For Canadians one of the most popular way to save for your future is through the Registered Retirement Savings Program or an RRSP as most know it.
RRSP’s are heavily advertised by Banks and Mutual Fund Companies from the months of October through February, which is known as the investment RUSH zone to the “tax friendly” RRSP Vehicle.
But at the heart of it, an RRSP may be a Good, Bad or even Ugly investment for typical Canadians, and here we will look at three different views on this popular Investment vehicle, and you will be able to determine for yourself if an RRSP is right for you.
RRSP’s the Good:
RRSP’s were created in 1957 to help average Canadians who had no opportunity of a Work Sponsored Pension Plan save for their future. Prior to the introduction of RRSP’s average Canadians had no method of tax deferral when they wanted to save their money every month or year. With savings rates at all time lows the Government introduced them to encourage people to start putting money away for their future. Although they were not overly successful in the first years of introduction, marketing efforts by the Banks and the ease of contributions, slowly made these popular in the minds of Canadians. At the time of introduction, a tax deferral on contributions were the seen as the greatest benefit to Investors, but as you read below, you may be surprised what they didn’t tell you when you opened your account.
RRSP’s the Bad:
One of the problems that we see on a regular basis with an RRSP, is bad asset allocation. Typically when you first start off your RRSP you start with a Bank or Mutual Fund Company and you have an account balance of zero and start growing from that day forward. The initial asset mix you choose may not be understood and not reviewed until many years later when your account value finally is on the radar screen of the Advisor’s at the institution you choose to invest through. This mis-management of assets early on in your savings years can have a dramatic effect on your account value, and many of the clients we meet with don’t understand how their money has been invested, but they are just happy to be invested. Have you ever felt neglected by your Bank, because you thought you didn’t have enough money accumulated yet for them to be interested?
RRSP’s the Ugly:
While it is nice to receive a tax deduction back from the Government for your RRSP contributions, you have to realize it is only a deferral of tax into the future. Currently by some estimates the unpaid taxes that reside in Canadians RRSP’s are in the Hundreds of Billions of Dollars, yes that’s right Hundreds of Billions of $’s. So while it is convenient for Investors to receive the tax break, as your account value grows inside your RRSP, so does your tax obligation. Your tax owing actually compounds inside of your RRSP in the same form and fashion as your account value does, so if you save $1 on tax today, how much will that obligation grow over time? And does it make sense to receive a tax break today for such a large obligation into the future?
So for all that it is worth, without RRSP’s in today’s financial landscape, we believe that Canadians wouldn’t save as much as they currently do, but you should use an RRSP strategy to Compliment your Financial Future, and not Dominate it.
An RRSP with a GMWB feature will help you save today for the future, but with the Income Guarantee and the Growth Guarantee of 5%, you will know with certainty how much your RRSP account will be worth when you need it at retirement, and you will know with certainty what your Tax Obligation will be as well.
Download the Income Stability Report today to see how a GMWB RRSP can compliment your long term savings goals. Or call our office today at 1-800-924-6385 to discuss your unique needs and goals.