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| The Great RRSP Debate
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COMMENTARY BY THE PATENAUDE SCHAFER GROUP
I don’t know how many times I’ve had someone tell me they don’t believe in RRSPs. "The government just taxes you when it is time to get the money."
True enough. In the end, all money that comes out of an RRSP is fully taxable, just as it was fully tax deductible when it was purchased. The taxability at withdrawal is a source of frustration, but there are no complaints about the tax deduction at purchase.
I just don’t buy that RRSPs are not a good investment and retirement solution.
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RRSPs are not a savings plan for your next family holiday or new vehicle. The idea of an RRSP is very simple. It is a tax savings and deferral strategy to encourage Canadians to save for retirement.
First of all, you receive the incentive of tax deduction for your contribution in order to save for your retirement. You receive the deduction while you are a member of the workforce and earning your wage or salary and paying taxes on that income. While your money is invested, it grows completely sheltered from paying tax, thus increasing your returns while you save, thus creating a tax savings.
The money is taxable at withdrawal, but then it should replace your employment income that you no longer have in retirement. There is also tax savings if you withdraw your retirement income in a lower tax bracket than when you were an employee and received the RRSP deduction. Your RRSP should be treated as your own personal pension plan to supplement your retirement lifestyle and I am yet to find someone who wishes they did not have a pension plan through their employer to provide retirement income.
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maxing out personal RRSPs may not be the best solution for everyone
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Granted, maxing out personal RRSPs may not be the best solution for everyone. If you are a married couple with two solid pensions, maybe a leveraging strategy or flow through shares is a better solution. There are certainly risks to manage and understand, but there are tax advantages and the savings stay ‘non-registered’.
If only one spouse has a pension you may benefit from spousal RRSPs where the spouse with a pension can receive a deduction while accumulating the RRSPs in the name of a spouse without a company pension.
Last but not least, look at the compounding effect. If you earn 8% compounded in your RRSP, you get to keep all 8% of your growth. If non-registered, you will be paying taxes on capital gains, dividends or interest income and therefore will not ‘net’ all of the 8% you earn after paying taxes.
So, before you denounce RRSPs, carefully consider their benefits and how they can impact your personal retirement game plan. You may just become a believer!
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