Older friend's dilemma (how to spend money!) | Page 5 | General financial discussion | Discussion forum

Doug said

That's true, yes, but structurally, the RRSP is a terrible product.

Not for everyone, not for me. I contributed to RRSP on six figures salary, getting corresponding tax refund.

I will be taking money from RRSP/RRIF on 5 figures income, with lower tax bill. I am also in charge when to pay taxes on RRSP/RRIF withdrawals, by timing those withdrawals.
Income on RRSP holdings is not taxed until withdrawal.

It is almost like capital gains tax structure - what not to like about it?

Also, one of my employers matched employee RRSP contribution up to 5% of salary, if I recall correctly. When I was employed there I contributed to RRSP exactly amount employer matched, and that was instant 100% ROI for me.

Saver-Mom said
Why glad to be rid of it, Loonie?
Is it not better to keep funds longer in registered account to avoid taxes on interest?  

It is better for some people in some circumstances to leave the RIF alone.
I don't want to get into all our personal circumstances, but it isn't true for us and our priorities.
Everyone has to make their own assessment.

Some issues to consider might be:
making accounts easier to manage and more flexible, for self and POAs as one ages, especially if no close family; likelihood of increased income later from other sources such as selling real estate, inheritance or even lawsuits, which will generate more income and trigger possible OAS clawback or other losses; need or desire to actually spend whatever money one can get out of the RIF while still alive. It's no use to YOU when you're dead or when the money is inaccessible (it might as well not exist except inasmuch as you think you might get at it later or imagine heirs enjoying what's left after probate.
For those who have little else left except the RIF when they die, and there are many like this, the will will have to be probated and costs paid; for some this could be avoided if no RIF left.

RetirEd said
As Alexandre shows, there are situations where the RRSP is advantageous. When it was created, it was the only game in town, and because of the income-based contribution limits was considered suitable for medium-income taxpayers.

But contributing when young and income was still low meant lower tax breaks and then higher tax rates on withdrawal if one's income had risen over one's lifetime. And high investment income after retirement could create a higher tax rate than on contribution.

Then the consequences on income-tested benefits for lower-income folk got figured in. Fortunately, for myself, I understood this in time - but I still lost money in my youth, contributing at a very low tax rate and needing to withdraw during a financial downturn while seeking new employment.
  

Even if a young person invested at a lower rate than he withdrew on retirement, tax deferral over decades generally means that this person benefited compared to investing in a non-registered product.

People tend to focus on tax rates (which is easy) and under-appreciate the benefit of tax-shielded compounding of returns over a period of several decades.

RRSP is a good investment vehicle; has several advantages over TFSAs, as well as some disadvantages.

RetirEd said
…
But contributing when young and income was still low meant lower tax breaks and then higher tax rates on withdrawal if one's income had risen over one's lifetime. And high investment income after retirement could create a higher tax rate than on contribution.

Then the consequences on income-tested benefits for lower-income folk got figured in. Fortunately, for myself, I understood this in time - but I still lost money in my youth, contributing at a very low tax rate and needing to withdraw during a financial downturn while seeking new employment.
…

It is the average tax rate the RRSP deductions were claimed at and the average rate that the RRSP and RRIF withdrawals are taxed at that matter.

People with rising incomes will make the bulk their RRSP contributions when they are in their higher income brackets when they have both the RRSP contribution room and the means to make those higher contributions.

If 1/3 of the contributions were deducted at 25% and 2/3 deducted at 40%, then the average is tax rate is 35% for the deductions. If one can arrange it so that the RRSP and RRIF withdrawals are taxed at an average of 35%, then one will just be repaying the tax refunds from the RRSP deductions plus the gains on the tax refund money when one is paying 35% tax on the withdrawals.

Loonie said

mordko said

Even if a young person invested at a lower rate than he withdrew on retirement, tax deferral over decades generally means that this person benefited compared to investing in a non-registered product.

It's not so ideal, however, when people lose money on their RSP investments because they really don't understand anything and are persuaded by profiteers who intimidate them into unwise decisions. They have simply thrown their money away, albeit untaxed. I certainly know people who have sustained such losses. people who waste their money often want and need handouts later - from us.
We'd be better off with a more robust CPP or similar, where we couldn't touch the money.

If there is a "more robust" CPP, who do you think pays for that? It always comes back to us - so it would be a handout to the people whom you say "waste their money and need handouts later." Canada has already become a highly taxed, low productivity, socialist leaning country with a failed universal medical system and constant "handouts".

mordko:

Even if a young person invested at a lower rate than he withdrew on retirement, tax deferral over decades generally means that this person benefited compared to investing in a non-registered product.

People tend to focus on tax rates (which is easy) and under-appreciate the benefit of tax-shielded compounding of returns over a period of several decades.

Alas, the tax-shielded income in an RRSP shrinks with inflation, and a big hit on withdrawal. The deferral doesn't help. An aggressive investor may do better, but most retail equity or commodity investors lose on their investments.

savemoresaveoften said

mordko said
Even if a young person invested at a lower rate than he withdrew on retirement, tax deferral over decades generally means that this person benefited compared to investing in a non-registered product.
 

While RRSP does allow tax shielded compound growth, one also loses the dividend tax credit and capital gain preferential treatment. Every single dollar is taxed as interest income essentially at withdrawal time. With so many moving parts, its almost impossible to gauge the breakeven return RRSP vs non-registered.  

Unless you are a low income person, dividend tax credit still means that you are paying taxes rather than reinvesting. Nor would it be wise to ignore the world outside Canada. Foreign dividends in a non-reg account are taxed at your marginal rate, while RRSP allows them to be reinvested in full.

Nor are RRSP withdrawals taxed like interest. Interest is taxed at your marginal rate. When you are contributing to an RRSP, you are getting a refund at your marginal rate. But your tax rate on withdrawals is averaged over different rates. One can reasonably expect RRSP refunds to be at around 50% mark. Even if you are in a much lower tax bracket, its still at your marginal rate. Tax on withdrawals for a middle class Canadian will be closer to 30% or even less.

The maths is straightforward. Unless you are in a very, very low tax bracket, RRSP wins 100% of the time.

mordko said

Unless you are a low income person, dividend tax credit still means that you are paying taxes rather than reinvesting. Nor would it be wise to ignore the world outside Canada. Foreign dividends in a non-reg account are taxed at your marginal rate, while RRSP allows them to be reinvested in full.

Nor are RRSP withdrawals taxed like interest. Interest is taxed at your marginal rate. When you are contributing to an RRSP, you are getting a refund at your marginal rate. But your tax rate on withdrawals is averaged over different rates. One can reasonably expect RRSP refunds to be at around 50% mark. Even if you are in a much lower tax bracket, its still at your marginal rate. Tax on withdrawals for a middle class Canadian will be closer to 30% or even less.

The maths is straightforward. Unless you are in a very, very low tax bracket, RRSP wins 100% of the time.  

RRSP withdrawal are taxed like interest income, which is the same as employment income, as in no tax break, period. Whether it’s marginal rate or not is irrelevant.

Simple example, RRSP grew from $100 to $200, 100% return being all capital gain. $200 is taxable as income, vs $50 if it’s outside RRSP. The only diff is u need $100 after tax money to begin with, vs $100 if inside RRSP. Not quite sure how RRSP wins 100% of the time, regardless of tax brackets.

If someone marginal rate is very high even after retirement, I don’t believe one can blindly say RRSP is better 100% of the time.

RRSP works for those who does not have much income source post retirement, which makes their marginal rate much lower than during their working years, that’s about it.

savemoresaveoften said

Simple example, RRSP grew from $100 too $200, all capital gain. $200 is taxable as income, vs $50 if it’s outside RRSP. The only diff is u need $100 after tax money to begin, vs $100 if RRSP. Not quite sure how RRSP wins 100% of the time, regardless of tax brackets.
  

Thats serious misunderstanding of basics. Same as with MER. You are missing up front tax (at marginal rate rather than average rate) and decades of tax free div reinvestment.

You won’t have $200 outside RRSP. You’ll start with after tax money, so $50 rather than $100. It won’t double but will grow to $80 (annual tax on divs will take a big bite). you will pay little in tax at the end and will end up with around $75. Compared to $130 if you were to put it into an RRSP. Congrats though, you paid less tax.

Firstly, “Partner content” isn’t Financial Times. I hope you don’t assume that celebrity TV ads reflect particular hockey player’s or TV station’s actual opinion about Coke and Pepsi.

I would caution anyone from seeking unsubstantiated opinions of “investment fraternity” from a silly ad about people who are not their clients. Conflict of interest is obvious to anyone with IQ over 10. Appreciate the lesson about “misleading advice” though. Honest.

Meanwhile actual data (as opposed to unsubstantiated opinions) are also available and also by googling. For example an average equity fund investor enjoyed decent annualized returns, well above inflation over 30, 20 and 10 year periods to the end of 2022 (6.8%, 9% and 9.3% respectively). 2022 was a bad year, but 12 months returns of -21% didn’t hurt long term returns all that much.

Fixed income fund investors had negative returns. Asset allocation fund investors had positive returns and beat inflation but not by much.

This is just a slice of the total. Some invest in individual equities. Many invest in expensive mutual funds (ludicrously expensive in Canada). More and more invest in cost efficient ETFs. Costs impact returns.

https://static1.squarespace.com/static/6175db867234a57f74ccebd4/t/65051d600d380e7b4bed1976/1694834017023/QAIB_2023.pdf