RRSP Silly Season
I don’t entirely agree with Jim Stanford that RRSPs are a bad way to save for those not fortunate enough to be covered by a good pension plan, but I am struck by the absence of sober, independent analysis as we head into RRSP season. Today’s special Report on RRSPs in the Globe and Mail is, predictably, totally uncritical, and basically argues that just about everybody should max out their contribution to the extent possible to take advantage of the tax savings.
The argument for saving through an RRSP is that the contribution is tax deductible, and that the capital income earned within an RRSP is untaxed. At the other end, RRSP withdrawals (and income from RRSPs converted into RRIFs) are taxed, usually at a lower effective tax rate as income falls after retirement.
Tax deferral is attractive, but the attractiveness of saving through RRSPs has been undercut by increasingly generous tax breaks for capital income (eg only 50% of capital gains income is now included in taxable income), and by a flattening of the tax structure. If the right-wing dream of no tax on capital income nd a flat tax rate came true, there would be no point to RRSPs at all. If one thinks that right-wing tax proposals are likely to be implemented, one should not be very attracted to RRSPs.
For low income earners, RRSPs are not a very attactive way to save, since withdrawals will, at best, be taxed at the same (bottom) rate as previous earnings, not at a lower rate. At the very low end, RRSP withdrawals will, in effect, be much more heavily taxed than were pre retirement wages since the RRSP income will reduce the Guaranteed Income Supplement, an income-tested supplement to Old Age Security. Richard Shillington has showed that many low income seniors face punitively high marginal tax rates from loss of various income-tested benefits, making it foolish to save in any vehicle that delivers taxable income in retirement.
At the other end of the scale, a layer of people with good incomes and generous pension plans should not save through RRSPs since income withdrawn from plans will be taxed at a high marginal rate due to the income test applied to Old Age Security (which is taxed back at incomes of over about $60,000).
I’m a bit surprised that the financial advisers whose RRSP investment strategies are studied in today’s Globe choose to invest in RRSPs given that (1) they will likely lose OAS income as a result, and (2) given that savings in non RRSP vehicles would be more attractive to them in retirement since capital assets outside of RRSPs can be liquidated without giving rise to anywhere near the same amount of taxable income.