Lately, a lot of our analysis and writing hovers around retirement and RRSPs. We started with a brief post about Not Blindly Contributing to your RRSP a few months back and continued in March with more elaborate one explaining how we were Dealing with Complex Retirement Considerations. Today we persist with some profound thoughts on the never-ending RRSP versus non-registered debate. You’ll still note our research is not exhaustive as it particularly refers to our personal situation.
Some people feel RRSPs are a government scam to take more of their money thru taxes. Many angry retirees almost consider RRSPs as evil when they realize how much tax they owe at withdrawal. They just forgot all about the juicy tax refunds they received when they deducted their RRSP contributions in the first place. Over the years, these RRSP deductions helped fund a great portion of their retirement stash.
We can view RRSP tax refunds as a loan the government allows you to make to yourself. You only have to remember that you’ll have to reimburse it with interest some day (at withdrawal). If you are in the same tax bracket, the interest rate of that artificial loan will be equivalent to your investment return. If you now fall in a lower tax bracket, good for you, you’ll pay less «interest». Similarly, if your tax bracket is higher, tough luck, you’ll end up paying more «interest» via income taxes.