G&M: RRSPs are getting a bum rap as a tax trap

[cal79]

@resjudicata I have a budgeted set amount I follow for my rrsp contribution room I follow for every year. I've also taken last years tax return and used that as an additional rrsp contribution.

Based on what I've put in this year I will be given back 40% on my tax return, which I will put in along with my budgeted regular contribution back into my rrsp for next year.

 

[stackhouse1981]

@resjudicata Hehe well you can disagree, both of our statements are anecdotal I believe more people use the refund to increase consumption but would readily change that opinion if presented with evidence otherwise. I'm not challenging you to find it, i'm just admitting that i'm not nearly concerned enough to actually go look for it.

 

[sleepingatlast]

@mtainmn43 I'd like to present a scenario for a Québécois:
Single person living alone, 65 year old, retired, receiving QPP QIS and so on with no other income than RRSPs.

Unfortunately the supporting table is in French.
https://www.cqff.com/claude_laferriere/tableaux2017/2017-tabl-300.pdf

If you prefer a curve, the blue line is the effective marginal tax rate.
https://www.cqff.com/claude_laferriere/courbes2017/2017-courbe-300.pdf

If you take a close look, the effective marginal tax rate on income from 1000 to 17000 stays ABOVE 50%.
From the table:'

Single guy withdraws 1000$ from RRSPs, ends up with 19525$ after tax total.

Same guy withdraws 17000$ from RRSPS, ends up with 24608$ after tax.

For an additional 5083$ after tax income it took 16000$ from RRSP account/investments.
That's an effective average tax rate of 68%.

Can someone verify my maths?
If everything is correct, the RRSP does indeed look like a tax trap...
Also you'd have all the reasons of the world to empty your RRSP in a few years to be more tax efficient!

 

[sarahs_]

@mtainmn43 TBH, a mixture of both is ideal for 90% of people in a position to save at all. Flexibility is good.

 

[luth96]

@mtainmn43 TL;DR, my income in retirement may be greater than it is now due to pension and income gains in the future--and therefore I dont have much incentive to contribute to RRSPs

My problem with using RRSPs, (and I am welcome for critique) is that I am a federal gov't employee with a great pension--meaning my income upon retirement is already pretty high and may be higher than right now. I am in my early 30s and have a long career ahead of me. Being a Fed employee means my contribution room is relatively small (reduced due to automatic pension contributions) but there is still a few grand each year that I can contribute.

While the incentive to contribute/deduct is great since I can get a big tax refund each year, I am not sure being taxed on it when I am 65 would be any better. Tax rates may well increase and my income certainly will.

As for my TFSA, I am already maxing it out every January as I have greater savings than I can put in my retirement vehicles (pension, RRSP, TFSA). I know I am in a unique situation, but thought that in my case it may not make sense to utilize an RRSP.

 

[dserpa]

@luth96 I'm in a similar boat. I have a DB pension and can reasonably break $90k/year if I work until I'm 65. Nonetheless I'm still putting money into my RRSP (the little space I have left). The reason: I don't plan on working until 65, or at least being financially independent that I don't have to. I would like to be FI at 45, and probably work until 50. The RRSP would bridge the gap between early retirement and collecting the pension (which of course is less because of early retirement).

 

[luth96]

@dserpa retiring at 45 would leave me with a pretty puny pension, at least in the federal government system.

 

[dserpa]

@luth96 There's nothing saying you have to do it exactly like that. Why not retire at 55 and bridge to 65, or 60 to 65? Determine what pension you'd like at 65, and how long you'd have to work to attain that. Then figure out how many years you need to bridge between that age and the start of your pension. That's how long you need your RRSP to last. In that period you'll almost certainly be in a lower tax bracket, so it becomes advantageous.

In addition, the point is that you don't have to retire. But now you have "fuck off" money. And really, isn't that what we all want?

 

[alabamapentacostal]

@mtainmn43 So if I am responsible and understand that I have to provide for myself during retirement, they will likely claw back some or all of my OAS if I succeed at that... however if I fuck around and blow all my money when I was supposed to be saving I get a full payment of OAS?

How does that make any sense.

 

[robertdlindstrom]

@alabamapentacostal I guess the alternative is we have senior citizens starving to death.

 

[alabamapentacostal]

@robertdlindstrom Neither of those circumstances make sense, IMO. You have to take care of yourselves after you're finished working, and government shouldn't penalize you for having the wherewithal to do so after you no longer work for a living.

 

[robertdlindstrom]

@alabamapentacostal I agree. In fact I think they should scrap all the support programs and replace it with a universal basic income that everyone gets regardless of income, assets, or means. Paid for by the super wealthy, of course.

 

[resjudicata]

@mtainmn43

"Mr. Golombek's latest research highlights how ...most people will have a lower tax rate in retirement, which means they'll have a bigger benefit from RRSPs."

Garbage. He is looking only at statutory rates. Half of workers earn income in the bottom tax bracket. On retirement, the clawback of GIS from RRSP draws will create a Penalty from a higher effective tax rate on withdrawal. Making the RRSP the worst option. The effect of GIS clawback negatively impacts even those who contributed in the 2nd tax bracket. Heck the GIS clawback negatively impacts even those contributing in the very top tax bracket when you don't succeed in saving a big account balance.

The public is right and the 'experts' are wrong. They are selling a product with bad advice.

 

[robertdlindstrom]

@mtainmn43 As aughhhhh has shown me the light, the clawback of the GIS works out to something like a 72% tax on the first 10k of withdrawals from RRSP. Seems like TFSA is better if it's not maxed.

 

[resjudicata]

@robertdlindstrom GIS should be clawed back at very high rates.

It is an extra supplement for people living on very low incomes in retirement.

It's designed to be eliminated in situations in which someone has full CPP and OAS, plus some private savings.

This idea that getting the GIS clawed back is somehow the "loss of an entitlement" is an incredibly perverse idea and I'm amazed at how often I see this view espoused.

Of course people should arrange their affairs to pay the least amount of tax (including experiencing the smallest amount of clawbacks) possible (in accordance with "The Westminster Principle").

And TFSAs provide a new option to help avoid clawbacks, and people should do that if they're concerned about GIS clawbacks. But the focus on "avoiding GIS clawbacks" (very distinct from "avoiding OAS clawbacks") in this subreddit is just crazy, IMO.

 

[resjudicata]

I agree with both your points, so I don't see how you get to your conclusion. I am a Baby Boomer who had no choice other than the RRSP for my savings .... so I don't object at all to the clawback now of my GIS for the reasons you state - it is designed to support only the poor.

But for most all the posters here who are clearly young, with a choice between RRSP and TFSA, why on earth would they choose the account with the worst outcomes? As you say - people SHOULD arrange their affairs to minimize tax.

Personally I don't agree with the current tax rules because they will leave people with $50,000 incomes (in today's dollars) from TFSA still collecting GIS even though they are not poor. So I lobby gov't to change the rules. But I sure do NOT advice people to NOT minimize their tax bills.

 

[wonderingwanderer]

@resjudicata Just to add, most people who will receive ~50K in retirement "income" will likely receive close to the max CPP and OAS which will essentially clawback their entire GIS anyways.

 

[davetownsend]

@robertdlindstrom But if you're collecting GIS you are likely not living on much during retirement. Many people are fine with that, but it's not going to work for everyone.

As a quick example, say you are making $75,000 a year. If you don't have a pension plan and are going to avoid RRSPs, that means you can currently only contribute $5500/year to your TFSA. That's not a large retirement contribution given your income.

If this example, if you are planning to just survive on CPP, OAS, GIS and your TFSA during retirement, you probably are going to experience a significant drop in your standard of living during retirement. And like I said at the top, you may be fine with this. But many won't be.

 

[teddyc1]

@davetownsend Even those that say they are fine with "retiring poor" will balk at having to make deep cuts to spending habits on the order of >50%, especially if they have been awash with cash and thriftiness is a foreign concept.

Personally I think it's silly to plan on being poor and that there are more effective ways to prolong your standard of living (eg: thriftiness as a lifestyle rather than an ugly necessity).

 

[resjudicata]

@davetownsend

if you're collecting GIS you are likely not living on much during retirement.

No. If you will have a fully funded TFSA at retirement you will have an income about the top of the first tax bracket - all non taxed - PLUS the GIS.