Millennial looking to start investing asks: Should I go with Wealthsimple? | Page 2 | General financial discussion | Discussion forum

Bill said
…

If I save 30% but my estate (i.e. somebody other than me, and after my death) loses 52%, well then by my reckoning I come out ahead.

One may still end up ahead after paying 52% on that final withdrawal. One can't tell by just looking at the difference in tax rates. One needs to do the calculations to see.

For example, someone contributes $5,000 a year from age 35 to 64. At 2½% per annum return from interest, it becomes $225,001.35 by age 65.

Annual $11,000 withdrawals from age 65 to age 85. With the same 2½% per annum return from interest, that leaves a final withdrawal of $71,416.78 on death.

As mentioned, 30% tax refund on the contributions and 53% tax on the final withdrawal. Because of the wide brackets, there was no drop in tax bracket after age 65. So, annual withdrawals were taxed at the same 30%.

$11,000 x (85 - 65 + 1) = $231,000 of annual withdrawals.
$71,416.78 final withdrawal.
Total withdrawals = $302,416.78

Taxes paid = 30% x $231,000 + 53% x $71,416.78 = $107,150.89

Tax rate = $107,150.89 / $302,416.78 = 35.43%

35.43% is higher than the 30% taxes saved on the RRSP contributions. So, it looks like one should not have contributed to the RRSP.

But, that is not actually the case.

30% of the contributions were reimbursed by the government through the RRSP deductions. So, only 70% of the RRSP is actually the annuitant's own money. As a result, only 70% of the withdrawals is the annuitant's.

Of the $302,416.78 of withdrawals,

1. 30% or $90,725.03 belongs to the government and
2. 70% or $211,691.74 belongs to the annuitant.

So, $90,725.03 of the $107,150.89 taxes paid on the withdrawals is just repayment of the taxes saved on RRSP contributions and the growth of those saved taxes. The net taxes paid is $107,150.89 - $90,725.03 = $16,425.86.

Of the $211,691.74 of the withdrawals belonging to the annuitant, $5,000 x (64 - 35 + 1) * 70% = $105,000 is original principal, the out-of-pocket cost of the RRSP contributions after the 30% tax refunds.

$211,691.74 - $105,000 = $106,691.74 is then interest earned.

If the original $105,000 is returned tax free, then the $16,425.86 of taxes on the $106,691.74 of interest is a tax of 15.39%!

In reality, annuitant got the after-tax cost of his/her original contributions back tax free and only paid 15.4% tax on the interest earned. That is much lower than the 30% he/she would have paid had the interest been earned outside the RRSP.

Good info here re downsides of RRSPs for some. But we keep being told most Canadians are not saving enough for retirement, so it seems most are not in the situation of having to worry about being in a higher tax bracket after paid work ends. And I think many Canadians that use RRSPs do so as a forced savings plan for money that otherwise might have been frittered away, so it's a nice little bonus pile when they retire. So they have their benefits, generally not a bad idea for a society to encourage people to save something for their future and RRSPs are part of that message.

CARP is campaigning for the elimination of mandatory minimums. This is not really a solution to a system which is so problematic in its conception, but it may be the best that can be done with it for retirees now.

Another option, advocated by some, such as Gordon Pape, is to put the RIF funds into staggered annuities. Best to speak to a annuity broker as it can be very complicated to get what you want out of them. This smooths out the withdrawals, avoids the very high minimum withdrawals in later years, should you live that long, and ensures you won't run out if you do. Suggestions as to when you should start this vary from mid-70s (when mandatory withdrawal rates start to escalate more quickly and any term life insurance will have expired) to early 80s when you'll get the best possible rates. It involves a lot of calculating - just when you might not be as sharp as you once were.

I appreciate Kidd's problem, but it would be even worse if you hadn't started on your wihtdrawal system.

It may be that a lot of people aren't saving enough. There are various reasons for this - and various possible solutions. It doesn't excuse such an ill-conceived programme as this, where taxation ends up being a game of chance. The current discussion is aimed at people who have RSPs or are thinking of contributing. They need to know what they're getting into.

Those of us who are in the RIF phase now were not really aware of how this would all play out in the end when we first bought into these because nobody was talking about it then. There was an assumption that your income in retirement would be lower than while working and that this would bring you into a lower tax bracket, and that you would necessarily be better off because of this; and nobody really questioned that at the time.

My philosophy now is to beware of governments bearing gifts unless they can be quickly utilized and concluded. Some of them can be Trojan horses. I remain guardedly optimistic about TFSAs. Rules can and do change. The more your money is tied up in government programmes, the more vulnerable it is to those changes, although obviously all funds can potentially be affected.

I agree people need to know what they're getting into and that people make assumptions about retirement income and many other things (usually because they see everybody around them doing the same thing). However I don't agree that the government, the investment industry, the media, in fact any other adults, have any responsibility in those things, in raising my awareness or dispelling any assumptions I may have made. I'm a big boy so I'll take full responsibility for getting the info I need (if you haven't read the fine print, read it) and for my choices. I take credit for my good calls, so same for my errors, end of story.

I do remember sometimes thinking, years ago when I was socking my RRSP contributions away, what with inflation and everything else it looks like I might be paying higher taxes when I pull it out someday but I pushed that thought aside because I was so enamoured with the idea of socking away this money in a place where I couldn't get at it easily, of having this additional pile at retirement time. The fact it's turned out not to have been the best choice for me (in the years ahead I'll be paying for the self-satisfaction I experienced long ago) may be of help to others but it certainly was not anyone else's job to do my own due diligence.

And governments don't have gifts to bear, all the money comes from us, so I don't judge the success of a government program by whether or not I personally can take out more than I put in. So though I'm as greedy as the next guy, with my RRSPs I'm taking the view that I'm fortunate that I've ended in a position where maybe I will have contributed more taxes than the absolute minimum I could have.

The quote from John Manley is still true AND it is necessary for the gov't to get all its share back. Now whether that is through the current progressively increasing withdrawal percentages, or as a lump sum tax upon death, is probably not all that different (time value of money and all that).

The basic problem some of us are having is that when we were young(er), for example in our 30s and 40s, we never gave a lot of thought that our post-retirment marginal tax rate might be higher than in our 30s. I suppose one 'fix' would be a required regulatory 'cautionary' note that comes with RRSP marketing to the effect that a taxpayer may wish to consider the possible negative consequences of taking the tax deduction at our current tax rate when our marginal tax rate upon retirement may be higher. That would at least cause some investors to think that through.

That all said though, many of us do not know how successful we will be financially or how our lives will unfold and what curve balls come our way. There could be major health issues in the family, a divorce, or any host of things that severely crimps one's ability to earn good money and end up with a well financed retirement. For the bulk of the population, they will never have an RRSP big enough to worry about anything beyond the first tax bracket.

So what do you do? Assume 'unbridled success' in one's journey through life and then 'rail' at income taxes during RRIF years? Or grudgingly accept that paying more taxes is a first world problem, and one to have, rather than a severe alternative.

It really is time to stop complaining and wailing about marginal income tax brackets during RRIF years. I will pay more when I RRIF than when I took the tax deductions. An irritant sure, but I sure will NOT complain.

You are certainly entitled to decide not to complain.

Manley's statement, assuming it's accurate, is pathetic. The government was going to get its share regardless; and even more if they wait longer. Their problem was that they didn't want to wait.

i'm not complaining about paying taxes per se, but I want a fairer system and a much clearer explanation of the possible outcomes.

It's dandy that some people are able to wade through all the fine print and think through all the scenarios; and sometimes they get it right. Lots of people don't, and some aren't even capable of doing so.
Some people, even high school and university grads, can't even figure out percentages, and I'm not kidding. I don't know what should be done about this, but the FIs aren't really helping.

Loonie said
Manley's statement, assuming it's accurate, is pathetic. The government was going to get its share regardless; and even more if they wait longer. Their problem was that they didn't want to wait.

i'm not complaining about paying taxes per se, but I want a fairer system and a much clearer explanation of the possible outcomes. 

I don't think it makes much difference if one calculates time value of money between a periodic stream of tax revenues versus a future sum. Depends on where one is at in tax brackets in both cases obviously. FWIW, I don't think the gov't should wait as they presumably helped 'fund' that RRSP over a period of 30-40 years or so. Why should they wait another 20 years to collect what is rightfully theirs?

I do believe that much could, and should, be done to clarify possible outcomes, assuming mainstream population would understand. On a personal basis, even if I had all that information, I would have never dreamed back when I was 30 or 40 that I would end up in the positive financial position that I actually did. I would have probably contributed to the RRSP all long anyway and found myself in the same bind. C'est la vie.

At least the introduction of the TFSA and the wisdom from financial forums recommending that low income investors fund the TFSA first is a step in the right direction.

Top It Up, no, I wasn't at all thinking of you or your comments when I penned my diatribe, you've made very clear by your posts that you take responsibility for your decisions, so vent away!

Manley's statement is clear and is true. Again, it's not the "government" that has to wait (the "government" is a series of different governments over the decades), it's the Treasury (and thus the citizens of Canada) that are funding any tax deferrals. And if some of those citizens get through high school and can't figure out a percentage (there's no fine print re RRSPs, it's all in plain language in the CRA Guide or on the gov't website), well, I guess for a blamer there's yet another institution (education system) to add to their list to blame whenever they don't absolutely maximize their benefits from the Treasury.