Instead of an actual blog post on one thing, you guys are going to a bunch of random thoughts on topics that aren’t big enough to get a blog post of their own. Think of it as instead of your parents taking you to Disneyland when you were a kid, they decided to take you to Red Deer 4 separate times. That’s almost the same, right?
TFSAs vs. RRSPs
So you’re a beginning saver and you’re trying to decide whether you should be plunking your cash into a TFSA or RRSP. Here is the ultimate answer.
Okay, that’s a little misleading, so let me explain a further. Remember last week how I said that we tend to make simple investing topics more complicated than we need to? We do it with index funds, and we certainly do it when comparing TFSAs to RRSPs. For a full 90% of the population who doesn’t save enough, getting them to maximize contributions to one would be a huge step. By making 47 rules about which one to invest in over the other, we add another step that’s bound to confuse the newbie.
So newbies, listen up. In Canada, federal tax brackets work exactly like this.
Let’s assume you made exactly $87,907 in 2014. You’d pay federal tax of 15% for the first $43,953 of income, and then 22% on the next $44,000 or so. Then you’ve got provincial tax on top of that, which is about 10%, depending on the province.
Back to the example. If you made $87k and took $10,000 of it and shoved it in an RRSP, you’d get a tax refund of $2600, since any RRSP contributions are treated as if you never made that money in the first place. Then if you take the extra $2600 and add it to next year’s RRSP, you’ll pay $676 less in taxes the next year. That’s a 32.76% return, guaranteed.
Even if you’re in a lower tax bracket, it still makes sense to contribute to your RRSP. Say you’re making $40k, and contribute $5k. Sure, you’re in the lower tax bracket, but that $5,000 contribution is still going to get you a tax refund that’s $750 bigger. And if you take that $750 and contribute it again, you’re looking at an extra $112.50 for next year’s tax refund. That’s still a 17.25% guaranteed return.
Oh, and those examples ignore provincial taxes, which would further increase returns about another 10%.
Yes, I realize you’ll have to pay taxes in the future. Oh boo hoo. What a terrible situation to be in, having too much in retirement income and having to pay tax on it. Oh, woe is you.
The only time you should contribute first to your TFSA is if you make no money, and are 100% sure you’ll make a lot more next year. This happens in the real world much less often than you’d think, so you’ll almost never find yourself in that situation. And even if you are, it might make sense to wait until the big income increase kicks in and then use that cash for next year’s RRSP contribution.
The bottom line: contribute to your RRSP first, and get the tax refund. A dollar today is worth more than a dollar in the future.
Uproar Fund update
A quick update on the Uproar Fund, for those of you who are into that. I managed to get another 800 shares of MRRM before it went up, meaning that stock makes up about 5.5% of the fund. Reitmans continues to make up about 12% of the fund. As of today, there are no other holdings, but there are a few on the watchlist that I’ll profile over the next few weeks.
Look for updates on how the fund is doing starting shortly after July 1st, and then each quarter after that. Also, anticipate that it’s going to take at least until the end of the year to get it fully invested. Patience and whatnot, young grasshoppers.
Just your daily reminder not to venture into the comment section of just about everything on the internet. Why do you think I ignore 90% of all comments? (I do read them all, FYI, I just can’t be bothered to do anything about it.)
But yet I go on Twitter all the time, and have to turn it off on my laptop because I constantly look up from my work to see the latest thing that someone has posted, even though it’s just some link to the latest blog post. So weird.
Sell my house and rent strategy
Remember how I sold my house and I now rent, waiting until prices go down before buying back in? It’s working so far.
Compared to the month that I sold, the average price in my (former) small town has now declined 13%. That number represents the return until the end of April, the latest month where numbers are available. What I’m hearing from people who live there is the market has worsened in the meantime, since a medium sized employer just laid off about a dozen people.
Meaning, I’ve avoided losing $30,000 in equity, give or take a few bucks. Sure, I have rent to pay and stuff now, but that’s offset somewhat by property taxes and extra utilities I would have paid as a homeowner. I estimate about $26,000 of that is profit.
I think the market has another 10% in it to fall. People are starting to get the attitude that real estate isn’t the hot place to be any longer. I’m seeing more price reductions and stuff like that. Hell, I had a Realtor phone me and ask if I’d be willing to do creative financing for clients of her’s that don’t qualify at the bank. I found that interesting.
If the market does fall another 10%, I’ll make up for my travels about five times over. Yeah, I know that a lot of you just can’t (or won’t) pack up and move, but I know I have a lot of readers with an awful lot of real estate exposure. Get rid of that, at least what you can.
One more thing: don’t believe the national real estate numbers. Calgary and Toronto are leading the way, and pushing up average values with them. The rest of the country is lagging behind. Especially in the east, many markets are actually flat to negative. It’s not all rosy out there.
Hey, a whole blog post. That wasn’t so bad.