February 19, 2019 | The Finale

Once upon a time my father was a high school principal. He always drove white Buicks, had a legendary moustache and eventually made $10,000 a year. Huge deal or, as a child, I would not have been informed of the achievement. In the early 1950s my parents bought a house in the Toronto burbs – two stories, deep lot, garage, leafy street – for $18,000. Big mortgage. Fourteen grand. They took in a boarder to help pay it.

Anyway, as an educator he had a pension. The majority of employed people did back in 1957, but benefits were small. On my birthday in that year the federal finance minister, Walter Harris, delivered a budget speech which created a shiny new thing – the RRSP. A few months later the government of Louis St. Laurent was punted by voters in favour of the populist, Canada-first firebrand John Diefenbaker. Dief, in his wisdom, kept the retirement thingy, which at that time let people shelter $2,500 a year, or 10% of their income.

Blah, blah, history, blah, blah. I get it. But here’s the key point: retiring somewhere other than under a bridge has always (since 1957) been built on three pillars. A small public pension. A corporate pension. And your own savings – made easier by the RRSP.

These days 70% of people have no corporate pension. None. Zilch. For many who do it comes in the form of a half-baked, low-energy group RRSP stuffed into the lifeless mutual funds of a moribund, no-pulse insurer with a peppy logo. The public pension plan is anemic, at an average of $7,500 per year, plus another seven grand in OAS when you hit geezer status. And RRSP contributions have dropped off a cliff particularly among millennials many of whom – with the attention span of tropical fish – prefer TFSAs. For them retirement is not only in the remote, hazy future, but likely impossible given a gig economy. Besides, they can raid a tax-free account at any time.

Yes, this is the third and final time for an entire year that this pathetic blog will focus on RRSPs. They have become maligned, misunderstood and unsexy over the past decade with our accumulated room growing wildly. Canadians are paying hundreds of millions a year in income taxes that could be deferred for most of a lifetime while failing to reap the benefit of tax-free growth.

Why?

Sure, TFSAs have sucked off a lot of the investing energy but the real reason is property. My old man spent less than 2x salary to buy a detached house in a demand area. Today the same house is valued at $2 million and the average high school principal earns $120,000. Do the math.

For the record, the deadline for making a contribution (to get a 2018 tax break) is next Friday. You can contribute up to 18% of your income, to a max of just over $26,000. Look on your 2017 Notice of Assessment to see the room you have available from all past years. The contribution can be deducted from taxable income, so the more money earned (and the higher the tax bracket) the bigger the refund or tax reduction.

As mentioned here, a spousal plan will help split income within your family or finance a mat leave. A contribution in kind lets you use existing assets to contribute. An RRSP loan actually creates money out of nothing when you use the refund to repay it. You can use an RRSP to reduce the withholding taxes on your paycheque. Money taken from an RRSP for a house down payment is tax-free, but must be paid back. Money taken from an RRSP to pay an advisor’s fee is tax-free and does not need to be repaid. You can borrow from your plan for schooling – also repayable and triggering no tax. Your house mortgage can be put into an RRSP, so you make payments to yourself. Money can stay growing in an RRSP until age 71 when it’s converted into a RRIF – also a tax shelter, but with tiny annual withdrawals. However both an RRSP or RRIF can yield tax-free payments if melted down carefully. In short, this is a complex, flexible, modern vehicle for tax avoidance, tax deferral and tax-free growth which just gets better the more money you make.

Even if you never plan on retiring, this allows tax to be shifted from a year in which income is good to one in which life sucks or you decide to do nothing. As mentioned the other day, it also shields your wealth from creditors – something a TFSA can’t do.

So only a few more days. Use it, lose it. Your choice.

Garth Turner February 19th, 2019

Posted In: The Greater Fool

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