In the Globe & Mail, Dale Jackson Debunks some RRSP Myths. Overall, I thought the article was good and I liked it.
In debunking Myth #2 in the article, Dale Jackson says “There’s also a strong argument for young investors to delay making RRSP contributions until they are in their higher income years and the tax savings are bigger. The trade off would be less time to allow savings to grow tax-free. [emphasis mine]” First of all, he is confusing himself and all of us when he misuses the term “contributions” with “deductions.” He means to say “deductions” here. Let me re-write his quote the way I think it should be: “There’s also an argument for young investors to delay making RRSP deductions until they are in their higher income years and the tax savings are bigger.” I have replaced “there is a strong argument” with “there is an argument.” In a previous blog post I did some calculations to determine whether or not it is smarter to delay that RRSP contribution or not. As far as contributions go, there is a strong argument to make contributions right away without delaying, so you can take advantage of tax-free growth. ie. no capital gains and no tax on dividends or interest.
Another small detail concerning contributions and deductions. Myth #3 is: “3. You must take advantage of your maximum allowable contribution the year it is issued.” Answer: “Wrong. The difference between the allowable amount and what you contribute can be used in later years.” Although this is totally correct, you could also write a Myth #3.5 (which I think is a WAY, WAY, WAY bigger myth): “3.5. You must deduct all of your contribution the year you contributed.” Answer: “Wrong. The difference between what you contributed and what you have deducted (which is 0 if you haven’t made any deductions) can be used in later years.” Essentially, you can contribute to an RRSP when you are 16 and make the deduction when you start working full-time after university at the age of 22. That’s 6 years of tax-free compounding. Seriously, I don’t think I’ve met anyone who knew that you could contribute to an RRSP and then deduct it later. I don’t blame anyone though because it’s just not a common thing to do once you get older.
There were actually some pretty good comments in the comments section. I recommend checking it out. There are also some not-so-awesome comments but other readers are quick to point out the flaws.
One reader, Gardiner Westbound, says “. . . Modest income seniors approaching retirement should cash out RRSPs before applying for OAP, GIS and other benefits.”
Nick B. quips:
Gardiner, way to go dispensing unqualified financial advice. An individual applying for those benefits in short order should be working with their bank or advisor to determine how their finances are going to look. There may be a need to manage RSP withdrawals to create non-registered savings, but simply cashing out may well not be a good decision . . .