The Ugly Truth About RRSP
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- Опубликовано: 17 фев 2024
- The Ugly Truth About RRSP
𝗦𝗰𝗵𝗲𝗱𝘂𝗹𝗲 𝗮 𝗰𝗮𝗹𝗹 𝘄𝗶𝘁𝗵 𝗗𝗮𝘃𝗶𝗱 📅 𝗰𝗮𝗹𝗲𝗻𝗱𝗹𝘆.𝗰𝗼𝗺/𝗮𝗮𝗿𝗼𝗻𝘄𝗲𝗮𝗹𝘁𝗵𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁
Navigating the world of retirement savings in Canada can often feel like a complex puzzle, with the Registered Retirement Savings Plan (RRSP) being one of the most talked-about pieces. In our latest video, "The Ugly Truth About RRSP," we dive deep into the nuances of RRSPs, shedding light on both the advantages and disadvantages of using this popular financial vehicle for retirement planning. This balanced exploration is crafted for Canadians who are seeking to make informed decisions about their retirement savings.
Why This Video Is a Must-Watch for Canadians:
RRSPs are heralded for their tax-advantaged status, allowing Canadians to defer income tax and potentially lower their tax burden during their working years. However, the conversation around RRSPs is often one-sided, focusing primarily on the benefits while glossing over the potential drawbacks. Our video aims to present a comprehensive view, ensuring you have all the information needed to decide if RRSPs align with your financial goals for retirement.
Inside the Video: "The Ugly Truth About RRSP"
The Basics of RRSPs: Before delving into the complexities, we start with a primer on how RRSPs work, including contribution limits, tax implications, and withdrawal rules.
The Pros of RRSPs: Understand the immediate tax benefits, how RRSPs can reduce your taxable income, and the power of tax-deferred growth. We also discuss how RRSPs can be a part of a diversified retirement plan, including first-time home buyer and lifelong learning plans.
The Cons Unveiled: We uncover the less discussed aspects of RRSPs, such as the eventual taxation upon withdrawal, potential impacts on government benefits like the Old Age Security (OAS), and the risk of mismanagement leading to a hefty tax bill in retirement.
Strategic Considerations: Learn how to evaluate whether RRSPs fit into your personal financial landscape, considering factors like your current tax bracket, expected future income, and retirement goals.
Alternatives to RRSPs: For a holistic view, we compare RRSPs with other savings options, such as Tax-Free Savings Accounts (TFSAs) and non-registered investment accounts, highlighting scenarios where one might be more advantageous than the others.
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There is no ugly side to RRSP's, only people who don't understand how they work!
exactly!
Nah there's better things to invest in.
someone didn't watch the whole video...or did but didn't pay attention 🤣
Na, I'm going to draw down my rrsp so it's 0 when I'm 65. I plan on retiring early, so will have low taxable income. The TFSA I'll touch last.
Everyone keeps saying "tax-free growth". That is simply WRONG. It's tax-defered, not tax-free. You WILL pay that tax eventually; or your spouse or heirs will. Investments in a TFSA DO in fact grow tax-free. Not so in an RRSP.
I think by "tax-free growth" people refer to the fact that any growth you achieve within an RRSP doesn't get taxed in the same year, and that leaves you with more liquidity in your earlier years. You can reinvest your tax-sheltered gains within the RRSP and get even more growth and so on (a compounding effect).
I plan to meltdown my RRSP from age 64-70.
I do not want my hard-earned cash going to the CRA later in life.
I want to enjoy my earnings👏
Great idea!(sarcasm) You can have less for yourself so that the government gets less of your "hard earned" money.
@@dougnettleton5326
Everyone’s situation is different.
Context important.
Tax planning & wholistic plan management.
CANT U LEAVE YOUR RSP MONEY TO FAMILY MEMBER IN YOUR WILL?
Excellent advice. Start melting down that RRIF at age 60 with a minimum no withholding tax on the amount and increase in later years if needed. 👍
I loved this video and it is about time that people question the RRSP for their situation. It wasn't mentioned that if you have a large RRIF you will end up with a large mandatory minium withdrawl. If you have substantial other pensionable income in addition to a large RRIF, which causes you to have a retirement income from 91K to 143K, that will really cut into your OAS. It might be as much as $690 a month (all of it) lost at the top level. I have a friend who saved diligently and now is looking at losing all of OAS because he was so good at saving and unfortunately put the bulk of his savings into an RRSP. Definitely it is a two edged sword when compared to a capital gains tax of 25%. I started taking out RRSP during the lower and no income years to avoid excessive taxation. You can take 15000 out tax free in most provinces if you have no other taxable income.
Good video. I'm melting down my RRIFs so they will be depleted in 6 more years when I will be 80. My MTR while working was ~ 50%. Now in retirement it's also ~ 50% so where was my RRSP benefit? I can't see any.
Well that’s a tough one. One of the reasons I keep saying in my videos to start planning right away. There are only two options: income splitting with a spouse and, leveraged meltdown. The last one has more risk of course but it could eliminate the tax.
@@AaronWealthManagement My wife's RRIF is a spousal and I can transfer some of my withdrawal to her so I am getting a small benefit from that. I keep her income equal to the OAS clawback threshold. My OAS is totally eliminated.
The benefit was tax-free compounding. If you put $1000 in when you were 20 and you saved 50% - doubtful, but what you claim - that thousand dollars would have grown to $18,679 by your 80th birthday at 5%. If you take it out then and pay 50%, you will get $9,339. If you had invested $500 that you would have had after taxes at 20 and paid 50% on your 5% as you earned it, you would have had about $2,200 when you're 80. If you're able to get 9%, the $9,339 would be about $88,016, and $ 2,200 would be about $7,014.
You would have done somewhat better outside the RRSP with dividend and capital gains - but you would still be working with half as much invested.
HTH.
@@dougnettleton5326 Tax-free compounding. That's the error in your reasoning. It was NOT tax-free but merely tax-deferred. The tax is payable eventually. The only benefit to RRSPs is the extent to which your MTR in retirement is lower than when you worked. In my case they were about the same.
@@patrickmckeag3215
You are correct! It's tax deferred growth. I guess you stopped reading at that point and fired off your response. The rest of what you wrote about MTR's is just not true. It's nonsense promoted by people that don't understand compounding, leverage, and how to work a calculator or stupidly would rather pay less tax and have less money. If you really want to understand, please read to the end.
I will give a more detailed example.
If your MTR is 50% and you invest $1,000 in an RRSP, you "save" $500. After a year at 9%, you'd have $1,090. If you withdrew the whole amount and were still in the 50% tax bracket you'd have $545. If you didn't invest the money in an RRSP, you'd have $500 to invest, since you would have already paid $500 in tax. If you got the same 9%, I.e $45 and it was also taxable at 50%, you would have to pay $22.50 on the $45. So you would have $522.50. Congratulations, you paid $22.50 less in tax, but bad news, you have $22.50 less for yourself.
If you left the money in the RRSP for 50 years, you would have: $1,000 × 1.09 ^ 50 which is $74,357.52. If you took it out and you had to pay 50%, you would have $32,178.76 for you and $32,178.76 in tax to pay. Seems pretty outrageous, but let's look at the alternative.
You only have $500 to invest, and each year even though you still earn 9%, you only get 4.5% since 50% goes each year to taxes. Now after 50 years you will have: $500 × 1.045 ^ 50 or $9,032.63 to spend. Congratulations you paid way less in taxes over the years but now the bad news is you have:
$32,178.76 - $9,032.63 or $23,046.13 less to spend.
What people forget is that the original extra $500 in your RRSP is essentially an interest free 50 year loan to encourage you to save for the future. It was never your money.
I do find this useful and for many, counter-intuitive, especially some financial advisors. This is the RRSP drawdown/meltdown that many are suggestion now. Thank you.
Isn't the problem with your argument that the person in your example is only taking out the minimum amount from their RRIF? Shouldn't it be less linear to account for the stages of retirement (go-go, slow-go, no-go)? The plan should be to exhaust the RRIF by 90 (or before), not to leave a bunch behind. Based on that, there is no 'ugly truth' to RRSP's. They are an excellent tool for retirement planning.
exactly,stupid video.
The example is the result of having a minimum funded RRIF schedule. With that schedule $900K winds down to about $400K by age 90. A phased income approach doesn't necessarily mean an RRSP meltdown. It simply means spending more in different stages of your life. The message of the video is to have a withdrawal strategy for your RRSP prior to age 71.
The issue though is that a lot of retirees run into this issue because they have a hoarding mentality. They want to hold onto the RRSP, just in case, without thinking thinking about the tax implications at the end.
@@richardbartolo8754 your so correct on that point. Stuck in a savings mentality all these years and then were trying to get you to spend. Changing behaviour is the toughest challenge in retirement
So can we go over some rrsp withdrawal strategies that are tax efficient
The only way to use your money, is to stay in the lowest bracket possible. Have no debt. The big issue is that your retirement money is taxed as regular income. The government shouldn't tax retirement at same rate as regular income. Considering that all you purchase is taxed at 13%, the (real) inflation was at about 20% in recent years, the retirement money tax should not exceed a total of 5% (fed + prov).
just google it,think for yourself,sheesh!!
Thanks for the informative video. With my TFSA maxed out, I'm deciding between investing in an RRSP or a margin account as a self-employed individual with an incorporated business. Since there's no employer matching and withdrawing from an RRSP has tax implications, I'm seeking advice on whether the flexibility of a margin account or the long-term tax advantages of an RRSP would be a better fit for my situation. Any suggestions would greatly appreciate it!
Hi Hazel, thanks for your comment and for watching the video. Without knowing your situation, my first thought was why are you using an RRSP? Where to begin: Compare a corporate investment account/ personal margin account/ Individual Pension plan (for Incorporated businesses) / Corporately owned whole life insurance. Stack them side-by-side and examine which strategy works best for you
Wonderful Advice.
I have retired at age 55 this year, and I plan to start an RRSP meltdown strategy.
My income is only $5000 a year , and I plan to take an additional $15,000 withdrawal from my RRSP on an annual basis to bring down my eventual taxes owed at my retirement age of 65 when I can expect to receive Canada pension(CPP), Old Age Security (OAS).
Switch a certain amount to a RRIF. Banks will sing you for RRSP withdrawals but not RRIF withdrawals.
@@davidhughes6048
Thanks,
You can live off 20k a year?
@@foghole9449why not? It’s just enough if you do a modest life style with mortgage paid off and reasonable spending.
Hi David, Enjoy watching your videos. So from what your are saying , if my spouse dies whatever is left in their RRIF and RRSP is taxed at 50%. I thought it would roll over to the beneficiary ( Spouse) with no tax penalty and if the other spouse dies it would go to the children as secondary beneficiaries then the 50% tax would be applied. Please correct me if I am missing you point.. Kevin
I think you have it right, the RRIF is collapsed when both spouses have died, that’s when the tax hit happens
I was wondering what the tax ramifications are if you withdraw $250,000 from your RRSP to bridge the gap between buying a house and selling your current house, rather than getting a mortgage for two or three months.
I think its a way better investment to take the money and put it on your principle for house than paying fees for rrsp and huge tax when you go to take it out rhink about it
The problem I have is that company pension only started to kick in when I am eligable to retire, then if I withdraw RRSP at the sametime, then my pension and RRSP will exceed the tax bracket, anybody is the same similiar situation?
Yes that is a problem for many people that have a pension and RRSP. if you have a spouse, in line splitting may allow you to drawdown on your RRSP without pushing you too much higher up the tax bracket. Do some planning with your advisor to help you calculate the withdrawal.
You could also waite till 70 to collect cpp oas. This gives you more time to melt down your rrsp. While your cpp oas is growing bigger. If your rrsp is lower at 70 your cpp oas will be larger
good problem to have 😀
Correct my if I'm wrong - there can be no withdraw strategy if you hit 65 and continue to be in the highest income tax bracket for the rest of your life even before you receive RIFF income
Great point except your withdrawal strategy is more than a tax efficient withdrawal. Its also about not leaving money behind for CRA. Its about using your money within your lifetime otherwise you've been growing your account only to the benefit of CRA.
@@AaronWealthManagementCould you please comment on the idea of a designated charity for the remainder of the Riff account at passing assuming again that every year of life one is in the highest tax bracket -thank you
Good advise but without knowing the year you will die or no longer need the money it's a bit of a guessing game. Accelerating the meltdown while you have a spouse with their ~27k in tax credits is a good plan though. Also, returns will significantly affect your projected balance at age 90 or xx. If I add 4% to the mins (every year) with your model and assume a 4% return I get it down to 160k, 6% and it's up near 300k
What’s wrong with over a half century of tax free growth to fund your retirement? A more appropriate measure is how much money made it into your pocket (or your heirs) regardless of tax paid.
And what if you don't have heirs? You ended up never using and enjoying your money.
@@AaronWealthManagement
Your "heirs" don't have to be relatives. You can donate to charity.
Thanks the video. I am 65 still working can I withdraw my RRSP now.
makes no sense unless you are in a very low tax bracket. If you are married and you convert some of the RRSP over to a RRIF you can income split with your spouse assuming you are married, this may be good if your spouse is not working or in a very low tax bracket. You do need to complete a form when doing your taxes to income split T-1032 I beleive is the form. Also, the first $2,000 you convert from an RRSP to a RRIF is tax free, that's a freebee so do it. Also your spouse should do the same. All this RRSP meltdown stuff requires you to understand tax brackets. I suggest you review your provinces tax brackets and assuming your employer is deducting enough tax throughout the year you should have a good idea on how your RRIF would be taxed.
stupid knows stupid
@@marcelmed4574👍
exactly! hence i put minimum amount into rrsps, just enough to not pay any taxes! WL for the win! they aren't touching any of my money!
If I pass with 400k in my rrsp does my wife receive the rrsp account if she is the beneficiary tax free. Or is this considered a tax event?
She gets the RRSP tax free. It's still an RRSP or RRIF and subject to tax when she withdraws it.
My friend is a bank manager and she actually told me RRSPs are not woth it lol.
Banks are pretty much the last place to take financial advice from. Their prime objective is to funnel everyone into their GIC's and their branded mutual funds. Money compounding tax-free for decades is incredibly powerful. The tax deduction at the beginning is just the cherry on top.
Which circus 🤡 is your friend part of ?
I'm self-employed and planing to open RRSP. Can I withdraw from it before the age of 60?
Any age, just need to pay tax on the withdraw amount based on your income( including your RRSP withdraw).
I’m going to invest in crypto. Thanks.
I think the $406K left over at age 90 in RRIF may not even consider any RRIF growth over those years. It could actually be higher not sure how it was modelled.
Hi Marcel, Thanks for your comment and for watching the video. Here's the link to the website to calculate your RRIF growth/withdrawal. www.getsmarteraboutmoney.ca/calculators/rrif-withdrawal-calculator/
@@AaronWealthManagement Great videos, however the calculator assumes only minimum withdrawal. With lets say $600,000 in the account I would want to withdrawal more than the minimum in certain years. Especially the early years of retirement.
@@AaronWealthManagement
It would be more useful if there was an option to withdraw more than the minimum.
@@dougnettleton5326 You can. There's simply a withholding tax.
@@AaronWealthManagement
Thank you for taking the time to reply. I understand how RRIF's work. I meant your "RRIF withdrawal calculator" would be better if there was an input field to give the option to withdraw either a percentage or a dollar amount more than the minimum. I could fake it to some extent by using a fictitious age, between my spouse's real age and my own.
Yes, it’s the truth, but deferring tax on portfolio growth for decades is a valuable benefit. Of course there’s a huge tax burden at death, but we still keep half for our estate 🤷♂️
seriously!
get real,not many people have 900 grand rrif,only stupid people do
Wow, well I see it everyday in the clients I work with.
Keep in mind the TFSA was not around until 2009, so prior to that the only tax strategy unfortunately was the RRSP. There would be many (wealthy) people in their 50’s and 60’s who have amassed large RRSP holdings. Especially if they invested early in their careers, and were wise investors. It’s a problem from a tax perspective, but at the same time it’s a nice problem to have.
@@maxpayne7419 You got it right, I’m going to have to pay huge taxes on withdrawals when I convert to a RRIF, but that’s the cost of success! Until then, low taxes… not that bad a problem, I focus on the decades of tax deferral which is a wonderful thing
@gene6867
Someone who understands!
You may pay a lot of tax, but you also have access to a lot more money than if you were investing after tax dollars in a taxable account and paying the tax as you earn the return.
As someone else wrote, "it's not an ugly truth, it's the way they work." The ugly truth is that "financial planners and their clients are being duped into ridiculous 'melt down' strategies that while minimizing taxes paid are reducing overall wealth".
Unless there are known health issues, you should not be trying "melt down" down your RRSP / RRIF. The average couple, both 65, can expect at least 1 of them to reach 95.
With foresight they would have comparable sheltered investments - but even that's not as necessary with recent income splitting improvements.
They should only take out the minimum they need to fund their desired lifestyle and max out their TFSA's or the RRIF minimum. This idea of structuring your financial life to minimize tax at the expense of your total wealth and quality of life is just silly. Ask yourself: "Would you rather have $250,000 in a taxable account $50,000 of which is a capital gain - so $25,000 going to the government and $225,000 going to your heirs - or $1,000,000 in a RRIF - so $500,000 to the government and $500,000 going to your heirs?"
I have more than that in RRSPs and I'm early 50s. No pension here.
Said to much, told nothing.