Appeared in Business in Vancouver – January 28, 2014
It’s RRSP season. The Coles Notes version of what follows is that I’m less decisive than ever about applauding – one-hand clapping – the Registered Retirement Savings Plan.
Here’s my own RRSP/RRIF scorecard: 16 equities and equity funds, 10 winners, six losers (Penn West Petroleum, big loss; Hollinger Inc., total loss). RRIF payout – not too shabby. Many households live on less. An RRSP may be good for you. Or not. Depends. On your expectations. Personality. Lifestyle. Risk tolerance. Astrological sign (born under Taurus, the Bull, there’s a hunch you’re an investment optimist; if you’re a Libra, the Scales, you could weigh the choices interminably – just ask this one). You alone can decide.
As the famous baseball intellectual Yogi Berra unforgettably said, “It’s tough to make predictions, especially about the future.” And remember – as catcher, Berra gave the pitcher the sign. Who could better predict whether the next pitch will be a low slider or a fastball across the letters?
But I digress, however delightfully. The issue before us is whether you should start or continue to contribute to an RRSP, fondly nourishing and guiding it like a child, so that it grows up and becomes a Registered Retirement Income Fund, and on maturity looks after you in your old age like a loving daughter.
But today the decision is more complex than when I weighed it in the late 1960s. Born in 1957, the RRSP was widely hailed as a financial wonder drug. Pay into it – instant tax break. Ladle it out on low-tax retirement – no need to live on pensioner’s tea and toast. The common man’s capitalism. People who couldn’t figure out their hydro bill began to excitedly read columns of six-point-type stock quotes.
But there’s a winged insect in the sunscreen lotion on that Hawaiian beach. Let’s hear from an expert, Neil McIver, discretionary portfolio manager for the McIver Wealth Management division of Richardson GMP: “When those dollars are withdrawn from the RRSP in the form of a RRIF their income will typically be lower, therefore their taxes from that income will be lower. The RRSP ensures that individual has more than just a government pension during retirement.”
So far, so good.
“The problem is that those who maximize their RRSPs tend to be the most financially responsible … and those who work beyond the traditional retirement age of 65,” McIver notes. “The result is that the forced rollover to a RRIF creates unwanted income and, more importantly, unwanted taxes from that income.”
So Ottawa made two amendments, allowing income- splitting between higher-pension and lower-pension spouses, and basing RRIF income on the younger spouse’s age. But those aren’t applicable to all, and thus – I’m all for it – the pressure on government to remove the forced withdrawal of RRIF income on a scheduled basis until it’s exhausted, and arguably needed most.
That’s why the RRSP/RRIF is being strongly challenged by a young sibling, the Tax Free Savings Account (TFSA), born in 2009, the midwife being the present Conservative government. No tax break for deposits, but income grows and on withdrawal is untaxed – “an ever-increasing tax-free zone,” McIver notes. The maximum yearly deposit has grown and is now $5,500.
McIver’s cautionary note: “Just like the now-extinguished lifetime capital gain exception, all programs such as TFSAs hold legislative risk. What one government may give, the next may take away.”
So RRSP or TFSA – which? My non-expert advice: Both – tilting toward the TFSA. But then I’m a cautious belt-and-suspenders man; first order of business, don’t let your pants fall. Mutual funds? Be alert; many range from mediocre to terrible. As Yogi said, the future is hard to predict. You’re welcome.
© Trevor Lautens, 2014