By Paul Delean
The Montreal Gazette
Saturday, April 26, 2003
One of financial planning's sacred cows, the
registered retirement savings plan, took a
bit of a hit this week.
In a study for the C.D. Howe Institute by
social-policy consultant Richard Shillington,
the RRSP was portrayed as a poor investment
option for many low-income Canadians, given
that it could end up triggering higher taxes
and loss of a substantial proportion of government
benefits such as the guaranteed income supplement,
or GIS, and goods-and-services tax credit.
Shillington argued that some people approaching
age 65 with small RRSPs and no private pension
probably would be better off without an RRSP,
since monies withdrawn from it in retirement
could result in a clawback of GIS and/or reduction
of rental and nursing-home subsidies.
Adrian
Mastracci, investment counsel & president
of Vancouver based ‘fee-only’ KCM
Wealth Management, says, “RRSPs encourage
the discipline of saving, and saving is one
of the pillars of getting ahead in life.”
In his view, they'd be better off putting
their savings into things like real estate
or unregistered investments, where there wouldn't
be such severe penalties.
Claude Laferrière, a Université du
Québec à Montréal professor
specializing in taxation, said there's a lot
of truth in Shillington's report, which echoes
research he's been doing for several years
(notably the tax tables featured since 1998
on the Centre Québécois de Formation
en Fiscalité Web site, www.cqff.com).
But Laferrière isn't so quick to write
off the RRSP. While it might end up costing
you government benefits in the long run, in
the short term, it generates benefits that
also must be part of any evaluation of its
overall merit, he said.
In addition to the tax refunds - which even
at low levels of income can be hefty in a high-tax
province like Quebec - the benefits of an RRSP
contribution may include things like an enhanced
Canada child-tax benefit, Quebec family allowance,
federal GST credit, provincial sales-tax credit
and provincial property-tax refund.
All of those hinge on taxable income, and
RRSP contributions are one of the few ways
Canadians actually can lower taxable income.
Lower family income also increases the potential
tax deduction for medical expenses and the
credit for child-care expenses while reducing
the premium to subscribe to Quebec's prescription
drug plan.
Savings may not always be tax-efficient, but
people with nothing saved have fewer options,
Laferrière said, citing the example
of Quebecers who'd rather pay for immediate
medical treatments in Plattsburgh than go on
a waiting list in Quebec.
"If you want to save, if you believe
in saving, (the RRSP) is still the best way
to do it, especially for families with kids," Laferrière
said. "It's just best to start early.
Not at age 55."
Adrian Mastracci, an investment adviser at
KCM Wealth Management in Vancouver, also is
reluctant to knock RRSPs, even for low-income
earners. RRSPs encourage the discipline of
saving, and "saving is one of the pillars
of getting ahead in life," he said.
Longtime advertising executive Dick Meyer,
77, of Westmount, makes the same point. In
a letter responding to The Gazette story on
the C.D. Howe study, Meyer said he put aside
more money for retirement than he otherwise
would have because of the RRSP format.
"Without the RRSP, I probably wouldn't
have contributed as much," he said. "I
think it's a great thing" - so great he's
encouraging his two youngest children, 23 and
25, to start theirs now.
Mastracci believes the problem isn't so much
small or ill-advised RRSPs as a lack of planning
and information for people approaching retirement.
It's an area people should start getting professional
advice about and preparing for 15 or 20 years
ahead of time, to make sure they have set goals
and a strategy, he said.
"There's always something you can do
to help yourself," Mastracci said, "but
if you don't look, you might not discover it."
So while it's true an RRSP may cost you in
retirement, it's also true that it can produce
significant advantages before then. The key
is having a clear idea of how it fits your
goals and situation, and making an informed
decision.
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