Lifestyle | Retirement: did I take too much RRSP?

Believing that he would have lower income in retirement, a reader put his savings into RRSPs. Now 71, he believes he’s taken on too much.

The situation

Arthur*, 71, followed the recommendations on personal finances given to him when he entered the job market.

“People who have a defined benefit pension plan are often advised to subscribe to an RRSP,” he wrote to The Press. I have such a pension plan and I also have an RRSP. »

“I wonder if it was worth investing in an RRSP,” he continues.

Arthur put money in his RRSP when he had a much lower income than today, he explains. The septuagenarian earned only $11,000 a year. He continued depositing into the registered plan until he reached an annual salary of $60,000, when he stopped contributing.

“At those income levels, I had a much lower tax rate than I do today. I am now retired and my income is around $100,000 per year. In addition to my annual pension of $84,000, almost entirely indexed to the cost of living, I have $300,000 in two brokerage accounts that earn me about 7 to 8% annually. »

Arthur specifies that it is the spouse he had when he retired who will receive 40% of his pension at the time of his death, and not his current spouse, aged 58.

“Today, when I withdraw my RRSP, I am taxed to the maximum. As a result, I pay more tax than if I had paid it initially. »

“All the RRSP gave me was a tax deferral, but it cost me more. Unless I’m wrong,” he asks himself.

This possibility of having made a mistake in planning his retirement or of having been poorly advised eats away at him. Arthur wants to know for certain.

Was he right or wrong to take out RRSPs? If the answer is negative, how can he correct the situation? Are there any solutions?

Arthur has two children, aged 43 and 26, as well as three grandchildren.

Analysis

Jacinthe Faucher, financial planner, notary and tax specialist at the Société de gestion publique des Fonds FMOQ inc., did research to find the tax rates from the 1970s.

It was around this time that Arthur entered the workforce.

“In 1973, the tax rate for income of $10,000 to $20,000 was approximately 21%, 30% for income over $20,000, and 43% for income over $50,000,” relates the tax specialist.

“Still in 1973, the RRSP contribution rate was calculated based on the lesser of 20% of income or $4,000,” she continues. In 1976 until 1986, it was still the lesser between 20% of income and an amount which increased from $4,000 to $5,500. »

At the time, it was not possible to contribute to the TFSA, since this program appeared in 2009.

To determine whether or not Arthur was right to contribute to the RRSP, the planner made calculations based on two situations.

The first, the one that Arthur chose at the time: put his savings for 10 years in an RRSP.

The second: what could have happened if Arthur had invested the non-RRSP amounts for 10 years with the taxed investment returns.

“This reader did not know at the start of his career that he would one day have such a generous defined benefit supplemental pension plan,” specifies the specialist.

Contrary to what one might think before carrying out the calculations, the results are astonishing.

“If we only take into account the accumulation of savings, it is clear that the RRSP is more advantageous. After age 50, the amount in the RRSP rises to $54,600 and that outside the RRSP, to $37,662.

“But it is the effect of the tax that must be analyzed,” specifies Jacinthe Faucher.

Taking into account all income and tax impacts, in particular the reimbursement of the Old Age Security pension when income is greater than $81,761 (in 2022), here is the net income provided in each of the hypotheses: with RRSP savings, it amounts to $97,920, while with non-RRSP savings, it reaches $97,836.

The annual difference is $84. Yes, only $84.

The only way to modify these results would be to split income between spouses. However, you still need to have a spouse and this spouse must have lower income.

According to Jacinthe Faucher, when deciding whether or not to contribute to an RRSP, several elements must be taken into consideration.

In addition to saving tax and deferring it to retirement in the hope of having a lower tax rate, there are the tax advantages of workers’ fund RRSPs (CSN and FTQ) and the reduction in taxable income which creates a positive impact on Canada child benefits and increases the tax credit for child care expenses.

The tax expert reminds us that it is always a good idea to contribute to an RRSP, except in rare exceptions. “I have had cases of farmers who had very modest incomes in their working life and who obtained little tax reduction by contributing to an RRSP. Upon reaching retirement, when they sold their farm, they obtained a good sum of money, and the disbursement of the RRSP harmed them. »

The case of teachers who have a supplemental defined benefit pension plan is a little different, raises the planner. “The TFSA is certainly very interesting. I wouldn’t say that the RRSP is not, because fiscally, it will be in the short term. In the long term, the TFSA will provide other advantages. »

The RRSP provides access to the Home Buyers’ Plan (HBP), the Continuing Education Encouragement Plan (REEP) and the transfer of RRSPs and RRIFs to the spouse without penalty upon death.

* Although the case highlighted in this section is real, the first names used are fictitious.