RRSP myths debunked

Let’s debunks the three most common misconceptions about RRSPs.

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sad_pig_322Routinely 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.

6 comments on “RRSP myths debunked

  1. I think I have a good reason:
    I'm making extremely little taxable income. To me it makes more sense to save, let the money grow (tax free due to low income) and make a larger contribution in the future when I will have a much larger tax rate. This makes more sense to me than making a smaller contribution now and carrying the deduction forward. Please inform me if my logic is off.

    Reply

    • You're logic is bang on, but in case you save too much over 4 or 5 years to put into your RRSP once your income is higher, its best to put that money in a TFSA so any growth you get off this money once you start working will also be tax free.

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  2. Even if the money you put into an RRSP never makes a penny in interest, you've gained the 25-30% you don't have to pay today in income tax. This in itself is a huge gain.

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  3. Not really Duff, since when you pull it out you have to pay that tax. If you put it into a TFSA, you pay the tax now, but you don't pay it later. So if it gains nothing due to market gains, it makes no difference.

    The one thing nobody is looking at is what future tax rates will be. Over the past 50 years income tax rates have steadily increased. If your income during retirement is expected to be the same as it currently is, then putting money in an RRSP now would be stupid. You might save 25% on tax now, but what if you have to pay 40% on it later?

    Look at the governments spending… do you think that they will need more taxes in the future to pay for the unfunded liabilities or less?

    If you make a lot of money and can get a 35% tax refund and plan to live a modest retirement, sure they are a great idea. But if you plan to live the same as you currently do, I don't know if RRSP's are the best thing.

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  4. 4% interest on RRSP. ?
    That is better than the last 10 years average gain on the markets.
    The reality is rather harsh. 0 % over the last 10 to 15 years for North America (the lost decade).
    If you factor in 6% to 8% real inflation we loose substantially in an average RRSP account no matter the investment method.
    The 35% tax refund is canceled by 4 to 5 years of real inflation.
    In the end we still have to pay income taxes when we pull money from RRSP.
    All of this is propaganda for the banks to use our money in their interest and nothing for us in return.

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    • boio is spot on!! OP neglects the fact that amounts are fully taxable when withdrawn, and an investor looses dividend tax credit and capital losses. RRSP’s are for suckers.

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