Posts Tagged ‘Financial Post’

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Potential Dangers of RRSP. Yes or No?

January 29, 2011

Though I am being a bit derivative by posting this I thought it was a very important consideration for those of you who rely solely on RRSP’s strategies for their source of future wealth. I had not previously come across this research, or this thesis, but I believe it to be worthy of note.

Very briefly, it suggests that we are all told to invest heavily in RRSP’s in order to earn investment gains and defer paying tax until much later in life, when presumably your marginal tax rate will be lower (i.e. when you retire and have less annual income). It claims that this will do the investor no good since your tax rate may not actually be lower in the future. Either you will retain enough disposable income to maintain your MTR, or the Government of Canada will continue to increase the tax rates.  In either of these cases, it maintains, at retirement you will either see no taxable advantage or, in other cases, you may even lose money since your tax rate could actually higher than it was when you first begun making your contributions.

Yesterday (and coincidentally), I posted an article on Twitter (@nextgeninvestor) called “The Great RRSP//RRIF tax-grab” (http://opinion.financialpost.com/2011/01/28/the-great-rrsprrif-tax-grab-one-ex-pats-solution/). This article spoke about this exact phenomenon. In this case, retiring Canadians realized that they would lose money on their RRSP withdrawals due to the fact that the promised-lower-tax-rate-in-retirement was, in reality, actually higher. They claim the Government new this and conveniently raised the tax brackets to take advantage of a huge amount of the population having a huge amount of money in RRSP’s that it was soon looking to withdraw.  To combat this, the Reiterees actually withdrew everything, left the country, and became ex-pats. It is another interesting consideration.

Regarding these arguments, I will save my recommendations  for a later time. At this point I will allow you to draw your own conclusions. I will say, however, that it says nothing of income splitting (that is transferring your RRSP deposit to the lowest tax paying spouse)  and that it assumes a government increase in tax rates over time. Furthermore, I suppose that this would only effect those who are relatively close to the next tax bracket in the first place. For others, it would likely take a substantial increase in the rates by the Governenment to make it disadvantageous for them to not invest for a time when they will not be taking as much taxable income.  Whatever the case may be, it does make a good argument against having all your retirement eggs in one basket.

RRSPs and rising cost of government

By: Larry MacDonald

Tue, 25 Jan 2011 19:40:13 +0000

It’s generally accepted that persons in the lower tax brackets are better off contributing to TFSAs instead of RRSPs. But could all tax brackets be better off avoiding RRSPs? I’ve lately come across comments in discussion forums, blogs etc. that suggest as much.

RRSPs should be avoided by everybody, the comments say, because taxes seem to always go up – so by the time one gets to retirement, their tax rate will be higher than the rate at which they made RRSP contributions. Here’s a sampling of the comments, from 3 different persons:

1. “I wouldn’t sock away thousands a year in RRSPs like some people are doing…you save some income tax now, but when you retire, and start using your contributions, you will be paying more in income tax (I’ve never heard of the government lowering their taxes).”

2. “RRSPs are a form of gambling. You roll the dice that your tax rate in retirement will be lower than when you’re working – which was true for most people in decades past. But how can income taxes in Canada possibly stay at current levels, now that our national debt has erupted and the deficit made structural?”

3. “If taxes are going to go higher and higher over the next 10-20 years, then why should we put money in an RRSP just so that it will be taxed under those higher rates when we convert to a RRIF? Wouldn’t we be better off paying today’s taxes and investing outside the RSP?”

Could their fears be substantiated by future events? After all, the pattern over previous decades has been for tax burdens to rise.

According to the Fraser Institute’s Canadian Consumer Tax Index, the total average tax bill of the Canadian family has climbed from 33.5 per cent of income in 1961 to 41.7% in 2009 (if the large deficits in government finances during 2009 are assumed to represent deferred taxes, then the tax burden in 2009 is closer to 44% of income).

As the capacity for raising taxes on employment income nears exhaustion, new sources of tax revenue could be targeted, notably the billions of dollars held in RRSPs (which many think are the savings of the well-to-do). It might be assumed the voting power of retirees would render retirements benefits sacred cows no politician would dare touch — but it has been contemplated before.

In the early 1990s when Canada was dealing with a fiscal crisis, the federal government considered a number of measures to bring its budget deficit and debt under control. Two trial balloons floated involved imposing a capital tax on RRSPs and a capital levy on institutions administering RRSPs, as Hansard shows (http://webcache.googleusercontent.com/search?q=cache:L9o7CjZlZNwJ:www2.parl.gc.ca/HousePublications/Publication.aspx%3FDocId%3D1105168%26Language%3DE%26Mode%3D1%26Parl%3D37%26Ses%3D1+%22former+finance+minister+floated+another+trial+balloon+in+early+December%22&cd=1&hl=en&ct=clnk&gl=ca) (search on “trial balloon”).

 

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“Planning for the Unexpected”

January 3, 2011

A short, easy read, from Kim Inglis (writing for the Financial Post) that challenges readers to face the reality that they protect their boats and cars but not their own income.

http://business.financialpost.com/2011/01/03/planning-for-the-unexpected/