RRSP vs savings, is there a proper ratio?

[a_shy_guy]

Over the last 5 years I have been working, I started investing into RRSP's over the last 3 years. I have a rather decent start on my portfolio right now, and I plan to add more to it over the course of 40 years.

I took a look at my TFSA account that I have had since the whole thing started, and it looks pretty embarrassing to say the least.


Now, I have a head start on my retirement, but since it is so far away, and I wont be able to touch it for a while, its just cash thats sitting and growing. My TFSA on the other hand, has very little money in it, and as an emergency fund, it cant do much for me at all. My main emergency fund is actually my main bank account which sadly has more money then my TFSA account.

Since roughly 95% of my contributions are going into my RRSP's, and 5% into my TFSA, is there a proper ratio of where I should be putting my money?

 

[storm rider]

It all comes down to striking the lightning....the TFSA is a sort of mini RRSP....it is front loaded in that you pay into it with monies that have been taxed allready unlike an RRSP that is an investment that is tax deferred......the advantage of the TFSA is that whatever gain you make are not taxable in any way...you could have bought 1000 shares in Teck resources when they bottomed out at $3.35 a share and then sold those 1000 shares for $64 when the stock hit a high in the last month and you would not pay a single penny in taxes......for the most part though TFSA's are marketed by the large banks as glorified savings accounts that offer jack shit for independant investment action...RBC has woken up recently and grasped the idea the small investors look at the TFSA as an investment tool.

SR

 

[island-guy]

The best bet is to max out your TFSA contributions and then put what you can into your RRSP.

As far as what to hold inside the two, if you are young, then your RRSP can play the long game and have stuff in it that is a bit more stable and hold stuff for longer.

A TFSA on the other hand, is sort of like playing tax free blackjack. Get in, win, cash out, move to another table.

I rarely hold things in my TFSA for more than about a month at a time and so far (knock on wood) I've had at least 10% profit on anything that I've bought in it. The trick is to not be greedy. Make sure you buy in a trough and sell on a peak.

There have been plenty of opportunities that anyone without brain damage could see coming, the problem that a lot of people have is that when a stock they bought goes up 20% in a week, they hang on to it, hoping it will go up another 20% next week. SELL THE DARN THING AND QUIT WHILE YOU ARE AHEAD.

For example:

ARM Holdings. Big announcement by Microsoft that Windows 8 will run on ARM processors in December. Not much movement for days and days. I bought some ($5,000 worth) at about $18. A few weeks later, sold it at $26. Now I have $7,000

Stumbled around looking for what to put the money into, read a story that had come out 2 days earlier about Texas Pacific Land trust. I figured that the story would generate some interest, so I put the $7,000 into that at $36. Sold it a couple weeks later when it started to slide back down at $44.75 so now at $8700.

Read something last thursday about a small canadian company that got FDA approval for their product. The stock had already gone up 350% in a half day when I bought in. It went on to double again the next day and when the market opens tomorrow I'm going to jump back out again after at least doubling my money, maybe more. So I'll have over $17,000 in my TFSA.

So, started with $5,000 in december, always bought a day or two after the upswings started, always sold while the upswing was still going up and now it's only about 2 months later and I have $17,000 in there.

Too many people figure that if something is going up a lot, they should keep it, I figure if I've already made good money, it's time to move on to the next thing that is still just starting to go up.

jump in at the BEGINNING of the upswing and jump out before the downslide, don't be greedy and it's golden.

 

[Ray]

If you have a pension plan at work, then you don't need an RRSP. Maximize your TFSA.

Since the TFSA has a $5000 cap, if you are contributing more than that into an RRSP, maximize the TFSA first, then the balance into the RRSP. The reason being, you will pay taxes when you cash out RRSP's, but not a TFSA.

I have a six-figure investment in RRSP's, but have since started maximizing my TFSA since it got introduced and will put the balance into RRSPs.
I still have over 20 years to go before I retire, and there is a possibility I may have too much when I retire, but that is a nice problem to have.

 

[bakeshopboy]

Not trying to be smart here. But how many people have the capacity of contributing the maximum allowed $$$ in both RRSP and TFSA? It really doesn't matter because both are savings for the future. You put money in an RRSP account to reduce your income tax deduction whereas you are putting after tax money into a TFSA. You should look at your cash flow situation to make the decision. BTW, I don't trust the financial advice from a 25 year old financial advisor from the Banks with my hard earn money. Also remember risk and return has a direct correlation. You need to think before jumping into your investment decision. You should save on your own without relying on pension. These days, there is no job security, even in government. Look the the pensioners of Nortel. If you have more than 20 years of working life remaining, then both plan will probably end up the same.

 

[island-guy]

Government vested pensions are the only sure and secure bet. They are worth their weight in gold, and putting money into an RRSP or TFSA can't come close. Why? They are funded with current tax dollars, not with investments made by previous contributions. They are defined benefit and indexed to inflation.

Basically they are the reason why our country can't afford to have civil service unions anymore and it will be interesting to see what happens when governments are forced to admit that fact.

 

[island-guy]

From the Federal Gov't website:

Pension Plan

The Public Service Pension offered by the Government of Canada is one of the best in the country and provides income to our employees and their families upon retirement.

The Public Service Pension Plan is a defined benefit pension plan. This is a type of registered pension plan that promises a certain level of pension based on the plan member's salary and years of service.

Employees appointed on an indeterminate (permanent) basis (minimum 12 hours per week) or for terms of more than six months participate in the plan from the beginning of their employment; term employees (six months or less) begin after completing six months of continuous employment.

The Plan is funded by contributions of the employer (Government of Canada) and the employee. The Government of Canada contributes more than 60% of the cost for future benefits.

As of January 1, 2007, employees contribute at a rate of 4.6% on the part of the salary up to the maximum covered by the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) and at a rate of 8.1% on the part of the salary above the maximum covered by CPP/QPP.

Under a defined benefit plan, prior to age 65, the pensions are calculated as:

2% x number of years of pensionable service (maximum of 35) x average salary for 5 consecutive years of highest paid service.

At age 65 or in case of disability, the Public Service pension is reduced to take into account the CPP/QPP pension.

Pensions are fully indexed annually to take into account increases in the cost of living.

Example

A person who retires with 35 years of service and an average salary of $40,000 over the best five years would receive 2% X 35 X $40,000 = $28,000 per annum.

 

[FunSugarDaddy]

The answer to this question, as usual, is that it depends on what the money is for.

If you want to save up for a downpayment for your first house for example, an RRSP probably works better, at least up to 25K, which is the maximum you can use. RRSP's can also be used to fund secondary education under certain conditions.

And of course, there's more benefit from them if you are in a high tax bracket.

And still a factor is your net worth, as some studies have shown that those who are essentially the working poor are punished by having RRSP's in the sense that they loose entilement to the Guaranteed Income Supplement. (GIS)

For what it's worth, I believe that RRSP's can actually get too big. For example if you have an RRSP worth over 500,000 you have to start worrying about what the tax rate is going to be on withdrawal, whether or not you're going to get clawed back on your OAS, and if you happen to die, without being able to use a spousal transfer, it all comes crashing in as income..so there are a number of pitfalls

So what to do? My advice, is that if you are in a low income bracket, not saving for a first time home owners downpayment to utilize the TFSA, especially if you're in a situation where you expect your taxable income to increase sometime in the future..as then you'll still have the RRSP contribution room. (couse you could also just contribute to an RRSP and not trigger the deduction, but that's less flexible than a TFSA)

Investments can differ, but if were me, I'd probably focus on a large or small cap etf type of investment, as you're likely to get long term growth out of it, without the risk associated with say a penny stock. Fixed income investments should likely go into an RRSP, as a capital gains inside an RRSP don't allow for the application of capital losses to be netted against them, and you are taxed at 100% of the income, rather than simply 50%.

As for many posters on here who suggest speculating in penny stock or other risky ventures, I'd personally hold these outside both accounts. Because I'm damn sure if you you're doing this, you're going to be wrong a fair amount of the time, and I personally would want the capital losses. I'd be inclined to put more conservative stocks or etf's into the TFSA, where I'm fairly certain I'm going to get gains over the long term.

As for RRSP's verses TFSA's, if you're in a high income bracket, why not do both?

Invest in an RRSP, get the refund and put it in a TFSA

 

[FunSugarDaddy]

The best bet is to max out your TFSA contributions and then put what you can into your RRSP..

I'd argue that it would be better to do this the other way around, especially if you're in a high tax bracket. Say you're in the highest bracket and you contribute say $15k without having to borrow. Well assuming not much else is going on in your tax return you could expect a refund of about $6k. Then take the 6K and put that into a TFSA. So essentially you're using the tax deferral option to invest in a non taxable TFSA, and you have 6K of essentially borrow tax money, going into an account that you'll never have to pay tax on, and the remaining 15K going into an account that you'll defer tax on for multiple years..perhaps decades.

 

[edmontonsubbie]

Going back to the original poster's exact phrasing for the question i.e.

RRSP vs savings, is there a proper ratio?

then, yes, the answer is simple. At least from my own planning strategy.

I like to use the toilet bowl rule, or tbr method as it is more commonly known. With respect to these two types of relatively safe investments, I like to have a shit load of the one, and a piss pot full of the other. Of course, the mix will change given the season....but, that's just savvy investment management.

now back to your regularly scheduled programming,

eddie