A love letter to those who don’t believe in RRSPs | RRSPs and RRIFs | Discussion forum

The tax deduction at contribution time is a nice perk of RRSPs, but the much bigger benefit is the tax-free compounding growth over time. People who maximise this benefit (as well as TFSA) throughout their working careers should have quite a comfortable (and maybe earlier) retirement.

Using RRSP is usually worthwhile, except in certain circumstances for older people.

The point about reinvesting the tax refund relates to choosing between TFSA vs RRSP. If you compare $10,000 to RRSP vs $10,000 to TFSA, the RRSP looks great on paper, but that’s because the RRSP contribution was made with pre-tax dollars while TFSA uses after-tax dollars. You end up with a smaller investment pot net of taxes. To make it equivalent in terms of net retirement income you do need to invest the RRSP refund and assume similar tax rates in retirement.

The quoted article cherry-picks a case for RRSPs. And even then, the advantage of the RRSP is minimal ($15 in the case cited) and depends on the investment return and where tax rates go between investment and withdrawal. The unpleasant "minimum withdrawal" provisions of RRSPs can cause higher tax liability if one is decently earning after retirement.

And they can cause loss of some pension and other means-tested benefits.

That article only compares RRSP versus non-registered investments. The existence of the TFSA completely changes the situation, and while the contribution limits can't go as high as for RRSPs, not incurring withdrawal taxation is a huge benefit.

On the other hand, if one has a bad year or so, one can withdraw RRSP funds at a lower tax rate. But few people plan for a bad year, save for some business owners who can control when taxation is applied.

savemoresaveoften said
To me,
The hard decision is what to invest inside the RRSP. Equity gain and the accumulated dividend will be 100% taxable, but then it almost always outperfom fixed income in the long run.

So balance it with more fixed income in the RRSP, equities in the TFSA, but then only $7k a year for TFSA...

But always save and invest as much as one can when one is young.  

Equities in TFSA's. Yes.

Next, Equities in non-Reg with Cap Gains taxed @ 50% of RSP/RIF renumerations tax rate.

Then, balance out your portfolio risk in RSP's.

Try to minimize lifetime taxes, try to maximize govt handouts, those are just a very bad attitude mindset to me.

How about try to maximize lifetime money earning power !

None of us know with certainty what our future incomes will be. We have to plan for what we know. In my case, I'm old and can't count on high income any more. Sure, we'd all like to maximize our earning power, but the options for most Candians are limited.

Anyone who doesn't want to minimize their taxes can simply not purchase RRSPs. Or TFSAs.

"Maximize what they contribute," Bill? Is that really anyone's strategy? Contribute to what? Tax policy is there for a reason. Our national policy is intended to keep people from homelessness or exploitation that would make them dependent on government.

One of the largest reasons for those registered tax credits is that real estate inflation is boosted by tax exemption that makes life unaffordable for many, while property owners benefit from a big chunk of unearned income. Dividend tax credits increase that, rationalized by considering taking risk as "earning."

Registered products are a small, limited way to balance the higher taxation on earned income.

Is the capital gain on your principal residence still tax free?

If yes, buy the biggest house you can afford. Your house could be your best investment. I doubt you can buy a house with a roof in Toronto for under $1.5mm. Of course, one can buy a house without a roof for less than $1.4mm, LOL.

Dividend tax credit has nothing to do with rewarding risk.

It's just there to reflect that the profit used to pay this dividend has already been taxed before the payout. The reason for div tax credit is tax integration.

Risk/reward equation is an overall investment principle which is there regardless of taxes and credits. In fact, most high risk investments pay no dividends at all while safer investments like bank or utility stocks usually pay a decent dividend which is subject to tax credits. Risk premia are set pre-tax by the market. If div taxes were to increase, share prices would keep falling until the expected future returns got back to reflecting appropriate risk premium for the stock. It would also reduce investment in Canadian companies, at least in the short term.

In the case of housing, tax free profit is obviously unfair (violating tax integration principle) but what it does is distort the market by resulting in higher prices.