The types of people who say “RRSPs are a Scam!”

When I see someone declaring that RRSPs are a scam and dig into their reasoning, I find they fall into a few categories.  Here are my thoughts on each type.

“I sell life insurance products whose investments are better than RRSPs.  Look at this projection.”

So far, I’ve found these projections like puzzles.  How long will it take me to see the error?  Do they leave out taxes?  Do they add numbers decades apart without adjusting for inflation or investment returns? Somewhere in the columns of numbers there is a mistake or deliberate deception that makes the life insurance investment seem better than it is.  This is the part of the RRSP-is-a-scam crowd that I have the least patience for.

“Now that I’m 72, look at how much income tax I have to pay!”

They’ve spent their adult lives enjoying tax refunds from RRSP contributions, but all that is forgotten now.  For a million-dollar RRIF, the minimum withdrawal based on age 72 is $54,000.  For those with other income as well, the taxes on this RRIF withdrawal could easily be over $20,000.  This is a big slice taken from money they thought was theirs.  But the truth is that CRA was buying a slice of their RRSPs with every tax refund.

It gets worse for those whose income is high enough that the RRIF withdrawal causes an OAS clawback.  Depending on the numbers, it’s possible that some people would have been better off making TFSA contributions rather than RRSP contributions in some years.  More commonly, they’ve done very well with the RRSPs, and they’re just complaining about having to pay some tax.

Frequently, these people could have helped themselves by starting to make some RRSP/RRIF withdrawals starting from when they retired rather than waiting until age 72 for forced withdrawals.  There are many calculations that go into making the best choice, but the result is often that people with large RRSPs should use withdrawals each year to use up lower tax brackets.

“If I die, my estate will pay nearly half my RRSP/RRIF in taxes.”

This is true for large RRSP/RRIF balances.  RRSPs that were a great deal for someone living into their 80s or beyond can be a bad deal if they die in their early 70s.  The problem here is that people fixate on their RRSP/RRIF balance before and after the tax bite.  If they had saved in a TFSA or non-registered account, they wouldn’t have built nearly the same balance as their pre-tax RRSP/RRIF balance, because of the RRSP contribution tax refunds.  The proper comparison is the after-tax RRSP/RRIF versus the after-tax balance they could have built in some other type of account.  This difference is much smaller than the tax bite on the RRSP/RRIF after death.

Even if they could have done slightly better with some other account in the event that they die in their early 70s, I think it’s better to focus on being alive than dead.  Having more money available to live a good life is more important than the possibility of leaving a modestly smaller estate.  For those who can’t let this go, a modest amount of life insurance may help.

“RRIF withdrawals are killing my GIS.”

This is a major concern for low-income people.  I’ve seen cases where people made small RRSP contributions that got little or no tax refunds, and then RRIF withdrawals after age 65 cause 50% to 75% GIS clawbacks.

By the time I see these cases, the damage is mostly done.  Often, they can salvage something by withdrawing their entire RRSP/RRIF and putting the after-tax amount in a TFSA (in one year or possibly spread out over a few years for larger balances).  This causes a hit to their GIS for a while that they can compensate for by spending some of the withdrawn RRSP/RRIF.  When considering this option, it’s important to take into account all income-tested benefits.

However, I’ve never got anyone to do a complete withdrawal.  It all sounds scary, and the short-term hit of taxes on the RRSP/RRIF withdrawal as well as reduced GIS payments scares them off, even though it works out better in the long run.

Overall, this is the only group who have a legitimate reason for believing that RRSPs are a scam.