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Why you want to stop "maxing out your RRSP"

on Thu, 11/07/2013 - 22:53

Since the federal government pushed out "RRSP" in 1957, due to the fact that we get tax deduction from contributions we make, the banks and majority of financial advisors had been telling their clients to contribute into RRSP. RRSP, as the name suggested, was to promote savings for retirement by employees and self-employed people, because the federal government knew already back then, the CPP system will not be able to support all the retirees down the road. So, they came up with "tax deduction" as an incentive, to attract people to "save for retirement".

However, as time goes along, getting tax deduction became the main reason of people contributing into their RRSP, no one tru-ly cares about retirement but the tax deduction. In order to "get the most out of it", people were advised to "max out" their RRSP every year. Little that they know, they will eventually get burnt.

You might say "are you crazy?" why would we get "burnt" with good amount of RRSP saved when we retired?! Yes, you will and here is why…

Remember the Canadian retirement system is mainly built with CPP, OAS and GIS, RRSP is what you saved on your own to "make sure" (or at least try to get close to) you have the desire income level in your retirement years. Currently, the maximum benefit of CPP and OAS is $18,702.84. GIS might not something you would that eager to receive, as that's only available to low income seniors.

When we add RRSP into the mix, we have a nasty thing known as "clawback" on OAS… OAS is design to compensate our older generation who had lived in Canada for at least 10 years after they turned age 18 at the time. We are supposed to get it simply because we were here as part of Canadian history.

The current qualifying age on OAS is 65 (for people born before March 1958, the OAS reform changed it to 67 for people born on or after March 1958), we can definitely pick up the OAS topic under another post as this is a post on RRSP. To learn more on the OAS reform, Fraser Institute had released a report in October.

Depending on which province you live in, if your total income (including CPP, RRSP, any investment income) is higher than $70,954 (for 2013, changes every year, you can check updated amount at Service Canada), you start experience the "clawback".

At that point, if you still have some RRSP room, you can then contribute and lower your income a bit for a few years, at least you get to enjoy the OAS benefit which you would have never got. So if you have been maxing your RRSP every year, maybe it's time for you to rethink that "strategy"… Getting tax deduction for today is always good, as some accountants say, "the tax dollar you save not to give to the government, is a dollar you earn today", so, tax deferral is always good, but we seriously don't NEED to max out our RRSP contribution room. Talk to your accountant, your financial advisor, contribute enough to get you into a lower tax bracket, and leave some RRSP room for yourself down the road.

As a financial advisor, my goal is to minimize people's tax due and maximum their governmental benefit. Bear in mind, retirement planing is an art, you save some for tomorrow, today you spend some, there is always a balance on what to save and how to spend.

**Lots of people do not know CPP and OAS can be kicked in different times. You can choose to delay both CPP and OAS (new after July 2013) till age 70, the longer you delay the payment to you, the more you get every month for the rest of your life. 


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