Fifteen years ago, when I was a lad with rock pecs and a hot wife (still is), I made considerable money writing books about RRSPs. People actually bought them. By the thousands. “We’re printing more,” my publisher told me one day in her sultry, Bohemian tones. In fact, there was a new Garth Turner RRSP book every year for a while, which you can imagine was quite a feat.
But these things seem sexy no more. Shelves no longer groan every winter under new financial tomes. Poor displaced, homeless authors now congregate beneath bridges and behind Timmies’, keeping warm beside smoky pyres fueled with the curling pages of retirement guides. It’s tragic. I hear some guys completely lost it, and started blogs.
So why have we stopped putting money into these things? (The deadline for contributing for 2015 was Monday.) Ignorance seems a key factor. Despite RRSPs having been around for six decades, tons of people know little. An H&R Block survey found half of Canadians glaze over and profess ignorance at the mere mention. Another poll by BMO found 41% say they don’t understand RRSPs, so don’t play.
Then we have the TFSA dilemma. Thanks in part of T2 and his myopic chopping of contribution limits, tax-free accounts have seized a lot more mindshare than RRSPs. These new accounts have been embraced more by the young, despite the fact 80% of them stick money inside a TFSA into dead-end GICs or cash savings deposits. Then we have the nihilistic what’s-the-point? attitude so prevalent today among people under 40, who think retirement saving is futile because we’re all going to fry or drown thanks to climate change. Either that, or Justin will give everyone a better pension and a pony. So why bother?
Finally, RRSPs have dropped out of favour because we’re all house horny, real estate is crazy expensive, there’s no money left after buying some, and saving/investing is hard and scary. Getting property is easier. Your mom approves. And how can you show off liquid assets to friends? They just don’t care.
As a result, the average RRSP contribution, among the reduced number of people making one, is just a little over three grand. Peanuts, considering the government will refund the taxes you paid to earn that amount.
So, there’s a strong case for making sure you fund RRSPs and continue to do so throughout your lifetime. Plus, you should not consider them retirement vehicles, because they’re not. They let you shift taxes around during your working life, with funds accessible anytime – not only after you start resembling an antique leather couch.
For those who forgot, money placed in TFSAs is cash already taxed. You can remove funds without reporting them on your tax return. So, the income doesn’t push you into a higher tax bracket nor imperil any means-tested government pogey like CPP or OAS. Everybody should have one of these and keep it fully-funded, fully invested and absolutely intact for retirement – when the benefits will be awesome. Imagine a $700,000 TFSA churning out fifty grand a year in tax-free income, allowing you to still collect a public pension, free drugs and discounted bladder-control undies. Yahoo.
The RRSP, on the other hand, is a tool for shifting the tax burden from one year to another during your working career, or for splitting income (and taxes) with your spouse since you receive a refund from taxable income for contributions made (unlike the TFSA). So, naturally, it makes sense to contribute heavily in years you earn good coin, and to withdraw from the pot in years you don’t.
That could be a sabbatical to nurture homeless donkeys with your children’s inheritance, or a time to go back to school (you can borrow from the plan, tax-free for that), or perhaps it’s when you get punted from your job for being a whiny, needy Millennial. Whatever. The point is the feds will refund up to 50% of the money put into an RRSP and the same money can be withdrawn later at a fraction of the tax if you earn less. So everyone in 2016 should have an RRSP. It’s an uncertain world, after all. Pay less now. Build a personal unemployment fund.
As mentioned, RRSPs also let you income-split with a less-taxed spouse. Contribute to a spousal plan, deduct it from your own taxable income then your partner (after three years) can withdraw at a cheaper rate. It’s a great way to finance a mat leave, or a university gig. You can also make an RRSP contribution without money, by transferring existing investments into an account (called ‘contribution in kind’) – which means the government sends you money for selling yourself assets you already own. (How cool is that?)
Plus an RRSP loan makes sense, since you borrow money, contribute, then get a tax refund to pay the loan down. It’s like achieving an instant 30% return on investment for most people. Or, just contribute with money you’ve saved, then use the refund to top up your TFSA.
There’s more. Like putting your mortgage inside your RRSP and making payments to yourself. Or creating tax-free RRIF income when you finally turn 71 and have to cash out. But we’ll leave the extra kinky stuff for another day.
The point is, RRSPs rock. Mercy. I’m aroused just writing this.