Yesterday’s post Don’t Give up Free Money elicited this comment:
I’m not sure if a RRSP is the best option. If the tax agency is trying to give you a “deal” you should run away as fast as possible.
I have heard variations of this “the government always gets you” theme over the years. For the vast majority of Canadians who don’t have a defined pension plan at work, there are plenty of advantages to the RRSP.
- Contributions to the RRSP are tax-free. Since capital gains, income and dividends inside a RRSP are sheltered from tax, true compounding is possible.
- It is true that withdrawals from a RRSP are treated as income, whereas capital gains and Canadian dividends are taxed much more favourably. Phillips, Hager and North analyzed three different portfolios with different asset mixes and found that the after-tax estate values were higher in all three, when held inside a RRSP.
- Interest income and dividends from foreign stocks are taxed at the same rate as ordinary income in taxable accounts. The RRSP is a good location for these assets.
Note: Karen from Hamilton, Ontario is the winner of the One Year Anniversary Giveaway. She will shortly be receiving a hardcover copy of A Random Walk Down Wall Street. Congratulations and thanks to everyone who participated.
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9 responses so far ↓
1 petey pablo // Dec 8, 2005 at 5:22 am
hi where are they getting the numbers for to come up with the graphs. Don’t get me wrong I believe in RRSPs, but i’m just curious where they’re getting the data from. thanks
2 Canadian Capitalist // Dec 8, 2005 at 8:35 am
Pablo: PH&N has listed the assumption they are making for the three asset mix scenarios in the Appendix.
3 ncnblog // Dec 8, 2005 at 11:51 am
While getting out of debt, I continued my 403b contributions, at just 100 dollars a month, because of a $17.50 match from my company. That may not seem like much, but it is a guaranteed 17.50 percent match…17.50 was the max for a month, so I continued to contribute just the right amount to get the max…
great blog…
ncnblog.com
4 Mike W. // Dec 8, 2005 at 1:30 pm
I have to get more evidence for my anti-RRSP argument (you’re winning right now) but another disadvantage is that in the case of accidental death or if you die, the cra takes something like 25% (or more) away from the estate.
Like I said, I need to get more evidence for my argument but I still believe in it.
5 Ray // Dec 8, 2005 at 2:59 pm
I would like to see Mike W.’s other evidence because I also agree that only-RRSP investments don’t necessarily make the most sense. I think there are scenarios where you can get the tax-deferred nature of RRSP an RRSP portfolio by making strategic contributions to an RRSP in order to offset any tax generated by the non-RRSP portfolio.
6 Canadian Capitalist // Dec 8, 2005 at 3:06 pm
Mike: I like a good discussion
It is true that if I die tomorrow, my RRSP will be melted down and my estate would have to pay tax on it. But, the same thing is also true of all stocks and bonds I hold outside my RRSP. The taxman always gets a piece!
Think of the RRSP as something that provides income during your retirement. To take care of my family, if I die suddenly, I have life insurance.
There is one small segment for whom RRSP may not make sense. It is those who have a very low income and won’t get much of a break for contributing to a RRSP. For everyone else and especially those in the top tax brackets, RRSPs are a excellent choice.
7 Dave W // Dec 20, 2005 at 8:09 am
Very good discussion.
There are always reasons to distrust government plans for retirement savings, but self directed RSPs are making it possible for many Canadians (not enough though) to think before they jump. It will be nice to have a supplement to CCP and OAP, a state of independance, taxed yes, but nevertheless something less controlled.
8 Canadian Capitalist // Dec 21, 2005 at 3:11 pm
Dave: You are correct. I think of my RRSP as my personal pension account. It will hopefully supplement my OAS and CPP.
9 Kathryn // Apr 11, 2006 at 8:28 am
Is there a median whereby a RRSP is not advantageous? Consider 2 healthy RRSP’s, say $350,000 each. The husband passes away and it rolls over to the wife…her total RRSP $700,000. OK, it’s sheltered from tax, at least until she dies and then the government will get approximately $350,000…..since, let’s say, $500,000 was put in with after-tax income…..is it really such an advantage?
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