Update April 25th/2015:
A must read is this Financial Post column (by Ted Rechtshaffen, head of a private wealth management firm) which clearly shows that a combination of RRSP and a TFSA can be a real winner for middle class Canadians reaching retirement.
In fact, if someone reading that column is in their 20s or 30s now, they have got to be told that, in the long run, a TFSA alone would be the best bang for their hard earned buck. And, that would be true even if they could only make a small contribution to their TFSA each year.
Of course, the example given in the FP column is a couple that both earn $80,000 a year and living in Toronto, Calgary or Vancouver given few of us outside those cities have properties worth $750,000. But, the example is informative nonetheless because it is not uncommon for those operating their own businesses, those in the certified trades or public sector workers like police officers and teachers to earn that much, or more. All you need to do is check out the Ontario Sunshine List for confirmation.
Meaning, the middle class is now considered people making $40,000 to $80,000 individually or with a household income of $160,000. So, when the NDP’s Tom Mulcair and Liberal Justin Trudeau talk about the TFSA only being for the rich, who exactly are they talking about? H/T NewswatchCanada.
Original post starts here:
Ah, the myths of RRSPs. I heard it again and again yesterday, both before and after, Finance Minister Joe Oliver delivered the Conservative Government’s 2015 budget.
Opposition politicians and those in the liberal media (CBC) were claiming that Registered Retirement Savings Plans were great because you could get tax relief when you were young and in a higher wage bracket.
I also heard a lot of complaining that increasing the amount Canadians could put in their Tax Free Savings Accounts (TFSAs) was bad because it took potential tax money away from [future] governments.
So, the assumption is that RRSPs allow savings to grow tax free until the plan holder is in a lower tax bracket — normally retirement.
Is that true? Will you actually have less money in retirement then when you put the money away? And, is the RRSP cash that is accessible as much as it might have been had the TFSA been available?
Fast forward to retirement and age 71 (see endnote below) when you will have to start spending that RRSP savings (which by that time will be in a Registered Retirement Income Fund — RRIF) and being taxed on it.
Let me tell you just two stories that prove how claims by the financial sector that RRSPs guarantee wealth in retirement are, more often than not, self-serving. Remember, contrary to Liberal and NDP claims, rich people don’t usually have RRSP’s, or if they do, they don’t care if they don’t qualify for the Old Age Security benefit (OAS). Plus, they have other tax dodges available to them that the middle class do not.
Female Single Parent Professional
I ran into a former teacher and colleague a couple of years ago. This woman had been a single parent most of her adult life and had to borrow money each and every year to put towards her RRSP. That is what had been recommended to her by financial planning professionals.
Now, she says, her RRSPs pay her almost exactly what she should be receiving with the OAS but does not because she does not qualify. She said when she complained to her financial planning consultant, he had actually suggested she was better off funding her own retirement.
She didn’t agree. She said she had believed, wrongly, that because she had paid taxes all her working life, she would receive both the OAS and what she herself was able to save — which isn’t the case. Her actual words to me were that she had been screwed and she was telling every young person she met to put away, even a small amount per month, in a Tax Free Savings Account (TFSA) — something that wasn’t available to her.
Single Male Tradesman:
I have a friend who had been a single wage earner all his life. He now receives a small, modest, private pension from the company he worked at for twenty-five years. He also managed to put away RRSPs every year, some of which have been converted to a RRIF. Right after retirement, he decided to splurge and take an Alaskan cruise. So, he took $13,000 from his RRSP account. Since the banks take 30% tax right off the top ($3,900.00), the actual cash he got was $9,100.00.
The following year when he filed his taxes, the $13,000 put his total income over the threshold for the OAS, meaning he lost his entire OAS for the next year. Now, the current OAS amount is $563.75 a month. So, let’s round things off and say it was $550.00 a month for the year in question — which is a total of $6,600.00.
Meaning, out of $13,000 withdrawn, my friend actually got the equivalent of $2,500.00.
So, even for those with a modest retirement income, it is a myth that in your old age, your income will always be in a lower tax bracket!
My advice to young people — as a current retiree — is to put as much money as they can in a TFSA — even $50.00 a month — because the miracle of compound interest will make that amount a lot bigger by the time they retire. And remember, unlike the RRSPs, all that money will be tax free!!!
Of course, my advice assumes the Liberals and NDP will not take away the benefits of the TFSA sometime in the future given their obsession that they know best what to do with our money.
Endnote regarding the Conservative Budget 2015: As confirmed by the Ottawa Citizen, until yesterday, at age 71, retirees have had to start taking out 7.38% of their income for taxation purposes. The Conservative budget lowered that to 5.28% which can be a significant savings. As well, by age 80, the current 8.75% has been lowered to 6.82%. But, if you are lucky enough to live to age 94, the amount you must pay tax on your RRIF, assuming you have any money left, is upped to 18.79% and capped at 20%. Think about that. Just when you might need the money to pay for long term care, a fifth of your savings goes to taxes! (H/T Ted Williams)