My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, December 3, 2012

Are RRSPs the Holy Grail of Retirement Savings or the Holey Grail?

In March 2011, I wrote a blog post disputing Jamie Golombek’s assertion that RRSPs are not the Holy Grail of retirement to Canadians. In May 2011, I followed up the above noted blog with another post in which I attempted to reflect that RRSPs are only accessed under financial duress.

Based on the above two blog posts, clearly my opinion has been that RRSPs are the Holy Grail of retirement planning for Canadians. However, I am beginning to wonder if my personal experience in dealing with higher net worth people who tend not to "touch" their RRSPs, has distorted my view of the situation and RRSPs are really a "Holey Grail".

The catalyst that has led me to second guess myself as to whether RRSPs are really sacrosanct is a recent poll (of 2,013 people) undertaken by the Scotiabank on Canadians' mindset regarding RRSPs.

The poll states that “one-third of RRSP holders (36 per cent) reporting taking money out of their RRSP this year, up from 23 per cent back in 2005”. The poll also reported “the average amount Canadians withdrew from their RRSP was $24,531. In 2005, the average amount Canadians withdrew from their RRSP was $10,716". 

What I personally found shocking about the poll was that “Canadians aged 55+ (41 per cent) are more likely than 18-34 year olds (32 per cent) and 45-54 year olds (30 per cent) to have taken money out of their RRSPs”. Although one must take into account people greater than 55 years old will have larger RRSPs from which to withdraw, one would think that of anyone, those closest to retirement would consider their RRSPs as Holy Grails. However, as noted by the Canadian Investor in the comments area, some +55 year olds may be accessing their RRSPs as part of their retirement plan, in essence lowering and/or smoothing their income tax liability and funding retirement expenses.

I summarize the poll numbers below (Note: I have used the numbers in the Scotiabank press release and from an article in the Financial Post by Garry Marr on “What not to buy with your RRSP”, to pull these numbers together, as I could not directly access the survey).

Reasons People Withdraw from Their RRSPs


Buy a first home - 40%

Pay down debt - 16%

Convert to a RRIF - 15%

Cover day-to-day expenses - 14%

Home renovations - 8%

Vacations - 6%

Education - 4%

Medical - 3%

Holy Cow - Did you really use your RRSP for a Suntan?


So, let’s step back for a moment to review the reasons provided by Canadians for withdrawing money from their RRSPs and examine whether my postulation that RRSPs are the retirement Holy Grail is flawed.

In total, 14% of RRSP withdrawals are used for home renovations and vacations; two fairly self-indulgent and discretionary expenses, that most would suggest should not be funded by a RRSP. What is scary is that number would be much higher if we added the percentage of day-to-day expense withdrawals that were for discretionary expenses such as tablets and TV's. Ouch, not much of a holy grail.

Holy or Holey?


The Scotiabank poll still reflects that 64% of the population do not access their RRSPs and that percentage would move closer to 70% if we exclude the legislated conversion of RRSPs to RRIFs, which are not true withdrawals.

If you believe that first time home purchases are technically just loans from your RRSP and not true withdrawals, the percentage increases to almost 85%. Finally, if you believe paying back debt is just a result of financial duress and not because RRSPs are holey, it could be argued the percentage of people accessing their RRSPs is a relatively small narcissistic percentage.

So let's look at the top two reasons for RRSP withdrawals in greater detail.

Buying a First Home


As noted above, the largest single reason for withdrawing money from a RRSP is the purchase of a first home. This is an extremely complex issue to analyze, because the CRA has condoned the use of RRSP funds for first-time home buyers. Many people make RRSP contributions they would never have made in the first place, knowing they will get an immediate income tax deduction and tax refund, while keenly aware that they will utilize these RRSP funds to assist in purchasing a home in the short-term.
 
In the Scotiabank press release, Bev Moir, a ScotiaMcLeod Wealth Advisor, said the following: "Investing in a home and investing in retirement are both important parts of life and finding a way to balance both is key. If Canadians are going to take money out of their RRSP for a major purchase like a house, they need to have a plan in place to return that money as soon as they can so they don't limit their options in the future. “  

The problem I have with Ms. Moir's statement is that it ignores the reality of the situation. People buying their first home typically struggle to just repay the yearly minimum Home Buyers Plan (HBP), which is re-payable over 15 years. In my CA practice, it is my experience that many people do not make the required yearly HBP repayment. The consequence of non-payment is that the required payment amount becomes taxable income in that year; which results in additional income tax and a further deterioration of potential retirement funds. Even where people have a plan and make the yearly repayments, years of tax-free compounding are forgone and their future retirement options may be limited to some extent.

Here is what Rob Carrick of the Globe and Mail has to say on this topic. In his book How Not To Move Back In With Your Parents Rob says that when people ask him should they contribute to their RRSP so they can withdraw money under the HBP his answer is "Uh no. You contribute to an RRSP to save for retirement. If you need some of your RRSP to afford a house, fine. But there's too much of a tendency for people to see RRSPs as a savings account from which money can, if necessary, be withdrawn."

Personally, I don't think using a RRSP to purchase your first home negates my Holy Grail argument. The intention of the HBP program is in essence to provide a 15 year or shorter term "self" mortgage, while keeping your RRSP whole; however, like any legislation that has more than one objective, both objectives cannot be fully satisfied.

Repayment of Debt


I discussed the issue of excessive Canadian debt in my blog, Debt – An Ugly Four Letter Word. Accessing RRSP funds to pay down debt is a blog on its own, so for now, I will only say, often RRSP withdrawals related to debt repayment are accessed under financial duress. Now whether this duress is self-inflicted due to excessive discretionary spending is another question entirely.

Rob Carrick in his book states that "there are better ways to accomplish this very worthwhile objective" than using your RRSP to repay debt. I discuss some of these ways in my above noted Debt blog post. Rob also makes a great point in noting that the statutory withholding tax rate attributable to RRSP withdrawals is often less than the person's marginal income tax rate, which can result in an income tax shortfall, which creates yet another new debt. In that regard, if a RRSP is accessed by a taxpayer in the 31% marginal tax bracket (the tax bracket the average Canadian would be in) to pay down debt, they will only be applying approximately $69 of each withdrawal to pay down their debt after the CRA takes its tax bite.

My Final Comment


At this point, I can only suggest that RRSPs are the Holy Grail for at least 70% of Canadians. However, for a disturbingly large segment of the population, RRSPs are the Holey Grail. For this percentage of the population, instant self-gratification, whether in the form of a nicer house, vacation or the latest electronic gadget, is of greater importance, than a distant concept called retirement. As for the high percentage of 55+ year olds making RRSP withdrawals, I am very concerned for their retirement if the withdrawals are not being made as part of their retirement plan.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

19 comments:

  1. Hi Mark,
    I'm actually one of those over 55s who did withdraw some funds from my RRSP, though I have since converted it to a RRIF. I would have ticked "to pay everyday expenses" as my reason. But in doing so I was merely using the RRSP as it was intended - to fund some of my semi-retirement expenses. I also withdraw funds (now from my RRIF) to move money over into the TFSA. RRSPs aren't the Holy Grail anymore, just one of many chalices for retirement.

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    1. CI, thank you very much for your comment. I just realized I had tunnel vision. I was just looking at +55 taking out money, but yes, as you note, there may be a day to day expense requirement and more importantly, income tax smoothing by accessing funds earlier. I am going to revise the blog to reflect your insightful comment.

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  2. To echo CanadianInvestor's comments, I anticipate withdrawing from my RRSP after age 55 in any year where I'm not working (retirement or semi-retirement). Basically, I'll always be sure to withdraw enough to bring my income up to some threshold, such as the point where marginal tax rates reach 30% or so.

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    1. Michael,

      I am surprised with your yearly blogging income that you will ever be at a rate lower than the higherst marginal rate:)

      Yes, your plan makes income tax sense. As noted above, I have revised my blog to reflect CI's comment and now yours. I think I was so shocked by the quantum of RRSP withdrawals, that I locked in on that aspect and not the fact some people may have planned like you & CI. I hope that is the case for the majority of +55 year olds.

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  3. To look on the optimistic side, maybe there are a lot of early retirees who are using their savings to replace their income. Or there may be many people taking advantage of low-tax years to avoid the future burden of fully-taxed withdrawals. We can only hope those are common reasons!

    I would think that some things at least are easier to manage than they were in the past. You mentioned that people could reduce their withholding taxes but would be less likely to save up the same amount as their annual income tax refund. It's easy to set up an automatic transfer the day after you get paid to put an equivalent amount or more in a separate savings account such as ING Direct. That still leaves a pile of money free for the taking but at least building it up doesn't require much thought or self-control. Maybe people are irresponsible with $50 (restaurants) or $5000 (vacations) but good with $1-2000 (mortgage pre-payment?).

    On your post last year you mentioned that leaving money in a holding company can have greater benefits than using an RRSP (if it isn't spent). Did you have any other posts (or articles from others that you read) related to this? We're moving in this direction and I'm interested in learning all I can about what tax management opportunities there are outside of the standard personal accounts.

    Thanks in advance Mark!

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    1. Hi Simply:

      Thanks for your comment. I have a post coming sometime, not sure the date, probably in new year, on whether better to leave money in a corp and just grow your RRSP in the corp; it will also address other issues such as dividend vs salary.

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    2. This may be the first accounting cliff-hanger! I've already switched to all-dividend income starting this year and will stick with that as long as I can find enough ways to defer tax to be comparable to or better than the standard options. Looking forward to hearing more about your ideas.

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    3. Almost as exciting as who shot JR:)

      Paying dividends instead of paying salary seems to be the way many practitioners are going remuneration wise these days where active income is less than $500k in a corp. Dont build up the blog too much, its only tax, bound to be a let down :)

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  4. I have a very nice pension, so the RRSPs I have in place are not really growing much, I have been looking at my TFSA as the place to put any spare money, however, I also must put money in an RDSP as well, so it's all an interesting circle of savings.

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    1. BCM- Hopefully one of those acronyms funds your retirement. But given your limited desires and lack of a bucket list, as long as your breathing and fed, you should do ok in retirement :)

      BTW, I liked your image yesteday for the circle of savings.

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  5. I am fortunate to have a DB pension, I'm under age 40 and already have 13 years into it. I figure if I stay with my current employer, for another 15 years (and they will have me???), then I won't need an RRSP for the most part to manage retirement expenses. The RRSP will be gravy to help me retire early. At least that's the plan :)

    For folks that don't have a DB pension plan, like the TFSA, it should be a cornerstone for them or part of the Holy Grail. Certainly not the Holey Grail. I can't believe folks withdraw from their RRSP to buy depreciating assets. Nuts.

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    1. Hey MOA:

      Got to love those defined benefit pension plans.

      What is interesting is that typically defined benefit plans are more governmental in nature, so you typically forgo greater salary than you could make in the private sector for the DB plan.

      But few in the private sector seem to translate those earnings into the same retirement stream as those with DB plans. Hmm, sounds like an interesting blog topic.

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    2. Hey Mark,

      Agreed. There is an opportunity cost here, or, deferred salary if you will. Most employees with a DB plan are paid less (public vs. private sector) during their working years, but get it all back in the form of fixed (DB plan) income.

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  6. Blew up our rsp's over the past couple of years in our mid 30's. Twas not an unsubstantial amount as we'd both maxed out contributions, but after being faced with the dilemna of what do with with excess investable assets after maxing out rsp room, I discovered there's more than one way to skin a cat. Bird in the hand, vs. two in the bush?

    For an individual with regular t4 income via a "job", I think they're the vehicle of choice, but it surprises me to hear your high net worth clients still partake. I'm assuming like most accountants, your high net worth clients have ccpc's and other avenues available to them. I found those avenues more attractive, including the non-registered dividend portfolio. Continual tax advantage on canadian holdings and the cap gain thing isn't far off from the pay tax on everything when compared to the rsp route.

    Eagerly awaiting the cliff hanger. Well no, that's not entirely true. I'll forget about it and be pleasantly surprised when it pops up on my rss reader. Cheers!

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    1. Anon, I like your sense of humour. Many of my clients have CCPC's, holding companies and family trusts, yet like to max their RRSP's. Like I said, RRSPs are still the holy grail to some. I understand your thinking of not using RRSPs and keeping those assets dammed up in a corp, will discuss in my blog that you will forget about until you read it. Then after you read it, you will say why did I even waste time forgetting about it :) Cheers till then.

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  7. What about withdrawing from an RRSP to buy a family cottage? I am 42 and would really like to enjoy a vacation property with my young family at this stage in our life. My primary residence is 80% paid off, mucho equity in it. I see this as an investment that would appreciate, so would it be wise?

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    1. Hey Anon:

      A RRSP for me is a retirement fund first and foremost and should never be touched unless you have a financial emergency. However, obviously many others disagree.

      Assuming you are an average Cdn, it will cost you 35% or so in tax, more if you have a higher marginal tax rate if you withdraw money from your RRSP, leaving you only 65% or less to pay for the cottage. (note the statutory RRSP wth tax rate will most likely be way less than the actual tax you owe, so be careful).

      That being said, if you can have 30 years of enjoyment using a cottage and it appreciates at least as much as your RRSP if not more, I can see an argument for doing what you want. Would I recommend doing it,no. But I do see why you would find the option appealing, especially if the cottage grows in value. That is all I can say, I cant provide you investment advice.

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  8. My mom has been called into the bank to meet with a FA, as she currently has approx $29,000 in RRSP’s. She turned 65 back in Feb. When she divorced with my dad she was given ownership of the house. So years back she made a large RRSP withdrawal and paid off the rest of the existing mortgage. I guess she got tired of making the mortgage payments on her own. My question is with regards to the $29,000 left in RRSP’s. Would it be a wise move to transfer all in-kind into a RRIF, TFSA, or just leave the RRSP until 71. She still works part-time and making less than $19,000.

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    1. Hi Ron

      I do not provide specific personal tax planning advice on this blog. First of all, she cannot transfer the money in kind to her TFSA without paying tax on the cashing in of her RRSP. In general, someone in this type situation would try and bring in a small amount each year so the withdrawal attracts minimal income tax. Thus, you would most likely keep the RRSP and possibly cash in small amounts each year and then roll into a RRIF and take the minimum payments each year, but again, this is general advice and you need to calculate the additional tax withdrawals would attract each year.

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