Are RRSP's Really Such A Great Idea?

Right about now, many people are taking stock of their money and the potential tax owing and preparing to make a last minute contribution to their RRSP. Some will line up at the local deposit taking institution on Friday and the person on the other side of the counter will offer sage advice (that would be sarcasm) and the deposit will find its way into the flavor of the month. Others will line up to borrow money in order to fulfill this media “should” and make a contribution.

Do I sound cynical, well I am. I have always held to the opinion that when everyone is doing something, probably best to do the exact opposite (ok, running to a lava flow would not qualify). Think about it for a second, the government has been touting RRSP’s for many decades, yet if you asked most people would they do what the government told them to do, most would say, “Not a chance!”

Let’s think about RRSP’s for a minute. The majority of people who make a deposit to an RRSP are not in the top marginal tax bracket so they are receiving a tax break of less than is usually illustrated. The money typically grows over time without incurring taxes on the growth and then is taxed fully when it is withdrawn (unless you are using the Home Buyers Plan or Life Long Learning Plan). I am not going to sit and run the various scenarios as to what rate of return is required to break even but I will relate that I read an article a long time ago that said one needed fifteen years of compounding before they broke even and that was when interest rates were hovering around 9%. If we assume that my memory is reasonably accurate, how long does that translate to in today’s environment – a long time?

In addition, a new type of retirement vehicle was introduced in 2009 by the government – the Tax Free Savings Account (TFSA). Contrary to the adept marketing by the banks, you are not relegated to the nominal interest rates of today and can actually use this vehicle to hold almost any type of investment from stocks to bonds to funds etc. Given that the only drawback to a TFSA would be the up-front deduction from your income, this type of vehicle is likely a good option for many. In fact, I have been suggesting this to many of my clients for the first $5,500 of their retirement savings and then above it we look at RRSP’s versus Non-registered funds.

There is also the issue of the future of our financial world. It would be very naïve to suggest that the Provincial Governments are prepared for the onslaught of medical costs as the baby boomers start to drawn upon the medical system as they fall apart physically and mentally. As such, is it such a stretch to think that future governments will stop paring back on care and simply start sharing the costs with those who can afford it – I do not think it is too far a stretch at all. In fact, if you look at how governments typically assess people there is one common feature – the amount of taxable income in a given year. If you do not believe me, ask a senior who has a decent pension if they have their OAS clawed back by the government. The screaming question then is when the government will do the same for socially funded medical care? Turning back to one of the problems with the RRSP is that it is fully taxable when withdrawn. This means that those who have spent their lifetime diligently putting money away into RRSP’s will likely lose some of that advantage to paying for their medical care.

Maybe it is time to consider what other options you have before you run to the bank on Friday – Just a thought.