Saturday, December 16, 2017

During times of budget deficits and inflation avoid your RRSP

Do you really think your government is there to help you and the middle class and the poor?  HAHAHAHAHA!!!!
Look at your RRSP that is promoted as being your friend.  You start saving and contributing young that way you can benefit from compounding. Right?  Eh… Eh….
Well, your income is still low and you are in a middle tax bracket of say 30%   You put $1000 in your RRSP and you get a tax refund of $300.   Now after 40 years it is time to take your $1000 out. But oops you were successful and amassed enough wealth outside your RRSP in retirement you are still in that 30% tax bracket or worse you are in the top marginal tax bracket of 50%. You take out your $1000 and, ding-ding, you PAY $300 in taxes or worse you pay $500!  Now that is nice!  No things get worse. After years of inflation and budget deficit, taxes have increased for everyone. Even if you remained in the same bracket, at retirement time you are not paying 30% but 40% and if you were in the top margin you pay 60% in taxes. You cash in your $1000 and low and behold you must PAY $400 or worse $600 to the government.

Don’t worry it gets worse. You were not always that successful and lost capital invested in stocks.  If you held those stocks outside an RRSP you got a capital loss deduction. Great, at least the government shares a bit in your pain. Oops, you got that loss inside an RRSP or TSFA?  Sorry bud, the loss is all yours!   Your respond: Hahaha, I invested only in interest bearing investments. After all, when collecting dividends within a RRSP I don’t get the dividend tax credits either. So, I use my RRSP only for the safest of safest investments.  Ok, today I still make even less than on riskier stocks and bonds but at least I preserve my capital.

Not so fast.  First your contribution lost purchasing power due to inflation. But to make matters worse even if interest rates increased over the years to compensate for inflation,  when you withdraw you have to pay taxes and likely at higher rates than if you cashed in your profits earlier and outside your RRSP. Even worse, if you made capital gains they are not tax free as when they were kept outside an RRSP (provided you never sold).  Even if you sold, you would have paid capital gains taxes that are at a much lower rate (50% less) than the full income tax rate that you pay when withdrawing from your RRSP. So, do you feel screwed by now?  You should!

With a TSFA things are much better. But an RRSP is something that royally screws successful people and to some extend it screws the less successful as well. So, why don’t you thank Justin for turning back the contributions on your TSFA?  After all, Justin has your best interest at heart, right? To be honest, even Conservative politicians are not there for you but for themselves and they don’t win unless you lose!  After all, the more they tax the more spending power they have.

If you believe that Jason Kenney, when elected, will reduce taxes in Alberta to levels before Notley came in power then I want to sell you some very valuable toilet paper. Rare are the politicians that lower your taxes!  BTW, I hope you don't have to pay a 'financial advisor' out of all those 'profits'.

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