It is that time of the year again when the average Joe/Joanne gets bombarded with ads from all medium about RRSP's. How you should make a contribution, how you should borrow to fund an RRSP and then use the return to pay part of it back, etc.
Have you ever wondered why so many institutions (including the government) promote RRSP’s? I have, and here are some of my thoughts.
Q. Why do people who cannot save up enough during the year suddenly have the ability to repay a loan?
A. Because they need someone else to help them become disciplined and because so many people see a loan repayment as a must but a savings payment as a luxury. If people would forego the tax savings for one year and take their regular loan repayment and start to invest it every January 1st, the savings in interest on their RRSP loan would more than make up for the one year tax savings.
Q. How does paying $10,000 to save $4,000 of tax benefit someone if they simply turn around and go on a holiday with the tax savings? Ok, they have the money growing in their RRSP.
A But what about putting the $6,000 into a TFSA and allow that to grow tax free and then when you remove the money later in life, you are not subject to higher taxation on the funds. Yes, I said higher because if anyone thinks that the tax rates are going to decrease between today and their retirement then they should try purchasing the proverbial swampland in Florida.
Q. Do banks help to finance any of the political parties? (Rhetorical question)
A. Aside from being rhetorical, think about how much money the bank makes on all of the RRSP deposits that they take in each year independent of whether it is into a GIC or into one of their funds, the banks make lots of dough on your bucks.
Q. If we set a deadline for people to buy a car each year, will we see lineups to do so?
A. You bet! Anyone in sales should make a deadline to spur their prospective clients to action
Okay, let’s put aside the cynicism for a minute and look at the biggest pending problem for anyone under the age of 50 with respect to investing in RRSP’s. Namely that when you go to take out the funds later in life, you are going to be taxed on every single penny that you take out each year. The problem is that the government distinguishes between each of us based on our taxable income levels. This is very evident for the retirees who have to repay some or all of the OAS they receive each year. To date, that is the primary clawback that everyone worries about trying to avoid. As the Baby Boom starts to die off, guess what happens – they use a lot of the public health dollars in the last couple of years of life. Does anyone believe that their provincial healthcare budget is prepared to accommodate and pay for the vast numbers of those Baby Boomers who will be draining the coffers? I, for one, do not.
Think about it this way:
(Step One) Has the provincial healthcare coverage been pared down over the past decade? If you are a middle aged man who has had a PSA test you know the answer because you had to pay for the test whereas previously that was covered. So step one to quell the pending tide has been going on for a while – the cutting back of covered services.
(Step Two) Has there been a tax hike in your province? Anyone in Ontario who says no should be examined for their mental stability. Obviously there have been hikes imposed by various provincial governments across Canada not just in Ontario.
(Step Three) Cost sharing between the ‘State’ and the ‘Individual’. I recently saw that those in public assisted living in Nova Scotia, who have more than $75,000 of investments, get to pay an additional fee each month.
Do you really believe that the government is about to sit by and spend every penny that they do not have on healthcare. I do not think they will; what I do think is that they will move to a system of ‘co-insuring’ services sooner rather than later.
Meaning, if you earn more than X dollars (taxable I suspect) in a year, you will get to pay 10%, then 20% of your medical bill and who knows where they will stop.
So, my advice is think twice before you join the lineup at the bank, credit union, insurance company etc. making an RRSP deposit this year.