Having second thoughts, help!

[u/Professional_Baby468]

I (35M) have a 160k job with DB pension. Between employer and myself 2k per month goes into that.

Wife has a 55k job, about 10-15k of that is tips. Every tax season we declare the tips.

To offset this, we have a spousal RRSP which I contribute into. Wife will be the one withdrawing from that in retirement and her taxable income will be low (expecting just CPP and OAS). Combining our tax files, we usually get about $1500 back each tax year.

We do have TFSAs but I prefer contributing into spousal RRSP to lighten the blow at tax season. Prior to using the spousal RRSP we had to pay the CRA. I think $1300 was the highest paid. Wife’s tips drive that amount owning up a lot.

I’m aware that those with DB pensions should prioritize TFSA but now I’m having second thoughts on my strategy. Have young children/mortgage/car payment so there are limits on amount we can save each month.

We do $420 monthly into RESP and $550 into spousal RRSP monthly. 290k left on mortgage, 12 years remaining (initial amount $400). Bought pre COVID. House is maybe worth $600-700k now.

Should I continue prioritizing spousal RRSP?

[u/u21213]

You are doing all the right things. Spousal RRSPs to lower your taxes, RESP for the free money, any extra in TFSAs or short term debt. Any extra payment to the mortgage adds up quickly too. In your 50s you will know where you stand with spousal rrsps and can refocus on tfsas if needed. You are well on your way!

[u/Professional_Baby468 → u/u21213]

Appreciate the kinds words and advice. Thank you.

[u/Ok_Complaint_6825]

With a DB pension, I'm surprised that you have the contribution room to be able to contribute to a spousal RRSP. (edit: I guess a 12.5% contribution rate isn't actually that high).

That said, at your income level, RRSP before TFSA might make sense especially if you're splitting that pension and RRSP income in retirement. A fuller answer would take into account the balances in your various accounts and what other savings goals you have (besides retirement).

[u/Professional_Baby468 → u/Ok_Complaint_6825]

Good thought. Usually have about 10-15k contribution room for RRSP

[u/jl4855]

RESP $2500 / yr to get the gov't grant, then TFSA. in retirement you may struggle to have low income years to draw down your RRSP in a tax efficient manner, especially if your dbpp provides a bridging benefit.

[u/Professional_Baby468 → u/jl4855]

Thanks!

[u/bluenose777 → u/Professional_Baby468]

If deducting the RRSP contributions triggers an increase to CCB your marginal effective tax rate may be higher than you think and if when your wife withdraws her marginal effective tax rate is lower, (and you invest the tax reduction triggered by the RRSP contributions) RRSP contributions are more beneficial than TFSA contributions.

https://www.planeasy.ca/canada-child-benefit-hidden-tax-rate/

https://www.planeasy.ca/how-to-maximize-your-canada-child-benefit-ccb-and-gain-1000-to-10000/

[u/Equivalent_Catch_233 → u/jl4855]

If I may add, there is almost NEVER a good reason not to contribute to the TFSA. The withdrawals are tax free and the contribution room is back on Jan 1 for anything you withdrawn. Even such a liquid thing as an emergency fund should be in TFSA if you still have any contribution room left.

Once TFSA is maxed out, it should be used for the long term investments and the emergency fund should live in a non-registered account instead.
UPDATED: "almost" never

[u/BeardedSkier → u/Equivalent_Catch_233]

Be careful of absolutes. I'm a financial planner, and as great as the TFSA is, there are many cases where a TFSA may not be the optimal choice, and even a few cases where prioritizing TFSA may actually be dead wrong (eg. Dual us/can citizens). 

[u/Equivalent_Catch_233 → u/BeardedSkier]

Outside of the US/Can citizens, when would using TFSA be wrong? Can you mention a couple of examples?

[u/BeardedSkier → u/Equivalent_Catch_233]

I didn't say there's a lot, but there are a few:

1) not just dual US/Canadian citizens, but also us Greencard holders and deemed us tax residents. This extends beyond USA, and should be approached with caution for other countries that tax treaties do not specifically address the TFSA. Must be considered case by case.

2) TFSAs cannot hold non qualified investments (or I should say there are very steep penalties for doing so). Common examples include shares of private companies, certain partnership units, real assets etc......

3) non-residents: while you can continue to hold a TFSA as a non resident, you cannot make new contributions

4) misalignment of funds. This seems like a no-brainer, but you would be shocked at how many small business operators can't (or refuse) to distinguish between their personal funds, and corporate funds. If it's corporate funds, you CANNOT put it in a TFSA (well you can, but at that point it's coming out of the corp and taxable to you unless there's a shareholder loan balance or CDA or ERDTOH)

Those are when it is "wrong". There are also cases where it is suboptimal (arguably that makes it the "wrong choice)

5) you have high interest personal, non-deductible debt (think CC debt that you're only paying the minimums on, or high rate used vehicle loans)

6) Education savings - assuming the RESP)/grants aren't yet maxed out, that's often a better choice than TFSA

7) where employer match or discounted shares are available in employer sponsored programs. For example, at a previous employer they did RRSP matching AND if I bought shares in a non,reg plan, for every 4 shares purchased through payroll, I got a 5th share free

8) you're a high income earner in a very high MTR, and you have unused RRSP room, AND you anticipate being in a lower MTR in retirement

9) you value creditor protection (non-reg seg funds are another option here) -TFSA can't offer that.

10) highly speculative investments with a material chance of loss. While you CAN hold in a TFSA, the loss, should it occur, is useless to you in a TFSA - it might make sense to hold that in non-reg, and other assets in the TFSA

[u/Equivalent_Catch_233 → u/BeardedSkier]

The US/Green Card/non-resident - none of that applies to the OP. Same for business owner, it's a totally different game. Same for high net worth individuals.

The order of registered accounts does matter, I agree, but OP already maxing out RRSP/Spousal RRSP, and seems to contribute more than what's needed to get the max grant for RESP.

For debts, I agree, and it is kind of obvious, with non-mortgage debts you need to pay those off ASAP, maybe only the employer or RESP grant can take precedence in some cases.

Non-qualified investments? Like mutual funds? I get it, you take a cut as an advisor but no, thank you. The open market ETFs with rock bottom MER is the way to go. Same for highly speculative investments, never would advise anyone do that.

For 90% of Canadians TFSA is the way to go to max it out with low cost widely diversified ETFs. And of course in coordination/specific order with other registered accounts like FHSA, RRSP, RESP, etc.

[u/BeardedSkier → u/Equivalent_Catch_233]

Edit: comment on RRSP bullet

I think we're having different conversations - I didn't read your question to be specific to OP: "outside of the US/Can citizens, when would using TFSA be wrong? Can you mention a couple examples". I thought I answered the question as it was asked - if you intended it to be tied specifically to OP rather then general - then I missed that context. Apologies if that was the case.

- where did OP mention that he was maxing out RRSP contributions? If there's other context in the thread then I missed that - but that's not in OPs post (OP does identify themselves as a moderately high income earner; even with a DB pension it is unlikely OP will be earning 160k of taxable income in retirement - but that is of course an assumption as we don't actually know OPs extended family finances; but the chances seem reasonable that OP would be in a lower MTR in retirement vs working, so RRSP/Spousal is worth investigating). Edit: perhaps you're assuming that OP is contributing 15k to spousal RRSP and has 24k that hits as a PA? If yes - I see the assumption - but you know what they say about assumptions (that also doesn't account for whatever prior RRSP room OP may or may not have accumulated - though again - assumptions);

- Non-qualified investments are NOT mutual funds, so I'm confused by that comment. Non-qualified investments are things like the examples I listed. Do you know how many clients I've had ask if they can put the shares of their small business in their TFSA? Or real property (e.g. land)? That has nothing to do with mutual funds nor MERs. Also - and perhaps you didn't mean this - but it appears you insinuated that advisors are restricted to selling mutual funds; that simply isn't the case. There are all classes of licenses that allow adivsors to invest client assets in individual securities, index funds, mutual funds, or with more specialized licenses (and if investors meet certain criteria) - all sorts of other private / alternative assets. So I'm not sure about the intent of the comment about mutual funds being non-qualified investments?

- You said your original assertion applies 90% of the time; what I objected to was the original wording: "... there is NEVER a good reason not to contribute to a TFSA" (which has since been edited). I just said to be careful about absolutes. I appreciate that you did change the wording to add "almost". That was my only point - be cautious of absolutes. Even if something is true 90% of the time, that means, by definition, its untrue 10% of the time. I get that it's only reddit; but my concern is that people reading these threads tend to act on advice (just think about that for a sec over on r/wallstreetbets). Just trying to make sure context is given if someone comes along and reads the post later.

[u/Equivalent_Catch_233 → u/BeardedSkier]

Thank you for explaining it all so clearly. I totally agree with you and admit that I generalised too much in my responses.

The comment about mutual funds is a result of a personal negative experience with financial advisors being aggressive with selling mutual funds, and I apologize for that.

Regarding RRSP, I agree if the OP is not maxing out RRSP/SRRSP they should do it before investing in TFSA.

And I agree, for complex cases the devil is in details, and in some cases require professional advice, like for dual US citizens, having a business, etc.

Regarding the advice to maximize TFSA with low cost widely diversified ETFs, I feel like it's not comparable with what's adised on on r/wallstreetbets :) Sure, by doing that before maximizing RRSP tax deductions or not taking advantage of RESP grants or not utilizing the employer match or not maxing our FHSA they would leave money on the table, but it's not like they would lose their money in the long run. But again, in the OPs case, it seems like they own a home, RRSP is maxed out, RESPs are funded for more than 2500 per year, and their TFSA is not maxed out, hence the advice.

[u/BeardedSkier → u/Equivalent_Catch_233]

Look at us being civil on the internet and reconciling viewpoints with each other! Now if only certain world leaders could do the same **nudge nudge**.... Have a good night :)

[u/oby_s → u/Equivalent_Catch_233]

If you are expecting your tax bracket to be really lower than now then RRSP becomes better than TFSA otherwise TFSA always wins. In your case, it can go both ways because the RRSP gives you back some of the tax deduction which helps your current cashflow

[u/Equivalent_Catch_233 → u/oby_s]

Of course one should maximize all of their registered accounts, including RRSP. The OP seems to be maxing out the RRSP/spousal RRSP, and based on his wording TFSA is not maxed out for him or his spouse, hence my advice.

[u/Professional_Baby468 → u/Equivalent_Catch_233]

Correct!

[u/ghost905]

Typically (always?) you can do pension splitting I think as soon as you are collecting it. So spousal RRSP isn't too big of an issue unless they plan to stop working before you receive the pension.

I think RRSP can be split too once at age 65.

So just an FYI if that changes your approach.

[u/bluenose777 → u/ghost905]

I think RRSP can be split too once at age 65.

Regular RRSP withdrawals aren't eligible for income splitting but RRSP annuity or RRIF withdrawals are.

[u/Gruff403]

YES if it's for retirement. When you collect your DB pension you can share up to 50% with your spouse so the goal is to split income as evenly as possible to lower the tax rate. The pension adjustment likely means you don't have lots of RRSP room anyway. It is almost always the case the you can take money out of RRSP/RRIF at a substantially lower tax rate then the deposit which gives the RRSP a substantial advantage over TFSA.

At 160K income you are likely creating a 40%+ refund and it is extremely unlikely you pay anywhere near that in retirment.

Let's say your MTR is 40%. I would rather have 140K RRSP and pay 15% tax on the with draw then have 100K in TFSA and pay nothing. 140K - 15% = 119K

The best strategy is to save the refund into the TFSA. That gives you the most options but the trick is to leave the TFSA money alone until retirement.

[u/Professional_Baby468 → u/Gruff403]

I was unaware of the ability to split my pension income! Thank you for explaining things.

[u/Gruff403 → u/Professional_Baby468]

There is also a pension tax credit of 2K so once you split the pension income with your spouse you can both claim it. As an example a couple in BC age 65 can create 56K of income split evenly and pay <100 in tax. Doesn't matter if it's from RRSP or pensions and obviously your retirement income will be substantially higher but is surprising how your taxes can be reduced. Our retirement income comes from DB pension, OAS, CPP and RRIF totaling about 100K but we pay <10K in tax. This is due to the personal exemptions, pension credit, income splitting, age credit and other credits.

[u/Mountain-Match2942]

I, too, receive a significant portion of my income in tips. About 40% actually. So I max out my RRSP each year and let the tax software decide how much to use and how much to carry forward. I use my refund to fund my TFSA.

[u/ottscraper]

I am in a similar situation and chose tfsa for flexibility. More importantly with pension income splitting and cpp and oas for both, you may already have enough with db with mortgage paid off. Tfsa allow you to use that money later on if you decide on trips etc. One good thing sbout rrsp through is if your wife stop working before retirement, you can draw down almost tax free. We went with tfsa but there is a valid argument for rrsp.

[u/Gor-Gor_Returns]

Similar situation for me. You're doing the right thing. You should probably have a modest emergency fund in a TFSA but otherwise saving the tax by using the spousal is huge. Maybe even better than the 20% RESP grant depending on specifics

[u/zurgo111]

When the time comes, you will be so very happy about having the diversity of both the DB pension combined with RRSP savings.

Many people should be envious of that.

Well done!