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 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 means one great thing to my generation and other working Canadians – it’s a sign 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?