Are RRSPs a waste of time and money? I'm beginning to think so

[newtohobby]

So I'm helping my mother do some tax planning and her income taxes.

She is in here late 60's and starting to dip into her RRSP's

27k base income as she is widowed.

On a 27k income she pays around 1700 in taxes.

Heres where in the RRSPs come in, She withdrawls 10k, already losing 2k in withholding taxes, her income taxes jumps up to around 1900.

Wait till shes 71, then the mandatory RIF withdrawl rates hit and, she'll be withdrawing close to 15k and paying over 5k in taxes.

This seems to be alot of taxes, and maybe it would've been better to not by RRSPs. Also she will probably out live here money so, the government will get most of it.

I

 

[benstt]

Do simulations, both in and out of rrsp. With rrsp you generally are deferring to a time with a lower marginal tax rate, and have tax free compounding during the deferral.

 

[Smallcock]

It's a shame that finances are made so difficult by tax laws. Trying to figure things out is like finding your way out of a maze.

 

[Scorpio Rising]

It's a shame that finances are made so difficult by tax laws. Trying to figure things out is like finding your way out of a maze.

Just keep transferring mazes, can be a blessing in disguise

 

[Barca]

Do simulations, both in and out of rrsp. With rrsp you generally are deferring to a time with a lower marginal tax rate, and have tax free compounding during the deferral.

Spot on.

 

[atlantica]

Yes, and don't discount the fact that when she made her rsp deposits they were tax deductible. This either resulted in either less taxes owed at the time or a tax refund. She may have spend that or saved it, but either way it worked in her favor then. After that the money grew tax sheltered, so it grew more then without that shelter. Now she is in a low tax bracket. Sounds like a win win for her.

 

[Butler1000]

Have her look into a property tax break as well depending on income she may qualify.

 

[Barca]

Yes, and don't discount the fact that when she made her rsp deposits they were tax deductible. This either resulted in either less taxes owed at the time or a tax refund. She may have spend that or saved it, but either way it worked in her favor then. After that the money grew tax sheltered, so it grew more then without that shelter. Now she is in a low tax bracket. Sounds like a win win for her.

I've noticed people forget about the benefits of rrsps once they start withdrawing and paying taxes.

 

[ultistar]

I've noticed people forget about the benefits of rrsps once they start withdrawing and paying taxes.

LOL, very true.
I would ask, is there a better alternative to RRSP? If you blow it all on hookers and cocaine, you may end up poor in retirement and become a burden on your kids... while they are trying to make their way in life.
K, I think I've had enuf to drink tonight...

 

[Worf]

I've noticed people forget about the benefits of rrsps once they start withdrawing and paying taxes.

Yes, correct. People have no problem getting the tax deduction when they initially save the money. But when the have to pay some of it back (at a lower tax rate) they complain the government is taxing them to death and ripping them off.

 

[james t kirk]

One thing about cash in an RRSP goes - when you die, if there's any money in there, it has to be withdrawn in one lump sum and paid to your estate. Your survivors will need to pay your final income tax bill for you after you are gone.

So say you die with a million dollars in RRSPs (nice dream, but nice round numbers). All the money has to be taken out in one shot and tax must be paid as if the person who just died was earning a million per year. So say buh-bye to $470,000.00 to the taxman.

Moral of the story, even if you don't plan on using the money, once you retire, start withdrawing it from the RRSP and paying tax at the lower margins over the years in order to minimize the tax impact down the road to your estate when you do die.

Lastly, at least when you die with RRSPs, your estate gets the money. If you die one year into a pension, well, your estate gets a funeral benefit (and a small one at that) (unless of course you signed over survivor benefits to your spouse, in which case, there is a penalty to the amount of pension you receive if you figure that your spouse will outlive you, in which case, they collect a partial pension.)

I've seen cases personally of when a person dies 2 years into a pension they paid into for a lifetime and their estate got $2,500 for a funeral benefit (good luck buying a funeral for that) and that was it. At least with an RRSP, whatever you have left in the RRSP goes to your family and not a pension fund.

At the end of the day, the beancounters have it down to a science. You aren't going to win either way, the objective is to simply lose less.

 

[bazokajoe]

So I'm helping my mother do some tax planning and her income taxes.

She is in here late 60's and starting to dip into her RRSP's

27k base income as she is widowed.

On a 27k income she pays around 1700 in taxes.

Heres where in the RRSPs come in, She withdrawls 10k, already losing 2k in withholding taxes, her income taxes jumps up to around 1900.

Wait till shes 71, then the mandatory RIF withdrawl rates hit and, she'll be withdrawing close to 15k and paying over 5k in taxes.

This seems to be alot of taxes, and maybe it would've been better to not by RRSPs. Also she will probably out live here money so, the government will get most of it.

I

So if I read this correct,your mother's taxes will only jump up $200 + the $2000 withholding tax ?Why wait until she is 71? Just because she withdrawls the money doesn't mean she has to spend it. Put the money she withdrawls into a TFSA.No taxes on that money.......well until pretty boy PM fucks that up to.

 

[oldjones]

Do simulations, both in and out of rrsp. With rrsp you generally are deferring to a time with a lower marginal tax rate, and have tax free compounding during the deferral.

That is the whole rationale: Your RRSP contributions let you pay lower taxes on the higher income you pocketted in the good years, and none on the contributions; now you pay those taxes on the withdrawals. But if your income is lower in retirement so is your tax rate on those withdrawals. And the withholding amount can come back to you as a tax refund, just like the withholding on a paycheque. The 'perfect' model would be a top bracket earner taking a year off — like to get an advanced degree — with no income but the amount taken from the RRSP. So the better you are at building a retirement income that compares well with pre-retirement, the less useful the tax advantage.

RRSPs made more sense back when they were invented, because we had more tax brackets back then, and the heavier rates applied earlier and went to higher percentages. However to answer the OP. they are never a waste of money, except what you pay in admin charges compared to other investments (or buying a cushier mattress to deal with the lumps).

As for your time being wasted; posting the question may have taken longer than making the contribution would.

 

[newtohobby]

Seeking a clarification here: James, are you sure they can't transfer your RSP directly to your spouse's RSP when you croak? I had thought this was what they explained to me at the bank, but I'm not sure. Thanks!

Yes, your rrsp rollover to you spouse if they are the named beneficiary tax free.

 

[SchlongConery]

So I'm helping my mother do some tax planning and her income taxes.

She is in here late 60's and starting to dip into her RRSP's

27k base income as she is widowed.

On a 27k income she pays around 1700 in taxes.

Heres where in the RRSPs come in, She withdrawls 10k, already losing 2k in withholding taxes, her income taxes jumps up to around 1900.

Wait till shes 71, then the mandatory RIF withdrawl rates hit and, she'll be withdrawing close to 15k and paying over 5k in taxes.

This seems to be alot of taxes, and maybe it would've been better to not by RRSPs. Also she will probably out live here money so, the government will get most of it.

I

The fact is that some of the money she is now withdrawing and paying income taxes on, grew tax free on money she invested that was also tax free.

So unless she is making more income now than when she initially put it into the RSP, she is money ahead.

And as others have said, it might be a good idea to take out extra money now and invest it in a TFSA (especially before the limits are reduced) so when she "outlives her money" that the entire value of the RSP/RIF is not taxed in a single year upon her passing.

 

[james t kirk]

Yes, your rrsp rollover to you spouse if they are the named beneficiary tax free.

I was recalling my experience when my mother died (after my dad) and we had t pay taxes for her full pop. Hence my warning. I should have defined my experiences better in my post.

The OP was referring to his mother which made me think of mine.

 

[newtohobby]

The fact is that some of the money she is now withdrawing and paying income taxes on, grew tax free on money she invested that was also tax free.

So unless she is making more income now than when she initially put it into the RSP, she is money ahead.

And as others have said, it might be a good idea to take out extra money now and invest it in a TFSA (especially before the limits are reduced) so when she "outlives her money" that the entire value of the RSP/RIF is not taxed in a single year upon her passing.

TFSA maxed out.

 

[benstt]

I've seen cases personally of when a person dies 2 years into a pension they paid into for a lifetime and their estate got $2,500 for a funeral benefit (good luck buying a funeral for that) and that was it. At least with an RRSP, whatever you have left in the RRSP goes to your family and not a pension fund.

There is a mortaiity pool benefit to pensions that RRSP"s do not have. Don't underestimate it. If you live a long time, you will win in a pension vs an RRSP. You can save what you don't spend, and pass that down.

If you want these to ensure a lump sum is passed on, you can use insurance for that and plan that amount.

I'm aiming for a mix of pension, individual annuity, and rrif. There are pros and cons for each.

 

[TESLAMotors]

One thing about cash in an RRSP goes - when you die, if there's any money in there, it has to be withdrawn in one lump sum and paid to your estate. Your survivors will need to pay your final income tax bill for you after you are gone.

So say you die with a million dollars in RRSPs (nice dream, but nice round numbers). All the money has to be taken out in one shot and tax must be paid as if the person who just died was earning a million per year. So say buh-bye to $470,000.00 to the taxman.

Moral of the story, even if you don't plan on using the money, once you retire, start withdrawing it from the RRSP and paying tax at the lower margins over the years in order to minimize the tax impact down the road to your estate when you do die.

Lastly, at least when you die with RRSPs, your estate gets the money. If you die one year into a pension, well, your estate gets a funeral benefit (and a small one at that) (unless of course you signed over survivor benefits to your spouse, in which case, there is a penalty to the amount of pension you receive if you figure that your spouse will outlive you, in which case, they collect a partial pension.)

I've seen cases personally of when a person dies 2 years into a pension they paid into for a lifetime and their estate got $2,500 for a funeral benefit (good luck buying a funeral for that) and that was it. At least with an RRSP, whatever you have left in the RRSP goes to your family and not a pension fund.

At the end of the day, the beancounters have it down to a science. You aren't going to win either way, the objective is to simply lose less.

I just came across this article for a friend whose mother has passed and James TK is 100% dead on.
http://canadianfinanceblog.com/dont-die-with-too-much-in-your-rrsps/

 

[basketcase]

...

On a 27k income she pays around 1700 in taxes.

Heres where in the RRSPs come in, She withdrawls 10k, already losing 2k in withholding taxes, her income taxes jumps up to around 1900. ...

Um. Aren't 'withholding taxes' just the bank taking money to make sure she files her taxes the same as many companies withhold the income tax from you patcheque?

Sounds like she is paying $1900 in total income tax so she will be getting $100 back from the withholding when she files.