Why I don’t like RRSPs

Registered Retirement Savings Plan

The Canadian government’s answer to the falling tax base. Over the last 40 years  more and more Canadians have had the ability to put aside money towards “retirement”. In the beginning of this trend people were being very smart about it. They were educating themselves about investing and the power of corporations, and were keeping their money out of the hands of the government tax man. This started putting a dent in tax revenue, so the government had to think up a way  to stop this trend. They knew that the people were getting to smart about their financial situation , and any time a population gets to smart for the governments good it’s time to take action. They decided to take advantage of the fact that human beings are basically lazy, and that if given the opportunity most people will take the easiest way out of almost any situation.

Enter the RRSP. Why go to all the trouble of managing your own wealth creation and retirement savings, just let your friendly neighborhood tax man do it for you. After all we all know how the government always has OUR best interests in mind right? All you have to do is open an RRSP account at your favorite bank or investment brokerage house, put X amount of money into it over the coarse of the year,  and bingo your done. Your money grows TAX FREE until you reach retirement age, when you convert the RRSP into a RIF ( retirement income fund) and start taking money out to live on for the rest of your life or until the fund runs out of money whichever comes first. Isn’t that easy boys and girls, you don’t have to do anything, you don’t have to learn about investing, you don’t have to research different investments and make decisions for yourself. Just give over your money to the banks and mutual fund managers, and they will do whats best for you. As an added bonus, just for playing ball on this one the government will allow you to use your contributions as a tax deduction, every year that you participate in their little game.  Oh by the way, all  you Americans reading this. Your 401K accounts work very much the same way as our RRSP accounts so you may want to pay attention too.

Lets take a closer look shall we.

Number 1.  TAX FREE. Most people are under the impression that these accounts are tax free, this is just not true. They are TAX DEFERRED. Big difference. What this means is that in return for not paying any taxes while the fund grows, you will pay taxes when you take the money out. So while your mutual fund manager is having fun buying and selling billions of dollars worth of stocks on a daily bases, and raking up millions of dollars a year in brokerage fees ( which he is allowed to take directly out of your fund I might add ).   You don’t have to worry about all the capital gains and losses he/she is creating. This is a very good thing for them, because if the mutual fund companies had to pay capital gains taxes on these funds they would very quickly go out of business. So ok we have given them all our extra money, all of our working life. Now it’s time to sit back and enjoy our golden years. Listen very carefully, NO matter how your money is invested at the time your fund becomes a RIF ALL THE MONEY YOU TAKE OUT IS SUBJECT TO INCOME TAX! Don’t believe me? Ask your accountant. How many of you think income tax will be the same or lower when you retire than it is today?

Number 2. Banks and mutual fund companies have OUR best interests at heart. Please, is there anyone out there in the real world who actually believes this? Banks and mutual fund companies have one goal and only ONE goal, and that is to make money for their shareholders, period end of discussion. They don’t give one jot or tittle about your retirement except to the extent that you continue to give them control over your money. How do these people make money? The only source of money these companies have is charging you service fees. Thats right whether you make money or lose money in their funds, they get to charge you fees. Most of these fees you don’t even know about. The biggest of them is brokerage fees. Every time they buy or sell a stock within your fund they get to charge a broker fee, thats why they trade stocks so vigorously, the more they trade the more fees they get to deduct from your fund balance. You never notice this because it come out directly from the fund itself, so they don’t have to list it on your yearly statement. In Canada alone this accounts for billions of dollars. Don’t believe me? Ask your accountant.

Herein lies the reason for the TAX DIFFERED status. By encouraging you to invest in mutual funds within an RRSP or 401K  the government has assured itself of a safe and secure source of INCOME TAX for the rest of your life. EG. Lets say you retire with a RIF worth 1 million dollars. You decide to leave the principle in mutual funds at an annual rate of return of 5% ( we will be nice and say the fund averages that for your life time ). This means that the fund itself is generating $50,000.00 a year in income. Is that enough for you and your household? Not mine. I figure the average North American household needs closer to $150,000.00 a year for a decent retirement income, because remember INCOME TAX comes off first. $150,000.00 a year will put you in an approx. 40% tax bracket so this will leave you with roughly $90,000.00 to live on, $60,000.00 going to the tax man. In this example your RIF will decrease in value by $100,000.00 per year or more and you will be out of money in roughly 10-15 years. If you retire at age 65 this means you will be broke sometime between age 75 and 80. If you plan on dieing before then, great if not, what then? This system is designed to have you die penniless, giving as much money to government along the way, over as long a period as possible.

Depressing? Not to worry there is a better way.

Stay tuned

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