The worst development ever for registered retirement savings plans was the 2009 launch of the tax-free savings account.
TFSAs have become the much more popular younger sibling of RRSPs. People love the idea of investing or saving money in an account where taxes don’t apply on growth or withdrawals. You get a tax-deduction for RRSP contributions and tax-sheltered growth, but withdrawals are taxed at your usual rate. Among retirees, RRSPs are getting a lot of bad word of mouth because of this taxation on withdrawals.
Blogger Robb Engen addressed this in a recent post that was headlined: “RRSPs are not a Scam: A Guide for the Anti-RRSP crowd.” Mr. Engen speculates that anti-RRSP sentiments come in part from people who forgot about the tax deduction they received when they contributed to their RRSP in the first place. In his blog post, he offers a long list of points to help people understand RRSPs better.
Here’s an example that applies to younger families: Contributing to RRSPs instead of TFSAs could help them receive more money from the Canada Child Benefit. He also notes that RRSPs and TFSAs work out the same if you’re in the same tax bracket in retirement as you were when you made contributions.
Mr. Engen said RRSPs are a key part of his financial plan and insists they are still an important tool for Canadians to save for retirement. “They’ve just got a bad rap over the years because of some misguided thinking around withdrawals, taxes, plus the introduction of a new and seemingly better (re: tax-free) savings vehicle.”
Finally, here’s a column I wrote on how retirees can ease their RRSP “tax nightmare.”
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Rob’s personal finance reading list…
Retirement spending Do’s and Don’ts
Useful guidance on what expenses are worth the money in retirement, and which are not. Travel to visit friends and children is worth it, and so are activities to improve your health.
Tips for improving your credit score
It may be possible to improve your score just by changing habits like how and when you pay your monthly card bill.
Tax savings for students (and their parents)
The Canada Revenue Agency generated this list of 10 ways students can save money on their taxes.
Read this before lending your car to someone
If the person borrowing your car has an accident, it could go on your insurance record. “Auto insurance is tied to the vehicle, not the driver, so when you lend it, you’re lending your insurance too.”
Q: Can I buy an exchange-traded fund for my registered retirement savings plan through my bank?
A: ETFs are bought and sold like stocks, which means you need a brokerage account. All banks have online brokerage divisions that would allow you to invest in ETFs with commissions topping out at just under $10 per buy or sell. You can’t buy ETFs over the counter in a branch like you can with a mutual fund.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
A guide to interpreting the best before and expiry date labels on food packages. According Food Banks Canada, “Many people incorrectly say food has ‘expired’ if it reaches its best before date, so they throw it out.” Here’s some further commentary on best before dates and what needs to be thrown out.
What I’ve been writing about
- Robo-advisers beat these human advisers – sorry, salespeople – any day
- The surprising twist in deciding how best to pay the investment management fee for your RRSP
- Lots of ETFs do dividends, but these do dividend growth (for Globe Unlimited subscribers)
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