Routinely I get letters from people who tell me why RRSPs won’t work for them. I’m not sure if they’re trying to convince me or themselves. Most of their arguments are based on misconceptions like these:
1. The markets are in the crapper. What’s the point? Hey, an RRSP isn’t an investment; it’s a registered savings account. You put your money into the RRSP and the taxman treats it with kid gloves. How you choose to invest is a completely different subject. You can choose from the safety of a savings account, to mutual funds, indices and individual stocks. And current market gyrations shouldn’t be a huge issue if you’re saving for retirement that’s 20, 30 or 40 years down the road. Of course the markets are going to go up and down; that’s what markets do. If you don’t have the stomach for the slips and sides, stick to fixed-income investments. Which leads to objection #2.
2. Interest rates suck. What’s the point? The point is to set something aside for your future. The point is to not spend all the money today, so you have some money for when you’re no longer taking home a paycheque. The point is to even the playing field between all the folks with access to company pension plans and those without. Besides, interest rates won’t always suck (just like markets will not always go up.) If you’re not happy with interest rates, learn more about investing so you can take advantage of alternatives with potentially higher returns.
3. You’re double-taxed on RRSPs. No you’re not. When you put money into an RRSP, you get a tax deferral on the amount you’ve contributed. You’re only taxed once, when you take the money back out. People who focus on all the tax they’ll have to pay when they start making withdrawals from their RRSPs or RRIFs are losing sight of the fact that for all the time the money was inside the RRSP it was growing on a tax deferred basis.
According to the Investor Education Fund website calculator (link: http://www.getsmarteraboutmoney.ca/tools-and-calculators/sheltered-investment-calculator/) a single $5,000 investment, assuming a marginal tax rate of 35%, would grow to $10,799 outside an RRSP over 30 years at just 4%. Inside an RRSP you’d have $16,217. That’s $5,418 more inside the plan than outside the plan. Contribute the $1,820 in tax savings to the RRSP, and in 30 years, you’d have an additional $11,094.
People come up with all kinds or reasons for not using RRSPs to plan for retirement. Maybe that’s why only about 1/3 of us make an RRSP contribution every year. Such a shame. A wasted opportunity really.