When I was a member of Parliament (the first time, when I behaved), the country’s realtors wandered around the lobby of the House of Commons trying to sell a crazy plan. People should be able to drain their RRSPs, they said, to buy houses.
I opposed it, but the government caved. So now young horny couples can game the system using what’s called the Home Buyer’s Plan. If they have, say, $50,000 saved for a downpayment, they can plop it into two RRSPs, keep it for ninety days then remove it tax-free to buy a fabulous condo which is falling in value. For doing that they’ll get a tax rebate big enough to buy gleaming appliances (white is the new black), or two BB Z10s, an HD flat screen and a week in Mexico. All paid for by the government.
This is but one example of how the RRSP has evolved since being invented in the 1950s so Baby Boomers would not retire stupid and bankrupt the country. It didn’t work. In recent years the amount of money going into retirement savings plans has plunged just as a torrent of cash jammed into houses. Today we have a bizarre situation. Over 70% of people have no pension, but 70% of people own real estate. How is that supposed to work?
Without a doubt, you should worry more about impoverished wrinklies overrunning all the Costcos and clogging up the roads in Korean Imitation Automobiles (KIAs) than falling housing values. Both will happen together, but at least real estate doesn’t whine.
While Boomers may have largely blown their privileged circumstances, you don’t need to. Given the fact there are just two weeks or so left until the latest tax deadline, let’s use at least one post to review some uses for RRSPs – besides the aforementioned HBP. First, my oft-stated view that these retirement savings plans are no longer the best way to save for retirement. Many reasons for that. I fully expect personal tax rates to be higher in twenty years, for example, which means the tax break you get now for contributing could be less than the tax payable at the other end.
Plus, since all cash taken from an RRSP is taxed as income, you lose the advantage of earning dividends and capital gains inside a plan. Better in the long run to be owning assets producing those returns in a non-registered account. Or a TFSA, for that matter, where withdrawals are untaxable.
In fact the TFSA over the years to come will eclipse the traditional RRSP as the chief vehicle for retirement financing. This means the first $5,500 you invest this year should go into your TFSA, and make sure it doesn’t end up in a parasitic GIC.
So what good are RRSPs? To slice a big outstanding tax bill from last year, of course, since contributions are deductible from taxable income. But instead of leaving the money there until you need a walker and underwear that sucks when you sneeze, use the RRSP for tax-shifting, rather than tax deferral. That means banking income in good years to take during years when you live on less. That could be thanks to a sabbatical, a pregnancy or joyous unemployment.
Also remember you can put money into a plan during working months to take out when you go to school. It’s called the Lifelong Learning Plan – good for withdrawing $20,000 which you can use for a bunch of years and then take a decade to repay. This is also good for income-splitting, since you can finance your spouse’s time in school from your own plan, after you enjoyed the tax deductions.
Speaking of splitting, this is something an RSP excels at. Open a spousal plan, put in contributions up to your own limit, deduct them from your income and after three years the money belongs to your spouse. Why do this? Because if you’re the higher earner you get to reduce tax while your less-taxed spouse ultimately receives the money, and can withdraw it at a lower rate. You’ve effectively transferred income, subsidized by the feds.
Ditto for a contribution in kind. You don’t require money to make an RRSP contribution, since all you need do is transfer existing investment assets into a plan. So for taking taxable stuff and making it non-taxable, you receive a tax refund (although you might trigger some lowly-taxed capital gains in the process).
RRSPs are also nifty for financing a mat leave, of course. Just open that spousal plan far enough in advance of the Big Swim, so that money can be withdrawn at (hopefully) no tax to finance the year at home. And there’s always the RRSP mortgage, which allows you to hold the mortgage on your own home and make mortgage payments into your retirement plan, instead of to the bank. A neat idea, however it costs to set up and the returns are low. But so is the risk.
In short, there are lots of ways to use an RRSP.
How many did the nice lady at the bank tell you about? I thought so.