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Thread: Canadian RRSPs ?

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    Default Canadian RRSPs ?

    My mom thinks i should invest in some RRSPs, even though I'm 21. I think I should wait until I'm through school at least, but I don't really know that much about money. I have a fair bit saved up now, and I've paid off all my student debts (debt free! hooray). However, even if after this year I'm paid off, I might want to pursue law school or graduate studies...Which I am imagining is going to be costly. Should I wait to invest? Or start now anyway? I've been told $10000 in RRSPs now would probably be easily $100000 when I'm forty.

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    God/dess kitty260's Avatar
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    Default Re: Canadian RRSPs ?

    I'm 20 and I've been contributing to RRSPs since I was 18. Usually, I throw my tax return in there every year....I figure, I lived without the money for a whole year, I might as well invest it instead of blowing on crap.
    They earn wicked interest. You don't have to max out your yearly contribution, but just putting a few hundred a year (just think...just one good night's wages) in one for now will get you in the habit for when you're older and can afford to put quite a bit away. Even a few hundred bucks will still earn interest.
    Best to start now, because at our age, we can't rely on CPP still being around by the time we retire. They're already talking about cancelling it.
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    Banned Melonie's Avatar
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    Default Re: Canadian RRSPs ?

    Canadian RSP's are very similar to American Conventional IRA's. They both offer the opportunity to make tax deferred contributions to a retirement fund, and to earn tax deferred interest/dividends. However, they are both subject to strict rules regarding early withdrawls. Potentially, they are also both subject to future law changes which may wind up 'changing the rules' after the game is in progress. Canada has already established a 'clawback tax' and means testing of some benefit programs based on RSP assets/income levels, which could lead to a CDN$ contributed to an RSP today translating into a future CDN$ not being paid out by the Canadian gov't in other forms of benefits.

    "Make sure additional income doesn't have a negative impact on government payments and credits you may be eligible for. Before you withdraw additional income from your RIF or other retirement plan, find out what impact it may have. For example, if your income exceeds $57,879*, you would be subject to a clawback tax on your OAS payments. Age credits, GST credits and provincial tax credits could also be affected. Check Canada Customs and Revenue Agency Tax Guides and your provincial tax office for details."

    Americans with Conventional IRA accounts are running the same sort of risks, i.e. future means testing where if a person has saved his own money in a retirement account it could reduce eligibility/size of benefit checks from other gov't programs. However, Canada has already enacted the 'clawback tax' (which attempts to recover deferred tax on retirement plan contribution money and compound interest which accumulated tax free in a retirement fund) and also has already enacted means testing (where too much total income including retirement fund withdrawls makes you ineligible for other gov't payments).

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    Default Re: Canadian RRSPs ?

    Depends on what your tax bracket is now, whether RRSPs are worth it. They aren't for me- I'm in one of the lower tax bracksts as is (with deductions and all), so the tax I pay now is less than I'd pay when I take it out at retirement.

    There is the argument that the tax invested now has the chance to grow over time and be worth more than you pay later, even if you're in a higher tax bracket later; I prefer to keep things simple, though. As long as you put away money, RRSPs aren't necessarily the best option; they are good for forced savings if you wouldn't be doing it otherwise.

    Sit down and do the numbers. $10000 now could def. be $100000 at 40- it could be half a million at 65 if it's invested well. Whether or not it's in an RRSP...well, everyone has their opinion on that.

    Money that you put in to RRSPs can be withdrawn for school later anyways (LLP), so you don't have to compromise on that. Put something away starting NOW though, whether it's RRSPs or not.

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    Banned Melonie's Avatar
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    Default Re: Canadian RRSPs ?

    Money that you put in to RRSPs can be withdrawn for school later anyways (LLP), so you don't have to compromise on that.
    we Americans aren't so lucky ... IRA money can be 'borrowed' to pay for tuition, but it must be replaced or you'll get socked having to pay income tax on the withdrawn money plus a 10% penalty to recoup tax-free interest earned by the withdrawn money before it was withdrawn.

    Sit down and do the numbers. $10000 now could def. be $100000 at 40- it could be half a million at 65 if it's invested well. Whether or not it's in an RRSP...well, everyone has their opinion on that.
    The power of compound interest is certainly not confined to authorized retirement accounts ... although the authorized retirement accounts are touted as offering huge advantages re up front tax deferral and tax deferred accumulation of interest earnings. However, many other types of investments can offer high returns without having to roll the dice re current tax brackets vs future tax brackets, loss of other gov't payments due to means testing which counts authorized retirement account withdrawls as income, the possible institution of a 'clawback' or 'consumption' or other new tax in the future which forces you to withdraw twice as much money from your authorized retirement account as you really want to spend in order to cover the taxes due ...

    IMHO authorized retirement accounts are OK up to a certain percentage of your income. The scenario that should be avoided is winding up shorting more conventional investments for 40 years in order to build up a monstrous authorized retirement account balance, and then seeing much of that authorized retirement account money 'disappear' to pay future taxes or pay for future expenses out of pocket due to loss of gov't program coverage.

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    Default Re: Canadian RRSPs ?

    You can withdraw from your RRSPs for school too under the "life long learning" plan, so don't let that be a deterrent for putting money away.
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    Default Re: Canadian RRSPs ?

    Thank you smart women! I am slowly educating myself on these matters. This gives me better perspective. And good to know it wouldn't affect potential future costs for school. I don't think I qualify as a particularly high tax bracket either, so this is good to hear.

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    Default Re: Canadian RRSPs ?

    The scenario that should be avoided is winding up shorting more conventional investments for 40 years in order to build up a monstrous authorized retirement account balance, and then seeing much of that authorized retirement account money 'disappear' to pay future taxes or pay for future expenses out of pocket due to loss of gov't program coverage.
    Yes, exactly. Melonie also touched upon the point of RRSP income at retirement cutting the amount of old age pension/security you get- this is a great point. As far as I understand it, RRSP money is considered income when you retire, so if you're reciving, say, $2000 a month of RRSP income, you will not receive any old age security if the limit at that time is $2000 or under. Whereas, if you have an RRSP income of say $500 a month, and the CPP limit is $1600, you will be eligible to receive $1100 worth of benefits. And maybe you happen to liquidate $400 worth of stock per month too- who knows . Point is, you pay into CPP your whole life, hopefully you'll get to benefit from it at some point!

    START INVESTING NOW! I wish I'd started younger- those compound interest charts drive me insane (the ones comparing money at retirement if you started investing at 20 vs. 25). Argh.

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    Default Re: Canadian RRSPs ?

    As far as I understand it, RRSP money is considered income when you retire, so if you're reciving, say, $2000 a month of RRSP income, you will not receive any old age security if the limit at that time is $2000 or under. Whereas, if you have an RRSP income of say $500 a month, and the CPP limit is $1600, you will be eligible to receive $1100 worth of benefits. And maybe you happen to liquidate $400 worth of stock per month too- who knows
    As I understand it, these qualified retirement accounts are tax DEFERRED but not actually tax free the way they are usually hyped. This arrangement allows people to subtract qualified retirement account contributions 'above the line' in their tax returns in the current year. This means that a person has gross earnings of say $50k, and makes a $5k contribution to a qualified retirement plan, their taxable income for the year is reduced, their taxes for the year are reduced etc. However, the tradeoff is that, when money is withdrawn from a qualified retirement account, either after retirement or earlier, the amount of money being withdrawn counts as additional 'ordinary income' in the year that it is withdrawn with income taxes being due at the time of withdrawl.

    The amount of tax which will actually be due on that same $5k when it is withdrawn from the qualified retirement plan 20-30-40 years from now is an unknown. The tax will depend on the tax rates which are effective at that time, as well as the tax bracket the person is in i.e. how much other money is being earned from other sources 20-30-40 years from now. Of course, if the money is withdrawn early, an additional penalty tax or clawback tax will also be assessed. How this all compares to the same person claiming the $5k as income in the current year, paying taxes on that money in the current year, investing in whatever stocks / bonds / commodities for the same period of time, and then selling off these investments with only the capital gains being considered as taxable (and usually at a much lower tax rate than applies to 'ordinary' income) remains to be seen.

    IMHO the bigger issue will be the loss of eligibility / shrinkage of gov't benefit checks which will be brought about by withdrawls from qualified retirement plans in future years. US, Canadian and European govt's all have the same demographics problems with baby boomers nearing retirement age and slow growth of citizens who actually pay income taxes. Thus it's entirely plausible that in the future, when the gov't is pressed to either jack income taxes on people of working age to continue paying gov't retirement benefits, or reducing retirement benefits across the board, or means testing retirement benefits so that people who have not saved for their retirement still receive gov't checks but people who HAVE saved for their retirement will see their gov't checks reduced or eliminated (after all some would say they are 'well off' and don't need the gov't money because they have saved up $500k in a qualified retirement account), they're going to select the option which affects the fewest registered voters (i.e. whacking people over retirement age who have 'fat' qualified retirement account balances)..

    While also unknown today, Scarlett's scenario of coming up with a $2000 per month income 30 years from now could very well go down the way she says. If means testing is enacted and if tax rates on 'ordinary' income stay in the 25% ballpark, in order to wind up with $2000 in spendable money it would be necessary to withdraw $2500 from your qualified retirement account. On the other hand, if you didn't have a qualified retirement account, you might receive $1100 in the form of a gov't retirement check and then have to liquidate $1050 worth of non-retirement account investment assets to make up the other $900 after paying a 15% capital gains tax. In other words, in order to break even on a $2000 net spendable monthly income including gov't benefit checks, you would need to have built up a qualified retirement account balance which was 2.4 times larger than the net present value of non-retirement account investment assets.

    IMHO this is a very real future risk, which motivates me to place 95% of my savings and investment outside of qualified tax deferred retirement accounts. Obviously, govt's could change future tax laws about capital gains too. But what they can't change is the fact that with qualified retirement accounts both the 'principal' and 'interest/dividends' are subject to future taxation, where with any other sort of investment the taxes have already been paid on the 'principal' such that only the 'interest/dividends' are likely to be subject to future taxation.

    Of course gov'ts could decide to abolish the income based tax and instead enact an across the board VAT / sales tax of 25% - which would whack everybody !
    Last edited by Melonie; 07-19-2006 at 11:07 PM.

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    Default Re: Canadian RRSPs ?

    While also unknown today, Scarlett's scenario of coming up with a $2000 per month income 30 years from now could very well go down the way she says. If means testing is enacted and if tax rates on 'ordinary' income stay in the 25% ballpark, in order to wind up with $2000 in spendable money it would be necessary to withdraw $2500 from your qualified retirement account. On the other hand, if you didn't have a qualified retirement account, you might receive $1100 in the form of a gov't retirement check and then have to liquidate $1050 worth of non-retirement account investment assets to make up the other $900 after paying a 15% capital gains tax. In other words, in order to break even on a $2000 net spendable monthly income including gov't benefit checks, you would need to have built up a qualified retirement account balance which was 2.4 times larger than the net present value of non-retirement account investment assets.
    Yes- that is what I was trying to say! You're so eloquent with numbers, lol.

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