Myth 5: Taking RRSPs is useless because, when you retire, you will pay taxes when you withdraw!
“I sometimes have clients who think that contributing to an RRSP is useless since they will pay taxes when withdrawing in retirement. This is both true and false,” says Nathalie Jacques, mutual fund representative 1.
Remember that an RRSP contribution allows you to benefit from a tax deferral. Indeed, it is more advantageous to invest in your RRSP if the marginal tax rate is higher when you contribute than retired and have a lower income. For example, if someone earns an annual salary of $68,000, their marginal tax rate is 37%. By paying $1,000 into her RRSP, she will benefit from a tax reduction of 37%, or $370. When this person withdraws this amount at retirement, his annual taxable income will be reduced – say to $38,000 – and his marginal tax rate will then be 28.53%; she will therefore have to pay $285.30 in taxes. The difference between the $370 received and the $285.30 paid is $84.70. The contribution is therefore worth it!
On the other hand, a worker who today earns $38,000 a year and will earn $22,000 in retirement will have the same marginal tax rate of 28.53%. In this case, it is exchanging four 25 cents for one dollar! Contributing to your TFSA is then an exciting solution.
In the case of both RRSPs and TFSAs, interest income accumulates tax-free for years, so why deprive yourself of it? And if we can, why not combine the two?
Myth 6: A TFSA doesn’t pay!
“A TFSA can be just as effective and profitable as an RRSP, contrary to what many people think!” explains Ms Jacques. Like an RRSP, the investor chooses the type of investments to put in his TFSA. But that’s what generates the return. The account as such has nothing to do with it.
“This perception probably stems from the fact that, as soon as the TFSA came out, certain financial institutions promoted it by suggesting that their clients invest in guaranteed investment certificates and term deposits, whose rates are almost lifeless. “says Ms Jacques. “It is possible, and even desirable, to choose mutual funds, stocks and many other types of investments in your TFSA.” Ask your advisor about the types of investments available. And grow your TFSA!
Don’t miss the other articles on myths and realities in finance in our series.
1Financial security advisor, group insurance and group annuity planner, Solutions financiers N. Jacques inc.†, financial services firm, distributor authorized by Sun Life of Canada, life assurance company, and distribution partner firm Sun Life Financial (Canada) Inc.† Mutual Fund Representative, Sun Life Financial Investments (Canada) Inc.†, Mutual Fund Brokerage Firm †Subsidiaries of Sun Life Assurance Company of Canada
