Boosting RRSP limits: Two views

I’ve always believed Canadians should have higher RRSP contribution limits and/or the equivalent space in registered pension plans.

It seems the C.D. Howe Institute agrees, based on this paper released Thursday, and which has already created a fair bit of publicity. I’ve received some emails to the effect that “only the rich” benefit from more RRSP room and that, in any case, low-income earners are better off with TFSAs.

I’ll quote from some of the skeptics below, but first let me reiterate the point that Ottawa will eventually get any tax revenue it may lose by raising RRSP limits now. As any retiree with a substantial RRIF knows, forced annual RRIF withdrawals will be fully taxable and may even result in the clawback of OAS or other benefits. That’s why some question my statement that higher-income earners should welcome more RRSP room.

Two pluses, one minus

I know those with big RRSPs will eventually pay the piper but remember two things. One, several years or decades of deferred and compounded growth on investments is worth a lot. Second, most of us can expect to be in a lower tax bracket in retirement than when we were working. If you can defer tax while you’re in a 46% tax bracket and pay it many years later when you have no other income and are in a 23% tax bracket, that to me is a fair trade.

A 72-year-old reader makes the following counterpoints:

…when the other shoe drops and you are withdrawing money, here are the nasty realities:

1. You may be paying higher tax rates than when you put it in! This is true in my case and you do not have to have amassed a huge fortune for that to occur.

2. The whole nasty business of clawback, which has huge potential marginal tax rates.

3. The fact that the government controls the rate at which you reacquire your own money—regardless of your needs and limitations.

Any reform of RRSPs therefore should not only deal with maximum deposit limits but should remove any restriction on the amount and the timing of withdrawals. If I want to leave it in there until I die I should be able to and it can then by taxed in my estate (as a lump sum, which the government would love!) or passed on to one more generation—the spouse.

In the absence of hard numbers on this situation, I tried very hard to come up with my own scenarios using a sophisticated hand-held financial computer, and concluded it was better to collapse my entire RRSP before my 72nd birthday, but I may be on shaky ground without stronger financial planning tools than I had access to.

What if we didn’t tax CPP and OAS benefits?

Another reader, from British Columbia, makes a suggestion that has occurred to me in the past. Instead of introducing an expanded CPP that will antagonize employers by in effect hiking their payroll costs, why not just make CPP and OAS income go further in old age by not taxing the income?

There could be a means test to apply some tax rate for high income earners, as there is now on OAS, but people who earn under $75,000 per year, for example, would pay no taxes on CPP and OAS benefits.

That simple, stroke-of-the-pen policy change by Ottawa would boost retirees incomes by at least 15% on those sources and not cost a single job. Nor would it require any provincial consensus.

It would cost Ottawa tax revenue, so of  course it’s a nonstarter, but it’s not difficult to eliminate the job-killer argument if the federal government really has the will to help low-income retirees.

Jonathan Chevreau is the editor-at-large of MoneySense. He blogs here and at findependenceday.com. Find him on Twitter @jonchevreau.

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About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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