The Shift

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Under 40% of people aged 18 to 34 have retirement savings. That compares with two-thirds of everybody else who has an RRSP. If you don’t think this thing is dying, chew on that. Even though shoving cash into a plan nets you a tax refund, the cynical, digital crowd is turning its back.

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Maybe this is because young people have no money. (After all, there’s more than $14 billion in student debt.) Perhaps it’s because this is a generation of house porn addicts. (Almost 45% of them say ‘getting real estate’ is their top priority.) Or, possibly, nobody trusts the government any more. (So why would you register your savings with the feds or believe taxes won’t be higher in three decades?)

Yesterday I gave you reasons why RRSPs, created along with all those teeming little Boomers half a century ago, deserve to fall out of favour. And while lots of posters piled on to praise the taxes they ‘save’ by making contributions, there’s one inescapable threat for everyone who has been building their nesteggs inside of RRSPs. It’s politics.

The age of retirement is being raised to 67, and then to 68 in Britain. In the States, it’s been reset to 67 for those born after 1960, and will likely be raised again. You can bet the same will eventually happen here, with CPP benefits being delayed by years for those now under thirty. Already Ottawa has started to goose the qualifying age for the OAS – a universal payment of a little over 500 bucks a month – to age 67.

So how does this affect RRSPs?

First, getting cheap with public pensions is an admission we probably have troubles ahead. Canada has a record federal debt, and continues to add to it. In fact, F admitted some weeks ago the debt will continue to grow for at least a dozen more years. Already governments are cutting back, and health care’s in a funding crisis. Imagine when the average Boomer age is 75 – which happens as today’s 35-year-olds hit fifty. In short, does anyone seriously believe tax rates won’t inflate?

If they do, using an RRSP to supplement the public pension pittance could bring a nasty surprise. How smart is it to deduct 30% of your contribution from taxable income in 2012 if you have to pay 50% tax to get the money out in 2032? Yikes. And expect new legislation to force conversion of RRSPs into RRIFs years earlier than the current 71. That means the feds would make you draw down the registered plan at, say, 67, whether you wanted to or not – and cough up the tax.

So, RRSPs are probably lousy bets if you plan on deferring taxes until you’re old. But they are excellent for other stuff, like shifting tax. Here are five Greater Fool-sanctioned uses for an RRSP:

First, income-splitting. For example, if you make boatloads of money being a lousy, bald mutual fund manager and a puffed-up TV host, and your wife stays at home shopping, then use a spousal RRSP. You can contribute up to your own limit, and claim the deduction against your fat income, and yet the money goes into your wife’s retirement plan. After three years it becomes her property, so she can cash it in and buy more Hermes bags, and pay little if any tax. You got the deductions. She gets the money. This is social justice.

Second, it also works for babies. Simply time your next pregnancy for 36 months after your spouse finishes dumping a wad of money into your spousal RRSP. Then when you’re on mat leave you can use the cash to live on (restrict withdrawals to $5,000 or less), while your husband has enjoyed the deductions from his taxable income. This way the feds subsidize your family. Yeah, revenge.

Third, RRSPs are useful little devils when you lose your job. Contribute while working and get a tax break, then suck them dry in a year when income vaporizes. This is tax-shifting, and it beats the pants off tax-deferral.

Fourth, you can use RRSP money for a house or for schooling. In the latter situation, withdraw $20,000 and have a decade to put it back into your plan (you can also collapse your plan to fund your spouse’s studies). And a young couple can suck out up to $50,000 for a down payment, then have more than 15 years to repay. So if you’ve got fifty grand, stick it in an RRSP at least 90 days before closing, then withdraw it tax-free. Just for having passed that cash through the plan, you’ll get a tax refund of $15,000 or so. Imagine all the important and valuable granite that’ll buy!

Or, you can use your RRSP to fund your mortgage. If you have enough cash in your plan, for example, to pay off your home loan, then do it. The bank loan can be replaced with an RRSP mortgage, which means you then make monthly payments into your own retirement plan. Sounds cool, however remember the interest you charge yourself needs to be at ‘market’ rates and you must CMHC-insure the thing. But, it can still be sweet.

If any of this turns you on (and I’m quite aroused myself at the moment) let me know. I might even tell you how to cash in an RRSP without paying tax.

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avatarGarth Turner - The Greater Fool posted Friday, November 9th, 2012.

1 Comment for “The Shift”

  1. It would be helpful to write out your abbreviations, like RRSP, at least once in the article. I don’t know what it means. (I suppose it means something like Individual Retirement Account(IRA))

    I am retired. It appears that the financial advantage of an IRA has disappeared. There remains the problem of getting it out before the value disappears. Any ideas?

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