There are worse problems to have in retirement
As RRSP season starts ramping up I’m thinking you and I are going to be seeing a number of RRSP related articles, seeing a number RRSP season TV ads and listening to a number RRSP season radio spots. This is a good thing, for the most part. What I mean is as the annual RRSP contribution deadline approaches for the 2014 tax year it’s worth considering how much more money you can realistically sock away. Besides, financial institutions need your money don’t you know…
It’s hard to pass up the two great benefits of the RRSP account:
- A tax deduction for RRSP contributions, and
- Tax-deferred growth for investments inside the account.
Recently though I’ve come across a few articles that say you need to worry about taxation when it comes to your RRSP withdrawals. That’s true, taxation is an issue but I think “worry” is a rather strong word. I’ll tell you why from my perspective. First some quotes from one article I read:
“Most people end up paying higher taxes in retirement than when they were working,”
“That’s a terrifying thought. RRSPs were designed in such a way that I was supposed to save on taxes when I’m in a 42-per-cent bracket and pay taxes when I’m in the 25-per-cent bracket.”
I read these statements in The Globe and Mail the other week.
I laughed.
Why?
I would like to know the statistics on “most people” who are paying higher taxes in retirement than during their working years. I can’t imagine most retirees in Canada are flush with cash and have a tax headache but I will acknowledge if I am wrong.
Next, our government began clawing back Old Age Security (OAS) payments once a retiree’s taxable income reached $71,592 in 2014. I don’t know about you but if I have a paid off home and no debt at the time of retirement, $70,000+ per year is good income. I only hope we have that much financial security.
Lastly, this RRSP “tax trap” term I’ve been reading about is disappointing. Depending upon your financial needs and situation of course, while there exists some truth to drawing down your RRSP funds before the year you turn age 71, a “tax trap” is hardly a horrific problem to have in retirement. I can think of much worse things in my 60s or 70s than having saved a good chunk of money saved for ourselves.
While I agree tax management is important, for any stage in life, I want to play devil’s advocate here. I think a tax problem in retirement in an outstanding problem to have in retirement. It means you saved enough. Good on you to do so.
What are your thoughts about RRSP “tax traps”? Aren’t there worse problems to have in retirement?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
What a great problem having to pay taxes after making over 71K on Pension.. I say bring it on!
Remember Health is Wealth and that is what counts the most. Paying tax and avoiding
TAX is the game we play in this the game of life.
Reguards Bill G.
I would think making >$70k per year on a pension, and having some savings, is an outstanding place to be in retirement as long as you have your health.
You can never escape the tax game of life 🙂 Thanks for the comment Bill G.
Interesting post.
Like you Mark I would like to see some stats on the “Most people end up paying higher taxes in retirement than when they were working,”
That is extremely hard for me to believe.
For most people with mid to higher income range an RRSP is a great choice. Besides giving you a tax break with your contribution it’s an excellent forced savings plan.
IMHO, the chances of your OAS being clawed back because you have a significant RRSP, or that you will pay more tax in retirement than working is very slim. This would only result if you/ and your spouse have a very large corporate or government pension, or your personal savings are well into 7 figures for an individual, or if you aren’t smart with your withdrawals waiting until you’re forced to withdraw. Most of these things can be calculated/estimated to determine in advance what your best approach is to avoid paying more tax.
If in the very unlikely event you are paying more tax or seeing OAS clawback you can consider yourself very lucky -perhaps an elite retiree with such a comfortable personal income in retirement.
Thanks for the comments Deane. RRSPs are excellent forced savings plans and we’re using ours for sure. I think OAS clawbacks are a great problem to have, I hope this is the biggest issue we have in retirement 🙂
I think the main thing is that many people think that RRSP money is all theirs, and those tax refunds were just fun things to have…. so you have a lot of people who feel dinged on their withdrawals, yet they probably came out ahead through using RRSPs.
You’re likely right Paul, they feel like the RRSP is a bad deal because they don’t understand the money is tax-deferred.
Mark, I totally agree. Having TOO MUCH taxable income in retirement is a problem I want to have. My mother used to contribute to her RRSP every year until she realized it would cause her to lose her GIS benefits. Thanks goodness the TFSA came along. Now she puts all of her money in that.
Smart move, her using the TFSA Sean.
RRSP like Any ither investments required analysis. In my case, marginal rate is at 51%, future rate will be at 42%? it is a no brainer.
My wife is actually at 42% and will be at 42% at retirement if there is no increase to marginal rate income tax… No so obvious for her. TFSA is I believe much more interesting and investing in Canadian Dividend stock is probably more interesting outside RRSP if you don’t have room In TFSA.
Obviously, if you are interested by the growth and dividend of US stocjpk, then RRSP is good.
In conclusion, no so interesting to invest In RRSP
Thanks for your comments Hemgi, I agree with you, when it comes to your tax rate in retirement vs. working as “a wash” then certainly TFSA assets become more valuable as they are tax-free.
I’d also like to see the statistic or study indicating that retirees are in a higher tax bracket than working Canadians.
Agree with the sentiment that having tax problems in retirement is hardly the end of the world. It means you’ve done a good job saving during your working years, and you’ve effectively delayed your tax problems for many many years. After all, I’d rather face tax problems in retirement than now.
Thanks for the comment Brian. I think a tax problem now means you’re making good money and/or you’ve saved adequately. I think a tax problem in retirement is also an excellent problem to have 🙂
Agree with you! It’s a good problem to have! I think there’s a tendency in Canada to diminish the importance of retirement savings and investments. As if some people were always trying to find new “good” reasons to not save…
I’m all for living for today, spending money, travel, buying some toys, etc. but I think folks making the argument about not saving for retirement because of OAS clawbacks, potentially paying taxes in retirement or something else is a bit nuts. I know if we have a tax problem in retirement we’ll be financially secure.
Exactly! Enjoying life now is good, living for today the rest of your life is even better! 😉
Heck ya Dividend Guy!
Haha it makes me laugh hard as well. What are people thinking? I would prefer to have $1000 than not having at all. RRSP, TFSA, RESP etc… are our Canada government’s greatest investment tools for people who do not have company or government pension to support themselves when they are not able to work.
I have no idea what people are thinking 🙂
Having a tax problem is better than not having enough money in your retirement and have to live day by day no? I wish the government can change the RRIF withdraw rules. I think the current rules are way too restricting.
You and I are on the same page when it comes to RRIFs Tawcan. Those RRIF rules are ancient, Canadians need more flexibility when it comes to account management.
Hey Mark
How she go?
I always love the taxation and clawback discussion. One of my favourites.
As you know, I retired 2 years ago at age 60 without any company pension. My wife was a stay at home mother so I contributed to her spousal RRSP a bit more than mine but both RRSPs now have a considerable size.
Since retirement, we’ve been withdrawing/transferring in kind to our TFSAs and non-registered accounts (I made my wife a loan to get hers started). We are paying more taxes now than we need to with the idea of trying to decrease the RRSP size before we starting collecting OAS and thus avoiding clawbacks.
It’s a tricky exercise to try and optimize but I think it is worthwhile to do. (and for us math guys, it was actually quite a bit of fun). I’m fine paying taxes on RRSP withdrawals and still think they are a really good thing. I also think that the TFSA is even better and should be maxed out first before the RRSP. It would have been nice to have had TFSAs earlier but better late than never.
Ciao
Don
Same, I enjoy learning about taxation or ways to self-manage. Odd ball I know 🙂
Yes, I recall you retired without any pension but your saving habits were outstanding. I think this is our plan ahead as well Don, use RRSPs early. Likely pull out $5,000 per year from each account, pay 10% withholding, spend a bit and then see if we can move some money to TFSA every year.
This will shrink or reduce our RRSPs to next to nothing by the time we apply for CPP and OAS, which might be beyond 67 for us in another 25 years!
I’m with you 100% on the TFSA, focus on that account before the RRSP almost regardless of the tax rate you’re in, although TFSA makes the best sense over RRSP for low to modest-income earners.
Thanks for the great comment.
Mark
Couldn’t agree more. Funny, I was having this very conversation yesterday. A gentleman approached me and started dismissing RRSPs because of the clawbacks. When he asked me what I thought the conversation went something like this..:
“Would you rather be seventy-one with zero money in the bank but receiving all of the OAS or would you rather be seventy-one with $500,000 in the bank and receive a clawed back OAS?”
Stutter, stutter, blank stare. “Yeah, but who has $500,000 in the bank?”
“Those who open RRSPs early and contribute to them consistently.”
Stutter, stutter, blank stare. “Oh.”
Too funny. I only hope we get clawed back Rob. 🙂 A tax problem in retirement is a great problem to have.
I hope to have all my OAS clawed back in retirement. I chuckle at those that structure their lives to qualify for seniors welfare. That wasn’t the way I was brought up.
I think saving enough Lloyd to have your OAS clawed back, even a little, is a good thing.
Calling OAS ‘seniors welfare’ is the same as calling a government pension as ‘seniors welfare as well’. It is a program that we all pay into. It’s a government pension – that’s it.
If it was seniors welfare – clawbacks should begin at 30K in todays dollars. I’d be fine with that.
True None, given OAS is a program funded by general tax revenues. I don’t think the OAS clawback should be north of $70,000 myself. As long as OAS exists for folks I will glad take it when I retire.
No one “pays into” OAS. Pensions (CPP or company) we pay into, different animal. OAS and the GIS are income tested so IMO they are akin to welfare. Like I said, I’ll be happy to have it clawed back ’cause it means I’m paying my own way. I’ll take pride in that even if it means I’ll “pay” more in taxes.
Mark,
I’ve always said that I’d rather have a tax problem than a revenue problem. Can’t remember the last time I ever heard: “Nah, I’ll pass up that $20k/year raise because I’ll have to pay more taxes.”
Funny what people worry about.
Best regards!
Yes indeed, thanks for the comment Jason, a tax problem is better than a cash flow problem for sure.
You’ve really never heard anyone say that they’ll pass on the overtime, because they’ll pay more in taxes then they would make on the OT. I heard it from several people when I worked in Ag manufacturing. Never understood it.
I agree that a tax program in retirement is a great problem to have, all things considered. However, I believe if you are going to go through the effort, dedication, and discipline to make sure you have enough money saved for retirement you should make an effort to make it tax effective.
I understand the clawbacks for high income earners. But it still bothers me that taking care of your financial future throughout your working years will result in clawbacks when compared to johnny who spent every penny throughout his working career and has little money saved.
This is why I to withdraw $5000 from my RRSP annually and make sure my TFSA is maxed out every year. In an attempt to lower my taxable income in my retirement years.
Thanks for sharing,
Mr. Captain Cash
No doubt tax considerations are important, as you enter retirement even more so, as investors need to think about structuring cash flow and assets accordingly but most Canadians would be better off forgetting about it until then, save, invest, live your life and see where you end up in 30 years.
Just my $0.02!
Thanks for the comment.
This rrsp tax deductions reminds me of my mom saying she didnt want to put her savings in anything higher than a 1% interest gain cause she said she would have to pay more in taxes if she made more. LOL
Yeah..I mean, tax management is important but because it’s so hard to predict the future…most Canadians should just use the RRSP either before or after or with the TFSA 🙂
Absolutely a good problem to have and the ‘RRSP trap’ articles can cause many to miss out on the benefits of using RRSPs. But I think there some things to be learned from these articles and if there are things you can do leading up to and at the start of your retirement years to maximize the long term value of your investments and other retirement income it’s worth thinking about. For example, let’s assume you retire at 60. It could be better to live off RRSP income and savings, while continuing to pay into your TFSA. That way when it comes time to draw on your pension/OAS you can avoid the clawback down the road since you will have less mandated RRIF income and rely more on tax free TFSA income.
Not some to worry about when you’re in saving mode during your ’30s and ’40s, but as you approach retirement these things start to matter.
I think for many middle-income Canadians, don’t overthink it, just contribute to the account and see how things make out in another 30 years.
Like you mentioned gmf, I think there are things to be learned from such articles but in the end, a tax problem in retirement is an excellent problem to have, all things considered!
Thanks for your comment, always great to hear from readers.
That’s exactly what I did. My parents came from Europe so I’m first generation Canadian. I graduated from university at 29, worked and contributed to my RRSP for 30 years as I knew I would only have CPP, no company pension to fall back on. I retired at 59 (2 years ago), and as it turns out, I saved enough outside my RRSP that I may never need the RRSP withdrawals. When I’m forced to withdraw, I expect it will be at the highest rate. That said and having taken care of my mother, I know the cost of Assisted Living etc. is very high so I’m still happy I have my RRSP (and TFSA) for the future. No OAS either but I know I am very fortunate to be Canadian and to pay Candian taxes. Nice problem to have indeed!
Congrats on the retirement and financial freedom…you certainly have it if you feel you don’t need RRSP withdrawals for expenses, what a great “problem” to have. Yes, the future is always so cloudy…who knows how our health will turn out – which is why for us we are focusing on having fun today but also saving for our future. Assisted living or healthcare expenses could be through the roof for us in another 40 years and we’d like to be somewhat prepared for that.
We have our social and economic problems in Canada but this country is very blessed when compared to the rest of the world. Cheers to another proud Canadian and thanks for reading 🙂
Worry about tax on registered withdrawals. Not really.
What does concern me is having those minimum annual withdrawals from an rrif. If we live to be really old, how does having tax to pay on any investment income effect us?
$70,000 a year? Far more than we are spending, even though we have enjoyed several extended holidays in this past year.
I wish they would change the RRIF rules altogether. Those rules don’t make sense to me whatsoever.
$70,000 a year, I hope I have that problem in future dollars. That is a great lifestyle with no debt!
It’s true that having an RRSP tax problem means you save enough, but I prefer the TFSA to avoid such problems. While working in public accounting, I have seen many seniors that were reluctant to withdraw their RRSP money because they didn’t want to pay the taxes. The other advantage of the TFSA is that your money grows tax free. Free beats deferred, in my opinion. I just wish the government would hurry up and raise the yearly contribution limit!
I think you’re missing something. The money that you put into a TFSA isn’t tax free. You put after-tax dollars into a TFSA. The government always gets their money. The question is what tax rate did you or will you pay on it. Most people pay higher tax during their working years and less tax in their retirement. Hence the benefit of the RRSP and the tax deferral. During working years your top marginal tax rate can be in the mid 40%. This is where the RRSP dollars are diverted from. In retirement, depending on what you’ve saved and spend, your tax rate is more likely to be in the 20% range. That’s the real benefit of the RRSP. It’s a tremendous savings. (One note though, if you don’t spend your money in your retirement, and you have substantial savings at the end, the government gets the higher tax rate again because all of the money comes out of the RRSP at once.)
Also you indicated that you see seniors that are afraid to withdraw their money from the RRSP because of the tax. The problem I see with the TFSA is that it’s too easy to withdraw the money long before retirement arrives.