For the most part of my life I've been told that RRSPs are THE best way to save for retirement. Every year I would contribute whatever I could afford in order to get nice refund cheque from the government and would feel super rich depositing it into my account. Like thousands of other Canadians, I would delude myself into thinking it was free money when really it was my own hard earned cash!
The short term aspect of RRSPs seems like a win/win situation; you contribute money to your retirement, which lowers your annual income and the excess tax you've already paid is refunded to you. Since you're penalized for early withdraws from your RRSP called withholding taxes, it stops the urge to touch that money and allows it to compound tax-free. During the last few years of becoming financially aware, I've started to question if RRSPs truly are, "all that and a bag of chips".
The Long Claw Of The Government
Now I know everyone's situation is different with income levels, dependents and items to claim so the following information is from my perspective. My wife and I roughly make the same amount of money, and we just so happen to be in the middle of tax bracket. For us to contribute enough money to sneak into a lower tax bracket, we would both have to contribute fifteen thousand dollars to come away with a large return. That's a lot of money to sock away when it could be used for paying off the student loan and the mortgage. Not only is it a lot of money, it's locked away where it doesn't make financial sense to touch it. What happens if one of us gets sick or a major incident in our life requires us to need that money? We would lose a large sum of money in withholding taxes and we would lose that contribution room in our RRSP forever. It kind of makes it seem like your nest egg is kept on the highest mountain top and is guarded by giant eagle ready to claw away at your savings if you ever want to use it. I wonder if the eagle gets benefits and a federal pension?Death And Taxes
Taxes have become a constant in life so unless you become a vagabond with no fixed address, you better get used to paying them. I for one hate paying taxes but they are a necessary evil. Some would argue it's better to postpone paying tax until you retire. That way when you aren't making any money your tax rate will be lower when you withdraw from your RRSP. While that does make sense, there is no way to tell what taxes will be like in the future. Sure there is a possibility that taxes will be the same or lower, but I subscribe to reality and have been around long enough to know nothing ever decreases. So technically by contributing to RRSPs you defer paying taxes now, only to pay less tax in the future which could essentially be a higher amount then they are now. I'm pretty sure the government gave a HUGE bonus to whoever invented RRSPs and developed the tax laws around it. Kind of makes you want to waive a white flag and live in the woods, doesn't it?So Now What?
Apart from stuffing money in a mattress or hiring Tina Turner to be the mayor of my own tax-free barter town, the government will get their taxes either now or in the future. Are RRSPs the best retirement savings vehicle? Everyone will have a different opinion after weighing their own personal pros and cons. One thing is for certain; they do allow you to pay less tax when you are younger and have more expenses. Majority of retired people have little or no debt, so it may prove better to postpone paying as much tax now and letting your financially backed future self pick up the tab. If you can afford to max out your RRSP each year then good on ya. I am still going to contribute to my RRSPs, but I don't think I'm going to max them out. I'd rather spread my money out and maximize my TFSA and whittle away at my mortgage instead. In the end it's at least better to contribute something then nothing at all.
To my dozens of readers: What's your take on RRSPs?
13 comments:
I completely agree with your RRSP assessment. I am just transitioning out of the student life and am starting my first real career. I will be starting part time, and will most likely be in the 15% tax bracket. I plan to use the RRSP mainly to help prevent me from entering higher tax brackets. I haven't been required to buy a house or car yet, and hopefully won't have to make a big expenditure like that for the next few years at least. I also was lucky enough to get through my undergrad without going into debt, and I hope to be able to do the same with my masters.
That's great you made it through your undergrad without going into debt. I wish my wife could have done the same thing.
When you take money out RRSP's you are taxed as earned income besides the withdrawal fees. TFSA's are better if you really think about.
So if a person wants to use RRSP's then they should max their TFSA first. Possible idea is use your non-registered account dividends or TFSA dividends to contribute to your RRSP.
That's a good idea Anon but it's also a slippery slope. If you paid the tax on you dividends from a cash account, you pay a reduced rate( if they are Canadian) something to the tune of 18%. If you contribute them to an RRSP, there's a good chance you will be taxed at a higher rate in the future.
Taking dividends out of your TFSA is a viable option as you can contribute what you take out the following year.
Here is my take:
1) First contribution to go to TFSA then RRSP.
2) Retire at 60, I mean start empty out RRSP and by 65 just finish the RRSP account (Leave empty bag for Taxman)
3) Get full Retirement benefits.
Note: Remember TFSA is not taxed (since contribution is after tax).
Enjoy life and Do really you love to do.
Thanks,
No RRSPs - Never will.
Why lose the benefits of tax efficient income like dividends and capital gains. To me, it doesn't make sense to hold Canadian dividend stocks in an RRSP. When you take the money out, it gets taxed like regular income. I put my Canadian Dividend stocks in my taxable account and my Foreign Dividend stocks in my TFSA (yes, I know there is some withholding tax).
TFSA all the way.
Anon: Well the taxman is going to get his fair share whether you empty your RRSP or not. Best to take small increments out each year, and minimize the amount of tax you pay any way you can.
Max the TFSA, as mentioned in my next post :)
TD: Hello my mentor. I agree about the RRSP. I had a bunch of money sitting in it from employer/employee contributions over the last 10 years so I have it invested in Canadian and American stocks. Yes my Canadian dividends get taxed higher then they would in a cash account, but it's better then investing in bonds or mutuals *shudder*
TFSAs are amazing. I guess I better finish my next post.
It was not supposed to happen, but I ended up in a higher tax bracket when I started to take money from my RRSP than when I made most of my contributions.
When I was young, I was sold on the value of RRSP to save for retirement. Too bad there were no TFSA then.
That's my biggest fear Susan. I think my RRSP is going to be left for any overwhelming taxable income I want to sweep under the rug until I'm older.
I am very lucky to be young enough take advantage of TFSAs and I'm going to maximize my contributions as I see it as a much better savings vehicle.
So I'm a little confused. Lots of people say RRSPs are great, but lots of people (including yourselves) say they are not so great. My question is if we don't use them at all like TD does above, doesn't that place us in a higher tax bracket and therefore we pay more taxes?
Wouldn't it make sense to place our money in the RRSP to shelter it from tax, and then slowly withdraw it over time, taking only enough money so that we don't end up in a higher tax bracket?
Hey Kyle. One thing to wrap your head around is that taxes are inevitable. You either bite the bullet and pay them now, or you can delude yourself and contribute to RRSPs each year and pay the taxes when you are older.
The theory is that when your older you make less money and therefore will pay less taxes when you withdraw from your RRSPs. Seeing as you are younger, there is nothing saying taxes will be higher when your older and you might end up paying the same amount in taxes then when you were younger.
My theory is rip off the band aid fast, pay your taxes now and max your TFSA. All that RRSP contribution room will make a nice buffer if there is ever a large sum of money coming into my life and I don't want to pay taxes on it.
Aha. I see!
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