Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice
In recent years RRSPs have gotten a bit of a bad rap. People are saying should I still be using the RSP as the primary retirement savings vehicle, or should I maybe be using a TFSA or may-be I shouldn't even bother and just use an unregistered account. After all when I take money out of my RRSP or rough I'm going to pay tax and that tax could be high. So why even bother with RRSPs. Our latest report addresses some common myths that we're trying to dispel with RRSPs.
There's no point investing in an RRSP
Perhaps the biggest myth is that there's no point in even bothering with an RRSP because after all when you take the money out under an RRSP ultimately in the RIF there a forced minimum withdrawal you're going to pay tax on it anyway. And in fact what's really the point at the end of the day because you're getting a deduction now and you're including the income later. But in fact if you look at the numbers behind this you find that effectively your rate of return on your after tax contribution is ultimately tax free. In other words what was your option. Sure you could have done TFSA and for some people that might make sense but on the other hand if you're comparing an RRSP with a non registered account you're still going to pay capital gains tax tax on interest income tax on dividends on the non registered money. Remember you're only dealing with a smaller pool so with an RRSP you're investing pre-tax dollars with a non registered account. It's after tax dollars and you're still taxable on the investment returns. We've proved mathematically in our report that you're always going to be better off with an RRSP or a TFSA than a non registered account.
Investing in a TFSA beats an RRSP
The second myth says that maybe TFSA is are the way to go and for some people that might be true for individuals in the lowest tax bracket. Say someone making under forty five thousand dol-lars a year yeah I wouldn't do any RRSPs I would do all TFSAs as your tax rate could only be higher when you retire. But I think a majority of Canadians who will be in a lower tax bracket in retirement than when working, then RRSPs do make most sense.
It's better to pay off debt
The third myth is maybe I should really focus on paying down my mortgage rather than putting extra money into an RRSP and again with low historic rates on mortgages, many mortgages having rates below even 3 percent, we’ve proved in a prior report called Mortgages or Margaritas that it really doesn't make a lot of sense to pay down low rate debt provided you can sleep at night. In other words your long term rates of return on a balanced portfolio inside an RSP or even TFSA will outweigh paying down low interest rate mortgage debt.
I don't have enough money to save in an RRSP
The fourth myth is I don't have enough money to save in an RSP. In other words I don't have thousands of dollars at the end of the year to contribute to an RRSP. That's OK. You can set up a regular contribution from your paycheque automatically coming out of your bank account on a monthly basis. You can do it for a hundred dollars a month. In other words start small it's im-portant to get into the habit of long term savings.
I don't need an RRSP because of other retirement sources
The fifth myth is maybe I shouldn't bother with RRSPs after all I've got Canada Pension Plan and OAS and while that's certainly true when you do a financial plan you may realize that those retirement pensions are simply not enough to be able to afford the type of retirement that you're looking for only with a financial plan. Can you determine how much you want to get into an RRSP.
Saving too much in an RRSP = large tax bill upon death
Finally some people say well shouldn't bother with RRSPs, because the end of the day after I die or after my spouse dies the full amount will be taxable and that's certainly true. But when you do the math on that, and you look at the tax deferral and the fact that you never pay tax on the income on the way in, what choice did you have? In other words the best solution. And we can prove this mathematically is that RRSPs despite facing a tax burden at the end of the day still remain for most Canadians the number one way to save for retirement.