Transcript: Jamie Golombek — Dispelling Common RRSP Myths

[Banner with a CIBC logo that says, “Dispelling Common RRSP Myths” appears.]

[Banner with a CIBC logo that says, “Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice” appears.]

[Jamie Golombek appears with a map of the world in the background.]

In recent years RRSPs have gotten a bit of a bad rap.

People are saying: should I still be using the RRSP as the primary retirement savings vehicle, or should I maybe be using a TFSA? Or maybe I shouldn't even bother and just use an non-registered account. After all, when I take money out of my RRSP or RIF I'm going to pay tax and that tax could be high. So why even bother with RRSPs?

Our latest report addresses some common myths that we're trying to dispel with RRSPs.

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Perhaps the biggest myth is that there's no point in even bothering with an RRSP because after all, when you take the money out under an RRSP, or ultimately in the RIF, there’s a forced minimum withdrawal. You're going to pay tax on it anyway. 

And in fact, what's really the point at the end of the day? Because you're getting a deduction now and you're including the income later.

But in fact, if you look at the numbers behind this, you find that effectively your rate of return on your after-tax contribution is ultimately tax-free.

In other words, what was your option? Sure, you could have done TFSA and for some people that might make sense.

But on the other hand, if you're comparing an RRSP with a non-registered account you're still going to pay capital gains tax, tax on interest income, tax on dividends, on the non-registered money; remember, you're only dealing with a smaller pool.

So, with an RRSP you're investing pre-tax dollars, with a non-registered account it's after tax dollars. And you're still taxable on the investment returns.

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We've proved mathematically in our report that you're always going to be better off with an RRSP or a TFSA than a non-registered account.

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The second myth says that maybe TFSAs are the way to go. And for some people that might be true.

For individuals in the lowest tax bracket, say someone making under 45,000 dollars a year, yeah I wouldn't do any RRSPs. I would do all TFSAs as your tax rate could only be higher when you retire.

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But I think for a majority of Canadians who will be in a lower tax bracket in retirement than when working, then RRSPs do make most sense.

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The third myth is: maybe I should really focus on paying down my mortgage rather than putting extra money into an RRSP.

And again, with low historic rates on mortgages, many mortgages having rates below even 3 percent, we’ve proved in a prior report called “Mortgages or Margaritas” that it really doesn't make a lot of sense to pay down low-rate debt provided you can sleep at night.

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In other words, your long-term rates of return on a balanced portfolio inside an RRSP or even TFSA, will outweigh paying down low-interest rate mortgage debt.

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The fourth myth is: I don't even have enough money to save in an RRSP.

In other words, I don't have thousands of dollars at the end of the year to contribute to an RRSP. That's OK.

[Banner that says, "Consider setting up regular automatic contributions to your RRSP" appears.]

You can set up a regular contribution from your paycheque, automatically coming out of your bank account on a monthly basis. You can do it for a 100 dollars a month.

In other words, start small it's important to get into the habit of long-term RRSP savings.

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The fifth myth is: maybe I shouldn't bother with RRSPs after all I've got Canada Pension Plan and OAS.

And while that's certainly true, when you do a financial plan you may realize that those retirement pensions are simply not enough to be able to afford the type of retirement that you're looking for.

[Banner that says, "You may also need RRSP savings to meet your retirement income goals" appears.]

Only with a financial plan, can you determine how much you want to get into an RRSP.

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Finally, some people say: well I shouldn't bother with RRSPs, because the end of the day after I die or after my spouse dies, the full amount will be taxable.

And that's certainly true. But when you do the math on that, you look at the tax deferral and the fact that you never pay tax on the income on the way in, what choice did you have?

In other words, the best solution, and we can prove this mathematically, is that RRSPs despite facing a tax burden at the end of the day, still remain for most Canadians the number one way to save for retirement.

[Banner that says, "RRSPs remain the #1 way to save for retirement for most Canadians" appears.]

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