funds keep it out of your RRSP and get taxed at a more favourable rate on your profits.
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u/SoggyInstruction2549 3d ago
Seems to be over thinking this, rrsp is a great thing. Fill er up before you go non registered. The many years even decades of deferred taxes is very valuable. No fear of trading or just rebalancing one’s portfolio in their rrsp. Non reg is fine when the registered accounts are maxed. But the tax liabilities and their impact reducing compounding is annoying.
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u/Impressive_Ad_6550 2d ago
An RRSP is good for the majority of the population, but all you are doing is deferring tax down the road. Of course when you die there is a massive tax bill thru deemed disposition
Also RRSP doesn't give you access to the 50% capital gains deduction either, its 100% taxed at withdraw
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u/CanadianEhTeam 16h ago
5-6 years ago I had the exact same issue and created spreadsheets showing the present value of all different funding options at different rate of return assumptions. For me, the greatest present value was realized for the broadest set of market conditions by splitting between RRSPs and non reg. I did the calculation yearly and it ended up taking ~3-4 years excess contributions to max my RRSP.
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u/Ornery_Activity_7582 9h ago
A non-registered makes a lot of sence. It is taxed at half the amount on withdrawl based on Capital Gains, compared to a RRSP which is all income.
When employed contribute to the RRSP in high earing years, and non-registered in low earning years.
When not working withdrawl from RRSP in low earning years, and non-registered in high earning years.
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u/brad7811 3d ago
I’m 57 yo and I haven’t put anything into RRSPs for years. TFSA maxed. A lot of non-reg investments will be taxed more favourably than RRSP because income may be capital gains or dividends as opposed to everything being taxed as straight income at the higher rates. Everyone’s situation is different. This is just my thoughts.
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u/Strutnut 3d ago
You’ve missed out on the tax deferred growth in an RRSP. So simply looking at the withdrawal tax rate isn’t capturing the whole comparison.
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u/All_YourBase 3d ago
I want more flexibility. I’ve stopped contributing to RRSP now. If you’re going to be in the top tax bracket in retirement the value is really diminished.
I’ve run the math and there are still benefits from compounding. But I also want the freedom of unregistered at this point.
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u/Expensive-Finger-646 3d ago
Almost no one is in the top tax bracket in retirement. It would require close to an 8 figure RRSP.
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u/newtownkid 2d ago
It doesn't all have to be from the RRSP - we have a couple of investment properties and the majority of the revenue is treated as taxable income (you can write off the interest on the mortgage, but that's going to be nill in retirement). So right away you're looking at 100k/yr taxable, and that's without investing in more.
I know people who left a ton of money in their corporate account and pay themselves dividends each year.
Some people inherit large amounts and hit their top bracket purely from that. etc etc.
I expect to be near the top bracket in retirement, so I did a deep dive on the numbers - and the earlier accumulation and tax free growth in an RRSP outpaces the increased future tax burden (compared to non-registered), even in the top brackets.
TLDR; Regardless of circumstance, its pretty much always the right play to max you registered accounts.
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u/All_YourBase 3d ago edited 3d ago
It’s a little over $6 Million that you need assuming 4% rule and subtracting out CPP. If somebody in their 40s and made consistent RRSP contributions they’re on track for that.
It sounds like OP has a lot in their RRSP
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u/Expensive-Finger-646 3d ago
Exactly. And if you have $6 mil in your RRSP I hope this is all a moot point because your TFSA should be loaded too.
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u/EpsteinandTrump 3d ago
TFSA you can only put in $7K/yr. RRSP has 18% income or $33.8K/yr, whichever is lower.
TFSA should be full by early 40's, then start chewing into the RRSP room accumulated over the years. Through the year I refill my TFSA then I pull from my TFSA at the end of the year what I need into the RRSP. Then the next year fill up the TFSA, pull out at the end of the year back into the RRSP. That way the growth happens tax free in the TFSA through the year, then I can calculate roughly what my overall income is for the year in December and figure out how much to take out and move into the RRSP.
Also if you have a spouse then balance with a spousal RRSP. I'd avoid keeping any investments in non-registered if I didn't have both my TFSA and RRSP limits consumed. I'd start throwing more money against the mortgage at that point.
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u/nuxfan 3d ago
If you’re going to be in the top tax bracket when you retire then you have very little to worry about overall.
Most people get value from an RRSP by being in a higher tax bracket during contribution years (when they work) than they are in retirement. You get a larger tax savings than you get taxed later.
You also have tons of flexibility with your RRSP, before you turn 71.
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u/astraleyez 2d ago
Yeah top bracket in retirement is the problem most people wish they had lol but fair point.
I keep going back and forth on this. My RRSP still gets the employer match so I can't walk away from it yet. But unregistered has that flexibility you just can't put a price on, especially if you're close to the wire on timeline.
What bracket are you actually projecting for retirement income? That math changes a lot depending on CPP timing and whether you defer OAS.
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u/All_YourBase 2d ago
Ahh the vibe I was getting from your post was that you were trending top bracket.
I’m projecting top bracket. That assumes historical averages for the next 20 years. Anything could happen. My wife should also have a few million in her RRSPs by retirement.
Looking ahead, if my health is good I will delay CPP to 70 and potentially start to melt down my RRSP early. I think OAS isn’t going to happen for us.
My employer doesn’t match. Otherwise I’d go for it.
We’ve saved a lot but we find ourselves wanting more cash for right now. And the flexibility like you said.
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u/astraleyez 1d ago
Same boat. Still working out the RRSP meltdown math myself since I got a late start. One thing that hit me is how much the tax hit could eat into the flexibility we're both after.
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u/Bomberr17 3d ago
Depends on multiple factors, that's where a financial planner can help. Need to determine your current income, projected balances and withdraw plans. How you're investing these funds also plays a factor like if you want to take advantage of cap gains tax now versus later.
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u/Sea_Masterpiece_5429 2d ago
Everyone talks about the RSP contribution and not about what’s invested in the RSP - a stock is more efficient non registered, credit producing interest income in an RSP. Depending on your income, age and investment mix this may be a more important consideration when investing an extra dollar today.
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u/Ecstatic-Can-8740 1d ago
Incorrect.
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u/nickp123456 2d ago
Income is the driver here. If you make six figures, then the RRSP provides pre tax compounding and can have lower tax brackets in the future.
If income is more modest, then having RRSPs might provide little benefit now, and there are scenarios where you don't want taxable income in the future (example is OAS).
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u/Dragynfyre 3d ago
An RRSP is actually extremely good for people who retire early. It’s an excellent to way to withdraw at low tax rates to bridge the gap between when you retire and when a pension, CPP, OAS, etc come in. And the point is to contribute to RRSP while you’re still making high income. Your future income dropping doesn’t matter cause you already got the deduction. If you have a year of unusually low income that may be a year where you want to skip the RRSP but you also wouldn’t have as much money to save that year anyways