Myths of RRSPs & why Conservative TFSA such a winner!

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.

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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.

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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)

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Sandy

Sandy is a retired educator, author & former conservative political strategist. She operated the first "Crux of the Matter" from 2006 until 2017 and opened this "Crux of the Matter 2.0" blog in late August, 2018.

39 thoughts on “Myths of RRSPs & why Conservative TFSA such a winner!

  1. No one will have any money in a RIF at age 94. There is a minimum annual payment that ensure the RIF is depleted at age 94.

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  2. Here’s my simplification of Liberal & NDP logic, who pan upping the contribution to a TFSA from $5,500 to $10,000, because according to them nobody has $$10,000 lying around to put into a TFSA.
    OK, so I buy a piggy bank that has a capacity for 10,000 loonies. But because I don’t have all 10,000 loonies right now, the piggy bank is no good to me. Never mind that putting in 10, 100, or 1000 loonies would be a good start on fattening up my piggy bank. No, according to Lib/NDP logic, it’s either all or nothing at all. Smart Lib/NDP thinking, eh? Of course, the corollary to that — don’t save YOUR own money for YOUR own needs — is: don’t bother saving, we’ll set up government programs to take care of you.

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  3. If the RRIF is invested well & wisely, the funds can last beyond age 94. However, in contrast to TFSAs, the government decides how much one must withdraw from it, whereas the TFSA can continue to grow untouched if the contributors wish to keep it that way, to eventually leave it to their children or grandchildren.

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  4. All good points Gabby. What it all comes down to is either we have the smarts and motivation to save for our own retirement, even 1000 loonies at at time, or the NDP and Liberals will take care of us.

    Which they don’t for those who have not saved or have no employment pension because the OAS and GAINS is barely enough to live on.

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  5. “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.”

    See that right there is, as you like to say, the crux of the matter.
    The usual suspects are in denial at experiencing something the rest of us have had to endure with successive governments. The practice in the past is that the government said they where giving when in reality the devil was in the details that they where leaving an unfunded liability for the tax payer. This time around its the laurentian elite that are getting it because now we can get the tax mans hands off our earnings where the statists can’t get it.
    And everytime they wail and complain about “losing” I say to myself

    Winning.

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  6. Quite the shim sham shuffle budget by Wynne and Sousa in a sea of red. Nice to know they’re taking care of us as they add to the massive debt by spending more.

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  7. Sorry to go off topic again but…….just heard another interview with Wynne, she can’t answer a straight question without blaming the Federal Conservative Government no matter the topic. It’s like the Devil made me do it and the Federal Conservative Government is the Devil.

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  8. With a teachers pension you don’t need to worry about RRSP’s DO YOU!!
    No need to self admin your RRSP or TFSA

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  9. And Liz — the media let Wynne gets away with her projection. She did the same thing when she was Chair of the TDSB, blaming Harris for the Board’s overspending.

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  10. Linda, this is an amazing strawman argument that you have constructed. The NDP & Liberal find fault with the TFSA not because it is a poor financial vehicle for individuals. They find fault with it because of the lost revenue to the treasury. The very thing that makes the TFSA attractive to individuals, the fact you earn money tax free, is what makes it a detriment to the government.

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  11. Poor Linda is being faulted with my arguments!

    Michael, I urge you to visit this CBC webpage http://www.cbc.ca/news/canada/tfsa-rule-changes-will-more-mean-less-1.3046457 to see/hear a CBC explanation of the difference between RRSPs vs TFSAs can make to a contributor’s income.

    As to the argument the opposition uses re: TFSAs, i.e. “They find fault with it because of the lost revenue to the treasury” that may be another part of their criticism, but every time I see MPs debate the proposed increase to TFSAs, opposition MPs repeat the line about nobody having $10,000 lying around to stash away in their TFSA, thus suggesting the increase from $5,500 to $10,000 is pointless. That inane criticism of theirs is what I decided to focus on.

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  12. Sandy, just curious … how are the avatars identifying commenters generated? I figure they are not chosen by the blog owner, because I’ve seen “my” avatar elsewhere.

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  13. Gabby — Actually, I programmed my theme to show a certain type of avatar. I thought that wordpress.com made sure that individual email addresses were unique. However, it is quite possible that another wordpress blog could have had someone with the same avatar — before you left your email and comment. On this blog, no one else can have your avatar.

    The way around that is to go to http://www.gravatar.com and upload your own avatar and associate it with your email address or even more than one email address. In that way, everytime you use that email, your personalized avatar will come up.

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  14. Further on the avatar issue — I just looked and there are at least four types of gravatars that wordpress users can choose — Wavatar (which is what I use if someone doesn’t have their own gravatar), Monster ID, Retro and Identicon (which are geometric-like shapes).

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  15. Let’s put this in perspective: a senior has to have $71,592 in net income (line 236) before there is any clawback of OAS. Total clawback occurs at $116,103. But OAS was never meant to be a nice extra for relatively well-off seniors (remember the comments when Pierre Trudeau began collecting?) but income for those who reached old age without pensions or other means of keeping themselves.

    That being said, RRSP’s have their place in retirement planning for a lot of people, particularly owners of small businesses and the self-employed. You get the deduction when you contribute so it is not an ‘after-tax’ contribution in the same way that one to a TFSA is. And, if you don’t give in to temptation and withdraw for vacations, etc., you do have a nest egg for retirement. And as for having to withdraw a certain amount each year after you reach 71, so what? Just because you have to withdraw the money doesn’t mean you have to spend it. You can have non-registered investments or schlep the funds into your TFSA. There is a school of thought now that says drawing down the RRIF (which is what the RRSP turns into) faster than the government schedule is a good thing, particularly for a low-income senior with lots of money tucked away in RRIFs. The idea is that Granny would draw down the RRIF to the point where her taxable income came up to the point where the tax rate rose. The point here is that, upon death, all money still in a RRIF becomes income to the deceased as of the date of death and has to be reported on the final return. So better Granny pay 15% – 22% annually (federal rate only) on her withdrawals over several years than only withdraw the minimum and have a large amount of income on the final return taxable at the highest rate. The net result of Granny’s frugality is more taxes to the government and less money to the family (including Gran).

    TFSA’s are also great, and I’m seeing increasing use of same by seniors who are relatively low income but do have savings. The T5’s are gradually disappearing as those GIC’s, etc., are being moved to TFSA’s. Younger people in jobs with pensions are also going the TFSA route. With the announced increase in the annual limit, I can see more people using TFSA’s instead of RRSP’s. But for higher-income earners, the deduction at tax time will still make RRSP’s attractive.

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  16. I hear you Frances. And, you are right of course, to a point. However, it doesn’t change how much both my friends, who are right on the edge of what is clawed back, have experienced. As well, I have family members who are self-employed and they now plan to only use their TFSAs.

    Personally, when I read your argument, what came to mind is how worried the financial planning industry must be. If people are very wealthy, they don’t care about OAS, but others close to the limit are hog-tied by the rules and how much tax they must end of paying.

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  17. Frances — You will probably be interested. I just got a Contact Form email from someone who says they average $48,000 a year gross in retirement income, some pension, some RRIF, CPP and OAS. In 2014, they took out $24,000 to pay down their mortgage which put them over the threshold. They have now been advised that they have lost their OAS for a year. Which means, in 2015, they will get $42,000 unless they take more out of their savings.

    So, the problem is with people who make around $45,000 to $50,000 a year. The minute they take money out for a major trip abroad or whatever, they are severely penalized the following year. And, even if after a year, their OAS is reinstated, they will run into the same problem again and again.

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  18. Hmm. I have been thinking about my recent comment at 1:51pm and have a problem. Even if the couple in question were slightly over the OAS amount and were clawed back, I am not sure why they would have lost their OAS for an entire year. Maybe someone can provide insight into that possibility — although it seems similar to my example with the fellow who took the Alaskan cruise.

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  19. I should have been clearer … when I said “I’ve seen my avatar elsewhere” I meant the same avatar has been used by other blogs to identify me & my comment, so I wondered how blogs choose avatars: are they generated depending on the tone of comments? Do certain words trigger a kind of avatar? See, some look more aggressive than others. That’s what got me wondering.

    As to generating my very own avatar … thanks for the suggestion, but to be honest, I don’t like to leave too many “footprints” all over the internet, so I’ll skip the uploading & whatever else would create my very own avatar. It’s already SO!! daring!! 😉 of me to have a Twitter account — which I fear I’m not quite adept at using, anyway. But thanks for the info. I was just curious.

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  20. There is always a lot of confusion stirred up and misinformation flying around from the usual subjects when the Conservatives do anything that’s of such benefit to the people. We know that having the opportunity to tuck away some money for one’s own retirement is never popular among the Left.

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  21. Hi again Gabby — I noticed the other day that you had a Twitter account but no profile image. I’m following you in any case.

    Re the avatars, they are computer generated by wordpress.com and have no relation to how aggressive a comment. 😉 I picked the Wavatar because they are better than the Monster ID, which are a little over the top cutesy.

    If you use an abstract clip art or diagram like my CotM, it wouldn’t identify you personally, either on gravatar or Twitter. Gabby is a great handle for ideas. I went looking for clip art for “talking” and found a cute little fox in the second row.

    Anyway, your decision. Hope I answered your puzzle.

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  22. Sandy – your buds are misinformed. Even adding $24,000 to $48,000 I get only $72,000 – and that’s without a calculator (I’m from your era). So there would be minimal OAS clawback. What I think they are seeing is the reduction in the age amount. That reduction kicks in at $34,873 (eliminated at $80,980), so they will be losing this.

    It all boils down to planning: start organizing your finances a year or so before the trip, remove that money from your RRIF, and tuck it away in the “trip” account. The rules are clear and the same for everyone. Also, the reduction is individual. So a coupe with income in the tax bracket you reference should figure out who does the withdrawal (this is assuming both have RRSPs – I’m surprised at the number of couples I see where one has quite low income but all the RRSP’s are non-spousal).

    Back in the day, aged P used to complain when hit clawback for OAS. I pointed out was fortunate to have the income to trigger the clawback and that – further – OAS was never designed to be an “add-on” to someone with a decent pension plus investment income. It was meant for people like my Grannies, both of whom ended up with little if no income in their senior years.

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  23. Frances — I appreciate your explanation since I am not an expert. Whatever the reasons, the two people in my examples claim that they cannot take much out of their RRIF or RRSP at a time or they will be penalized severely by taxes.

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  24. My conclusions:

    (1) If you have an RRSP account, leave it alone if you can, for 30 or 40 years, so that you can benefit from compound interest — recognizing that your early earning years may not be the highest.

    (2) In the case of the RRSP, you are taxed twice –When you earned it and when you remove it from your RRSP or RRIF. Of course, you get a tax benefit in the year you deposit your money into the RRSP (or in the current if you deposit your money during the months of January or February).

    (3) Starting as soon as is possible, put as much as you can in a TFSA every month — even if only $50.00. Not only will you benefit from the reality of compound interest but you will not have to pay tax a second time when you remove it — no matter when that is.

    (4) All cash saved in a TFSA is AFTER TAX money — something the naysayers should remember.

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  25. Just to let regular readers know, I won’t be blogging regularly over the next few months as I did before the last election in the spring of 2011.

    Instead, I will add to the 100 list of reasons to vote Conservative on October 19th, 2015, as well as write about any issue or issues that really pleases or annoys me.

    Meaning, I plan to stay right out of the Duffy trial goings-on. I suspect that Duffy, Wallin and Brazeau will just be the beginning of Senate entitlements — and look forward to the AG’s report on all the Senators. It will also be interesting to see how J. Trudeau and the liberal media do a pretzel-like happy dance trying to deflect Liberal Senator wrong-doing from the Liberal Party of Canada — especially given most “former” Liberal Senators still belong to that party.

    Spring is finally here, or almost here, in Southern Ontario and I want to enjoy it.

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  26. I can’t believe a political commentator as smart as Chantal Hebert used the same silly argument the opposition has been using against TFSAs on a Rad-Can political panel today. The contribution limit is just that — a limit! You cannot contribute MORE than $10,000 but it does not mean one has to contribute the limit. ANY amount below that $10,000 ceiling can be contributed AND any room not used can be carried over to the following year. To argue that TFSAs are measures that advantage only the rich, i.e. people who have the entire $10,000 to put into a TFSA, is a gross misrepresentation. The message, then, is don’t bother squirreling away $10 or $20 bucks a month, because you don’t have as much as Galen Weston to put into your savings.

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  27. Gabby — Put this comment in the wrong thread. Have a read and then send the link to Chantal. Or anyone can tweet her.

    “Okay everyone, it is nice to know I was on the money as it were. Frances, you may find this interesting.The Financial Post has a column that clearly shows the many problems with RRSPs savings versus TFSAs. Plus, it seems the middle class benefit the most afterall. And, using the same scenario as an example, the winner is — the TFSA. H/T NewswatchCanada on Twitter.”

    Enjoy. The Conservatives have a winner!!!!

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  28. Heads up that yesterday I put an update at the top of this post related to the Financial Post column on the benefits of the TFSA long term compared to the RRSP.

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  29. How about that, Mr Chretien meets with Vladimir Putin. What’s up with that, a friendly chat or mischief?

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  30. You know Liz, my husband and were talking about that. All of a sudden, Paul Martin comes to the fore, blasting the budget, talking to Evan on CBC. Then, Chretien shows up in Moscow. Subversion on Chretien’s part for sure. Just imagine if it had been the other way around. CBC would have gone nuts. No, the Liberals are pulling out all the stops. Actually a good sign because few care anymore what either of those men think. Sad really.

    Next up will be the man and former PM, who seems to have no common sense. Remember, the one who though he would treat a minority as a majority. Sheesh!

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  31. Watch for my next post, hopefully sometime today on the tax relief Canadians have been given since January 2006.

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  32. We know for sure neither Chretien or Martin are friends of each other or PM Harper and his government. When it comes to diplomacy this is gauche at best and could be considered to be meddling in the affairs of state. These are the two who divided the LPC , taking it close to the graveyard, now they can’t seem to retire gracefully without trying to mend their egos by attempting to embarrass the Harper government. The media trumpets and scribes will give them all the time they want which they will use obliquely to help sell their empty suit leader.

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