Preferential tax treatments in withdrawing from RRSP/RRIF

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ringyFinance
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Preferential tax treatments in withdrawing from RRSP/RRIF

Post by ringyFinance »

I've been reading online about a tax minimization strategy: Putting tax-favourable investments outside registered accounts if you don't have headroom within an RRSP/TFSA. Equity is the prime candidate. Correct me if I'm wrong, but when one eventually draws on one's RRSPs/RRIFs, and if it contains some equity, it gets tax benefits similar to those outside of a registered account?

Note: I realize that one's tax bracket may not be the same at the time of withdrawal.

Note: I realize that one's risk/return should be considered before tax implications.
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AltaRed
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

Post by AltaRed »

There is no preferential tax treatment on any withdrawal from a RRSP/RRIF. It is all taxed as Other Income..
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ringyFinance
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

Post by ringyFinance »

Ouch. So no capital gains treatment when selling, but also no tax as the nest egg grows. I guess it's a fair trade. Thanks.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

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ringyFinance wrote:I've been reading online about a tax minimization strategy:
It would probably help if you provided the link to this tax minimization strategy. Then other FWF'ers would have more context to your question.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

Post by OhGreatGuru »

It makes sense if you read the full sentence: I've been reading online about a tax minimization strategy: Putting tax-favourable investments outside registered accounts if you don't have headroom within an RRSP/TFSA.

But OP has confused things by talking about RRSP withdrawals, which has (almost) nothing to do with that strategy.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

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Peculiar_Investor wrote: It would probably help if you provided the link to this tax minimization strategy. Then other FWF'ers would have more context to your question.
Pardon me. In this crowd, I thought I was among the minority in that this is new. The link is:
http://www.moneysense.ca/invest/asset-o ... -its-place

My read on that is that equity is the most tax-favourable because capital gains are taxed at half of one's marginal tax rate (and you get to offset capital gains with capital losses). Canadian dividend paying investments are second most favourable due to dividend tax credit. Fixed income is least favourable.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

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ringyFinance wrote:My read on that is that equity is the most tax-favourable because capital gains are taxed at half of one's marginal tax rate (and you get to offset capital gains with capital losses). Canadian dividend paying investments are second most favourable due to dividend tax credit. Fixed income is least favourable.
You are correct if you are talking about non-registered accounts. In registered accounts (RRSP, TFSA, RRIF, etc) there is no tax advantage for capital gains or dividends. You pay tax on withdrawals as though they were regular income. The logic behind this is that you got a deduction when you put the money into the tax-advantaged account, so you have to pay the taxes on the way out. Presumably at a much lower rate.
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Shakespeare
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

Post by Shakespeare »

In registered accounts (RRSP, TFSA, RRIF, etc) there is no tax advantage for capital gains or dividends. You pay tax on withdrawals as though they were regular income.
TFSAs pay no tax on withdrawal.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

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Jo Anne, Shakespeare: Thank you so much for your clarifying elaborations.
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Re: Preferential tax treatments in withdrawing from RRSP/RRIF

Post by Peculiar_Investor »

ringyFinance wrote:
Peculiar_Investor wrote: It would probably help if you provided the link to this tax minimization strategy. Then other FWF'ers would have more context to your question.
Pardon me. In this crowd, I thought I was among the minority in that this is new. The link is:
http://www.moneysense.ca/invest/asset-o ... -its-place

My read on that is that equity is the most tax-favourable because capital gains are taxed at half of one's marginal tax rate (and you get to offset capital gains with capital losses). Canadian dividend paying investments are second most favourable due to dividend tax credit. Fixed income is least favourable.
Thanks. Context is important. Our wiki on Tax-efficient investing might be helpful here. As Jo Anne has replied, your interpretation is correct.
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