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Locked: RRSP discussion

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[OP]
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RRSP discussion

Ok guys one more financial tidbit from my brother in law who is a banking executive. Hopefully this thread gets a better response. Anyhow what he told me was that RRSPs are a horrible investment and a scam basically. He said people should be using a TFSA instead and max it out every year if possible. He said the problem with RRSPs are twofold:

1. You pay tax on the full amount including all the investment profit you have made over all those years. If your money doubles, you pay twice as much tax.

2. If your money is in a regular account and your stocks go up, you only pay capital gains tax on *half* of the profits. If you were to cash out an RRSP, you pay tax on *everything*. You’re basically paying twice as much capital gains tax essentially.

I don’t know much about this stuff but I take it with a TFSA you pay no capital gains tax at all? Hence why it’s called a “tax free” savings account?

I’m just sharing this because there seems to be a common belief that RRSPs are the one tax break we have here in Canada. I think that what my BIL is saying makes perfect sense. I’ve got some money coming in this year that I can either dump into an RRSP or else my TFSA and he said without hesitation, do *not* buy an RRSP.

*edit*

OP updated. Let’s just discuss the merits of RRSPs versus TFSAs and other means of investment. I no longer see RRSPs as a “scam” or a horrible investment. Thanks to everyone here for their insight.
Last edited by SickBeast on Jul 24th, 2018 11:35 am, edited 1 time in total.
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Issues / Challenges:
a) Your TFSA contribution limits are much smaller than RRSP. I don't know about you, but I save several times more money than the TFSA allows me to every year.
b) Your portfolio may contain US securities that pay dividends. The RRSP is the most tax efficient product for these.
c) Contributing to your RRSP can help to bring your income down and potentially allow qualification for programs such as the child tax benefit
d) You can do spousal RRSPs to shift income to a lower income earner
e) You could receive a reduction in income tax if you make less in retirement than working (such as the amount you make in a higher tax bracket)

There are both benefits and drawbacks to a RRSP. For some scenarios it's a great investment, for others not so great. The problem is when people think it's a "one size fits all" solution and then encounter problems because they did not research it (e.g. RRSP converting to RRIF). Calling it a "scam" would be rather short sighted and if your BIL is a banking executive I would caution you to avoid blindly following his advice considering these are all benefits he should be able to highlight.

However, to further highlight this you can feel free to use this calculator. Even just using their default numbers the RRSP is slightly ahead of a TFSA:
http://ativa.com/tfsa-vs-rrsp-calculator/
[OP]
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TrevorK wrote: Issues / Challenges:
a) Your TFSA contribution limits are much smaller than RRSP. I don't know about you, but I save several times more money than the TFSA allows me to every year.
b) Your portfolio may contain US securities that pay dividends. The RRSP is the most tax efficient product for these.
c) Contributing to your RRSP can help to bring your income down and potentially allow qualification for programs such as the child tax benefit
d) You can do spousal RRSPs to shift income to a lower income earner
e) You could receive a reduction in income tax if you make less in retirement than working (such as the amount you make in a higher tax bracket)

There are both benefits and drawbacks to a RRSP. For some scenarios it's a great investment, for others not so great. The problem is when people think it's a "one size fits all" solution and then encounter problems because they did not research it (e.g. RRSP converting to RRIF). Calling it a "scam" would be rather short sighted and if your BIL is a banking executive I would caution you to avoid blindly following his advice considering these are all benefits he should be able to highlight.

However, to further highlight this you can feel free to use this calculator. Even just using their default numbers the RRSP is slightly ahead of a TFSA:
http://ativa.com/tfsa-vs-rrsp-calculator/
Wow, thanks for sharing that. Based on that calculator in my case I think it’s pretty even. Also, my RRSP contribution limit is much higher than my TFSA limit, so I would probably be better off buying an RRSP and then use the tax refund to max out my TFSA.

What about what my BIL said about paying only 50% of the capital gain on capital gains tax with a regular investment versus paying it on the full amount with an RRSP?
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SickBeast wrote: do *not* buy an RRSP.
Dude, seriously, just do some generic googling and reading what TFSAs and RRSPs are (to at least understand why you cannot “buy” either :))
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omg bro, you sound like a 15 year old.

RSP is for retirement. It turns into a RRIF. A rif is for INCOME purposes.

RSP only works for people that will be earning LESS income in retirement than they are currently making. If you make MORE money in retirement than pre-retirement, than a RSP is a waste of time. It's also a waste of time for low income people e.g. making less than $50,000 a year. However, one might argue that it's a benefit for low income people as well as the extra cash flow + savings from the tax refund is helpful.
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also u dont buy a RSP.
u put MONEY INTO a RSP.
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1. You pay tax on the full amount including all the investment profit you have made over all those years. If your money doubles, you pay twice as much tax.

...But you also doubled your money meaning you earned a good investment return and didn't have to pay capital gains or income tax along the way until the end. In the mean time, you had access to cash flow in the form of tax refund that you can use toward life such as paying down debts, saving further or heck even paying for something nice. In the mean time, you do not have to worry about having to pay taxes every year on source income and dividends. So for many people who may have cash flow issues, RSPs can give greater flexibility to do two things at once. In the end, the tax amount paid may be a wash, but it does move forward the bill and the time opportunity gained may be more valuable.

Additionally, the money you doubled does not mean you have to withdraw it immediately. Taking out the money steadily may mean you pay little or no tax in the end meaning you could still save on the taxes.

2. If your money is in a regular account and your stocks go up, you only pay capital gains tax on *half* of the profits. If you were to cash out an RRSP, you pay tax on *everything*. You’re basically paying twice as much capital gains tax essentially.

True, but that isn't the purpose of registered accounts. Referring to my earlier point, you would likely also have to pay capital gains when you trade or sell meaning you will either have to pay with additional funds or sell your investment and take some to cover your tax costs. Additionally, many portfolios do not contain just capital gains. Most RRSPs will likely contain fixed income as well.

Again, this also doesn't take into account the fact that you may withdraw over many years. Most people shouldn't withdraw their RRIFs all at once. Taking it out overtime will again reduce this tax further.

My personal plan is to save aggressively in my RRSP. This gives me a hefty tax return each year which allows me many opportunities to live my life and allows me to do other things such as plan for my home purchase and use the exact savings to put toward my TFSA . If I retire at 55, I can steadily draw down the RRSP and because I live fairly frugally, I will be able to trigger it as income at a much lower rate than the income taxes I currently pay. This is all thanks to the RRSP.

I'm pretty sure your BIL understands how these things work, but you need to stop taking this as a black or white thing. RRSPs are a tax deferral tool and can be used to your advantage. It's definitely not a scam.
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Actually I'd say this part of what daivey said is very important:
daivey wrote: RSP only works for people that will be earning LESS income in retirement than they are currently making. If you make MORE money in retirement than pre-retirement, than a RSP is a waste of time. It's also a waste of time for low income people e.g. making less than $50,000 a year. However, one might argue that it's a benefit for low income people as well as the extra cash flow + savings from the tax refund is helpful.
[OP]
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freilona wrote: *
I never claimed to be any type of financial person. I work in a completely unrelated field. I’m quite well educated but I always found financial stuff “boring” so I took no interest in it. I’ve got some really smart people managing my retirement money so I just don’t worry about it.

I just thought I would share some info from a decent source. If you guys don’t like it or take issue with it, that’s your problem. I’m going to listen to him, personally.

In terms of my own argument, I never liked RRSPs simply because you wind up paying tax on a way higher amount of money when you pull it out. I’m going to have a very decent retirement income so I would wind up paying tax on the money in a similar tax bracket either way. So I’ve never been a big fan. I guess if you make a six figure salary now and you don’t have a pension waiting for you, RRSPs could work out ok. But what my BIL said to me made perfect sense, particularly the part about paying tax on 50% of a capital gain versus paying 100% with an RRSP.
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cmackie wrote: Actually I'd say this part of what daivey said is very important:
Fair enough, that is true.

*
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SickBeast wrote: Ok guys one more financial tidbit from my brother in law who is a banking executive.

Hopefully this thread gets a better response. Anyhow what he told me was that RRSPs are a horrible investment and a scam basically. He said people should be using a TFSA instead and max it out every year if possible.
what is your opinion, do you agree with your BIL or not?

done right at the right time in a persons working life within their financial planning, RRSP's can be advantageous, even if at the end of the day (retiring early) melting down RRSP's (without waiting to convert to RRIF at age 71), it's possible that there is less tax to be paid than the initial tax refund on the initial contributions.

I retired early, melted down RRSP's over several years and paid zero tax, so that at age 65 our RRSP accounts were zero, TFSA's intact growing & yielding income, tax free .... best of both worlds.
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Does this mean your BIL doesn't have any money in RRSP?
[OP]
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porticoman wrote: what is your opinion, do you agree with your BIL or not?

done right at the right time in a persons working life within their financial planning, RRSP's can be advantageous, even if at the end of the day (retiring early) melting down RRSP's (without waiting to convert to RRIF at age 71), it's possible that there is less tax to be paid than the initial tax refund on the initial contributions.

I retired early, melted down RRSP's over several years and paid zero tax, so that at age 65 our RRSP accounts were zero, TFSA's intact growing & yielding income, tax free .... best of both worlds.
How did you manage that? Does CPP and OAS not put you into some type of tax bracket at least for when you pull out money from the RRSP? Or did you retire early without collecting CPP early? That’s an interesting strategy if that’s what you did. I have a full pension waiting for me so I can’t do that. Once I retire I will have a decent income stream and I’ll be in a relatively high tax bracket.

In terms of agreeing or not with my BIL, I would need to do more research. But as of right now I am leaning toward agreeing with him. The other thing about using an RRSP is that when you pull the money out, it may disqualify you from some government programs that you could have had with a lower income. Based on @TrevorK’s calculator, in my case it’s a wash either way, but I don’t think that calculator factors in those government programs that cashing out an RRSP would make you ineligible for during retirement.
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drey wrote: Does this mean your BIL doesn't have any money in RRSP?
I would have to ask him, and really that’s none of my business. Isn’t the TFSA a relatively new thing that Stephen Harper introduced? He probably bought some RRSPs when he was younger.
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SickBeast wrote: Fair enough, that is true.

I just find a lot of people are being unnecessarily rude and hostile in my threads and I don’t appreciate it. And @daivey has probably been the worst offender.
im not being rude, just being blunt
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SickBeast wrote: In terms of my own argument, I never liked RRSPs simply because you wind up paying tax on a way higher amount of money when you pull it out. I’m going to have a very decent retirement income so I would wind up paying tax on the money in a similar tax bracket either way. So I’ve never been a big fan. I guess if you make a six figure salary now and you don’t have a pension waiting for you, RRSPs could work out ok. But what my BIL said to me made perfect sense, particularly the part about paying tax on 50% of a capital gain versus paying 100% with an RRSP.
I’m not a financial person, either, but learned enough to manage our combined portfolio (my husband’s and mine) better than many “professionals” :) I do make six figures and plan to retire within two years, so maxing both RRSP and TFSA with spillover to joint non-reg. I used to have lots of misconceptions about RRSPs (and didn’t contribute to it for years, thinking that I can only withdraw from it after 71!), so your posts make me smile - and sorry if I sounded mean, I wasn’t :)
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xgbsSS wrote: 1. You pay tax on the full amount including all the investment profit you have made over all those years. If your money doubles, you pay twice as much tax.

...But you also doubled your money meaning you earned a good investment return and didn't have to pay capital gains or income tax along the way until the end. In the mean time, you had access to cash flow in the form of tax refund that you can use toward life such as paying down debts, saving further or heck even paying for something nice. In the mean time, you do not have to worry about having to pay taxes every year on source income and dividends. So for many people who may have cash flow issues, RSPs can give greater flexibility to do two things at once. In the end, the tax amount paid may be a wash, but it does move forward the bill and the time opportunity gained may be more valuable.

Additionally, the money you doubled does not mean you have to withdraw it immediately. Taking out the money steadily may mean you pay little or no tax in the end meaning you could still save on the taxes.

2. If your money is in a regular account and your stocks go up, you only pay capital gains tax on *half* of the profits. If you were to cash out an RRSP, you pay tax on *everything*. You’re basically paying twice as much capital gains tax essentially.

True, but that isn't the purpose of registered accounts. Referring to my earlier point, you would likely also have to pay capital gains when you trade or sell meaning you will either have to pay with additional funds or sell your investment and take some to cover your tax costs. Additionally, many portfolios do not contain just capital gains. Most RRSPs will likely contain fixed income as well.

Again, this also doesn't take into account the fact that you may withdraw over many years. Most people shouldn't withdraw their RRIFs all at once. Taking it out overtime will again reduce this tax further.

My personal plan is to save aggressively in my RRSP. This gives me a hefty tax return each year which allows me many opportunities to live my life and allows me to do other things such as plan for my home purchase and use the exact savings to put toward my TFSA . If I retire at 55, I can steadily draw down the RRSP and because I live fairly frugally, I will be able to trigger it as income at a much lower rate than the income taxes I currently pay. This is all thanks to the RRSP.

I'm pretty sure your BIL understands how these things work, but you need to stop taking this as a black or white thing. RRSPs are a tax deferral tool and can be used to your advantage. It's definitely not a scam.
Do yourself a favor and have a look at the calculator that @TrevorK linked to in the second post. In my case, the TFSA and RRSP were about equal provided that I re-invest the tax return from the RRSP into more retirement savings. So if you’re pocketing your tax refund for “life” as you say, you’re probably coming out way behind compared to using a TFSA instead. Just check it out. I don’t know your particular financial situation.
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SickBeast wrote: Ok guys one more financial tidbit from my brother in law who is a banking executive. Hopefully this thread gets a better response. Anyhow what he told me was that RRSPs are a horrible investment and a scam basically. He said people should be using a TFSA instead and max it out every year if possible. He said the problem with RRSPs are twofold:

1. You pay tax on the full amount including all the investment profit you have made over all those years. If your money doubles, you pay twice as much tax.
Not necessarily. First, you don't buy an RRSP, RRSP is just an account type to hold whatever investment you want there. Second, RRSP is tax deferred (not tax free). Therefore, it makes sense to contribute to RRSP if you will be on a lower tax bracket during retirement than you are now. It does not make sense to contribute to RRSP if you are on a low tax bracket now or if you expect to be on a higher tax bracket when you withdraw your RRSP. Also, RRSP is the only account type that are not subject to dividend withhold tax, so it's the best place to hold US stocks that pays dividends - everywhere else, a portion of the dividends from US stocks go to withhold tax, including in TFSA.
SickBeast wrote: 2. If your money is in a regular account and your stocks go up, you only pay capital gains tax on *half* of the profits. If you were to cash out an RRSP, you pay tax on *everything*. You’re basically paying twice as much capital gains tax essentially.
True, however if the withdraw is on a lower tax bracket, I got the tax refund benefit during accumulation phase, which I can make it grow tax free until I retire. That's a decent proposition in my opinion. Speaking for myself, I won't pay any taxes when I withdraw from my RRSP, because I will implement the RRSP Meltdown strategy: The RRSP will be converted to a RRIF, and the amount that gets withdrawn will be used to cover my HELOC interest (which is used to borrow to invest in stocks), so it's a wash from tax perspective, because the interest is tax deductible at the same tax bracket as the RRIF income. The only income will be from dividends, which is a lower amount with the Canadian dividend tax credit. That goes on top of the maximized TFSA.
SickBeast wrote: I don’t know much about this stuff but I take it with a TFSA you pay no capital gains tax at all? Hence why it’s called a “tax free” savings account?
Not necessarily. If you day-trade on your TFSA or CRA determines that you carry a business trading there, your profits are taxed as income. Also, withhold tax from US dividend stocks applies to TFSA.
SickBeast wrote: I’m just sharing this because there seems to be a common belief that RRSPs are the one tax break we have here in Canada. I think that what my BIL is saying makes perfect sense. I’ve got some money coming in this year that I can either dump into an RRSP or else my TFSA and he said without hesitation, do *not* buy an RRSP.
Anyone that does a little research on this forum (or any Canadian investing forum) will find out that there are other alternatives to RRSP. By the way, RRSP is not a tax break, it's just tax deferred, it can be a tax break in the end of not, depending on your tax bracket during withdraw. TFSA is tax free, but there's a limit to how much you can contribute per year. RRSP makes sense for a lot of people, specially the ones with a high tax bracket now that plans to withdraw funds on a lower tax bracket.


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SickBeast wrote: I would have to ask him, and really that’s none of my business. Isn’t the TFSA a relatively new thing that Stephen Harper introduced? He probably bought some RRSPs when he was younger.
You and your BIL is saying RRSPs are scams. If I were you, I would want to ask if he has money in his RRSP. If he has some in there, then please find out why he thinks it's a scam.

If he doesn't contribute to his RRSP, I would feel sad for him for not understanding how it works. By contributing you get tax deferral which means you have more money add to your investment accounts... it's not free money, but it's like free money for now. Yes you have to pay taxes later, but you can pay less tax at a lower bracket when your income is less.

Friend, TFSA has been around for almost 10 years. It's not new. Oh, and if you work, your contributions are from what you have after you're taxed.
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SickBeast wrote: Do yourself a favor and have a look at the calculator that @TrevorK linked to in the second post. In my case, the TFSA and RRSP were about equal provided that I re-invest the tax return from the RRSP into more retirement savings. So if you’re pocketing your tax refund for “life” as you say, you’re probably coming out way behind compared to using a TFSA instead. Just check it out. I don’t know your particular financial situation.
Not at all, I use both. I am maxed with both. I also at the highest tax bracket. I can still use both accounts and the RRSP not "be a scam."

You also haven't answered in regards to the opportunity cost savings on the taxes to pay each year and cash flow advantages the RRSP gives.
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