The RRSP

          It is time for our annual reminder to not contribute any money to a Registered Retirement Pension Plan (RRSP).  There are so many negatives and only a handful of positives when it comes to them.  These plans are promoted to the public as a tax shelter, when in fact it is a tax deferment plan.  Specifically, the money grows tax free until one retires or reaches the age of 69, at which time the money becomes fully taxable at the individual’s tax rate once the funds are extracted.

          True, there are some positives to the RRSP, however, we believe the negatives outweigh the positives.  Below we have outlined the good and the bad  about RRSP investing:

• It is important to realize that the need for an RRSP depends on the individual.  Most people lack the discipline to save, so for many, the RRSP is the only method of saving as the individual is unable (I should say, not supposed to) to touch these funds until retirement.  Unfortunately though, this is rare.  A recent article in the Globe and Mail stated that 76% of RRSP’s are collapsed prematurely, resulting in penalties and loss of tax deferment status.
• For an individual who will be receiving around $32,000 from a pension plan in retirement, depending on the amount of money in the RRSP, the forced income from the RRSP will most likely push the individual into the next tax bracket, forcing him/her to pay higher taxes.   
• RRSP’s are huge revenue channels for all financial institutions which is evident in the large number of advertisements on the radio, TV and in newspapers.  Specifically, every RRSP plan charges an administration fee. In addition, if one is not using a self-directed RRSP, the financial institution managing the plan will always be investing your money in their financial instruments.  These instruments, mainly mutual funds and ETF’s, then charge numerous fees on top of the ones from the RRSP.  As we have discussed before, these fees come at the expense of profit.
• The laws surrounding a RRSP are complex at best and often require advice from a tax specialist.  Any breach of the laws and one will be heavily penalized. This is one of the main reasons I will never register my money in a plan. The best investments are always simple.
• Do you know what the tax rate and structure will be 10-15 years from now?  Based on the largest demographic shift in Canada’s history around the corner, more people will be leaving the work force than entering.  Because of this, it is safe to bet that taxes will be higher 10 years down the road as there may be fewer payroll tax receipts going to the government and more people drawing down government services.  As a result, it is beneficial to pay lower taxes on the money once it is earned today, rather than at a higher rate later down the road.
• Use a self-administrated RRSP.  A small yearly fee is cheaper than pouring large sums of money into expensive, poor-performing mutual funds.  Depending on one’s age, invest a portion in market funds (T-bills), and the rest in blue-chip companies that have a solid record of increasing dividends each year.

          While we will not recommend RRSP’s, there are some benefits to having one.  Specifically, the proceeds towards an RRSP are a tax benefit.  In addition, if one is fortunate to work for a company that contributes generously to an employee RRSP plan, I would recommend that the individual takes this opportunity, because it is an extra form of pay.  But, keep in mind this is a taxable benefit. Furthermore, companies that offer this will more than likely offer non-registered benefit plans as well.  If you choose to invest in RRSP’s, make sure to do your research and proper planning.  Failure to do so can end up costing you a lot of time, money, and grief. 

           If you have the ability to save on your own without touching the funds, I would not recommend investing inside a RRSP. When you do the math, there is no tax savings. If an investor saves $1m in an RRSP, once the individual collapses the plan he would have no choice but to purchase an annuity which will tie up his/her money. Failure to do so can cost the investor roughly $400,000 in taxes.

          By investing in these plans, all one is doing is creating long-term tax obligations.  Sacola feels that it is better to pay the tax when income, interest or capital gains are earned.  Only when one pays these taxes, does the money become truly tax free.  In addition, for the serious investor it makes no sense to tie-up ones money as you do with an RRSP.  Investing is about taking advantage of opportunities and registered plans limit a large number of them.