Posted on: 19-02-09 15:16:32
Quote:
Originally posted by pratickm
Also, it is wrong to consider the $3K as \"lost\".
It is not \"lost\" - it is simply paid off as taxes.
Taxes that you need to pay anyway - either now or later.
Just for example, say I earned $60,000 this year and my next year earning going to be $40000.
If I assume that the taxes below and upto $50000 are 20% and above that 30%. (I am taking just flat rates to demonstrate)
Then I put $10000 to my RRSP and take it out next year then I will be saving $1000 in taxes.
So without RRSP contribution
This year taxes = 20% of $50000+30% of $10000 = $13000
Next year taxes = 20% of $40000 = $8000
Total taxes for two years = $21000
With RRSP contribution (of $10000)
This year taxes = 20% of $50000 = $10000
Next year taxes = 20% of $50000 = $10000 (Because withdrawn money from RRSP is added to my income)
Total taxes for two years = $20000
Saved in taxes in two years = $1000.
Just rolling the money back and forth I saved $1000
Is there anything wrong in my calculation?
Assuming Ontario and using actual rates for 2008 -
This year taxes = $12,956
Next year taxes = $6,726
Total taxes for two years = $19,682
With RRSP contribution (of $10000)
This year taxes = $9,841
Next year taxes = $9,841
Total taxes for two years = $19,682
Quote:No, you haven't.
Saved in taxes in two years = $1000.
Just rolling the money back and forth I saved $1000
Quote:You were using approximate figures.
Is there anything wrong in my calculation?
If you use real figures, there is no saving.
If you withdraw the $10,000, you lose the contribution room forever.
Therefore, you will be paying tax on that $10K next year as well as all subsequent years.
Not just on that $10K of principle, but taxes on all the income earned with that $10K (assuming it is invested and not spent).
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by pratickm
Assuming Ontario and using actual rates for 2008 -
This year taxes = $12,956
Next year taxes = $6,726
Total taxes for two years = $19,682
With RRSP contribution (of $10000)
This year taxes = $9,841
Next year taxes = $9,841
Total taxes for two years = $19,682
Quote:No, you haven't.
Saved in taxes in two years = $1000.
Just rolling the money back and forth I saved $1000
Quote:You were using approximate figures.
Is there anything wrong in my calculation?
If you use real figures, there is no saving.
If you withdraw the $10,000, you lose the contribution room forever.
Therefore, you will be paying tax on that $10K next year as well as all subsequent years.
Not just on that $10K of principle, but taxes on all the income earned with that $10K (assuming it is invested and not spent).
I don't get your point when u say that paying tax in all subsequent years. I pay tax on $10000 either this year or any year I withdraw that amount.
I think I picked a wrong amount to demonstrate. it does make difference in the taxes in some cases. For example, say I don't earn anything next year due to any reason (Outside of country on long vacation). That means I will be paying no tax at all next year. (Even if I withdraw $10000, most of the amount will not be taxable as approx $9000 is non-taxbale income). So it is a good option for those to contribute in a year when income is very high and withdraw in a year when income is almost nil or very less)
Quote:Now you are changing your story, my friend
Originally posted by web2000
I think I picked a wrong amount to demonstrate. it does make difference in the taxes in some cases. For example, say I don't earn anything next year due to any reason (Outside of country on long vacation). That means I will be paying no tax at all next year. (Even if I withdraw $10000, most of the amount will not be taxable as approx $9000 is non-taxbale income).
I used the exact same numbers and % that you used and showed that there is no tax benefit.
Now you have a new story of no income in 2nd year.
If that's the case, then the person has no choice but to withdraw from RRSP for survival (assuming no non-registered savings).
Quote:That's the whole idea of RRSP meltdown.
So it is a good option for those to contribute in a year when income is very high and withdraw in a year when income is almost nil or very less)
And that's why people use spousal RRSP as income splitting.
I don't really see the point of all these manoevers and strategies, esp. if there is no significant saving.
Quote:It's the taxes that you will pay on the lost contribution room.
I don't get your point when u say that paying tax in all subsequent years. I pay tax on $10000 either this year or any year I withdraw that amount.
When you withdraw $10K from your RRSP, you lose the same contribution room forever.
Which means that assuming you are able to save $10K next year (or at some point in the future), you cannot leverage the lost $10K contribution room in RRSP.
Therefore, you pay taxes on that income.
Also, it means you will invest it in a non-registered account and thus may taxes on all the income that the $10K of principle will earn in the future, including compounding growth.
Unless someone is in real, genuine need of money, I don't see why they would want to withdraw from RRSP.
These kinds of manoevers are "getting kute" with the Govt. and never pays off in the long run.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by pratickm
Quote:Now you are changing your story, my friend
Originally posted by web2000
I think I picked a wrong amount to demonstrate. it does make difference in the taxes in some cases. For example, say I don't earn anything next year due to any reason (Outside of country on long vacation). That means I will be paying no tax at all next year. (Even if I withdraw $10000, most of the amount will not be taxable as approx $9000 is non-taxbale income).
I used the exact same numbers and % that you used and showed that there is no tax benefit.
Now you have a new story of no income in 2nd year.
If that's the case, then the person has no choice but to withdraw from RRSP for survival (assuming no non-registered savings).
Quote:That's the whole idea of RRSP meltdown.
So it is a good option for those to contribute in a year when income is very high and withdraw in a year when income is almost nil or very less)
And that's why people use spousal RRSP as income splitting.
I don't really see the point of all these manoevers and strategies, esp. if there is no significant saving.
Quote:It's the taxes that you will pay on the lost contribution room.
I don't get your point when u say that paying tax in all subsequent years. I pay tax on $10000 either this year or any year I withdraw that amount.
When you withdraw $10K from your RRSP, you lose the same contribution room forever.
Which means that assuming you are able to save $10K next year (or at some point in the future), you cannot leverage the lost $10K contribution room in RRSP.
Therefore, you pay taxes on that income.
Also, it means you will invest it in a non-registered account and thus may taxes on all the income that the $10K of principle will earn in the future, including compounding growth.
Unless someone is in real, genuine need of money, I don't see why they would want to withdraw from RRSP.
These kinds of manoevers are "getting kute" with the Govt. and never pays off in the long run.
I understand the lost contribution room.
So my point was that you can always do a math how to balance the income each year so that it should not fall under high income bracket. So contribute as much as u can when income is high and withdraw when income is low. So not putting money in RRSP will always cost u more than rolling it back and forth. In the worst case scenario the income tax could be same in both cases, which is not always true.
Quote:To correctly calculate the cost of withdrawing from RRSP and losing the contribution room, you need to calculate the Present Value of an Annuity
Originally posted by web2000
I understand the lost contribution room.
So my point was that you can always do a math how to balance the income each year so that it should not fall under high income bracket. So contribute as much as u can when income is high and withdraw when income is low. So not putting money in RRSP will always cost u more than rolling it back and forth. In the worst case scenario the income tax could be same in both cases, which is not always true.
For example,
http://members.shaw.ca/retailinvestor/return.html#tvm
Or
http://www.getobjects.com/Components/Finance/TVM/pva.html
By using 30, 35 or 40 years as the working years and a common rate of return like 6% you can calculate the true cost of such withdrawals.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Can someone please tell me which bank is offering a good rates RRSP. I want to contribute for year 2008. What are the things I need to keep in mind, and should I go for RRSP GICs? ING is offering 90 days RRSP GIC at 3.5% interest.
Does anyone have a good choice of bank and rates?
Thanks in advance.
