Weekend Reading: Frustrating Financial Beliefs Edition

It’s RRSP season, a time to consider topping up your contributions to build your nest egg and reduce your taxes owning for 2017. RRSPs are a useful tax-planning tool and one of the most effective ways to save for retirement. But some retirees don’t see it that way now that they’re in the withdrawal phase and facing tax rates upwards of 50 percent on money taken from their RRIF.

It’s one of the more frustrating financial beliefs, that RRSPs are nothing more than a tax trap that favours the government.

“Regret over using RRSPs is most likely to kick in with the tax bill associated with these RRIF withdrawals. But Mr. Golombek urges retirees to remember that they essentially didn’t pay tax on the income they used in their working years to contribute to an RRSP and that they benefited from years of tax-free compounding.”

I put this myth right up there with some other commonly held beliefs; that CPP won’t be there for me in retirement, renting is just throwing money away, and there’s no point working overtime because it pushes me into the next tax bracket.

Part of the problem in today’s world of ‘alternative facts’ is that if you repeat a belief over and over again eventually it becomes accepted as truth. As more baby boomers enter retirement and start to draw down their RRSPs, this belief that RRSPs are tax traps will only continue to grow.

Here’s a truth-bomb: RRSPs and TFSAs are the mirror image of each other. One you contribute to with after-tax dollars and pay no tax upon withdrawal, while the other you contribute with before tax dollars but you must pay taxes upon withdrawal. If you happen to be in the same tax bracket in retirement as you were when you made the contribution, the RRSP and TFSA race is a dead heat.

This Week’s Recap:

On Monday I shared 4 tips to help you start investing with ETFs.

On Wednesday Marie compared TFSA interest rates at the big banks and several online lenders.

And on Friday Marie shared four things to take care of this February.

Over on the Toronto Star I offered up my top credit card picks for 2018.

Many thanks to Rob Carrick for sharing my annuities post in his latest Carrick on Money newsletter. According to Rob:

“I’m among those who marvel that annuities aren’t more popular.”

Weekend Reading:

Global News consumer reporter Erica Alini shares 7 common mistakes that explain why you never have enough money.

A bargain isn’t always a bargain. Why you should stop trying to save money on everything.

This one is right on the money: The real reason why your finances are tankin’.

It’s hard to predict how you’ll respond to risk, says the always brilliant Morgan Housel.

Vanguard has introduced several ‘one-ticket solution’ ETFs – a globally diversified balanced portfolio packed into one-fund at an ultra-low MER of 0.24%.

Dr. Networth put together a great guide on passive real estate investing; from REITs, to MICs, to private mortgages and more. One of his key takeaways:

Don’t feel rushed or pressured into investing into something that you don’t feel comfortable with or don’t understand. Also, don’t invest because you have a Fear Of Missing Out (FOMO). Take your time. You don’t have to swing at every pitch.  

That segues nicely into this post by Nelson at Financial Uproar (back from the dead), who dodged a potential nightmare investment in a local storage business.

In his latest Common Sense Investing video, Ben Felix shares one of the more helpful explanations of bitcoin as an investment:

Bitcoin investors: Here’s why your children might ignore you:

Bitcoin investors, years after they get burned, will try to teach this to their children. But their kids won’t likely listen. Many will say, “Mom and Dad, you don’t understand. This new technology isn’t like Bitcoin. It will change the world. And it’s price has increased a lot, so I know that I’m right.”

The Long Island Iced Tea Corp’s decision to rebrand as Long Blockchain Corp might have been a bit hasty. It turns out the company doesn’t really understand anything about blockchain. Shocker.

The boring part of personal finance: You make a lot of smart money moves, and then you just wait. That’s it.

No surprise here. A University of Alberta study says families with adult children living with them have 24% less in savings and assets than families without.

WestJet began selling tickets — some for $0 — for its ultra-low cost carrier Swoop. The carrier will offer six weekly flights from Hamilton to Abbotsford, Edmonton, Winnipeg and Halifax; six weekly flights from Abbotsford to Hamilton; and three daily flights between Abbotsford and Edmonton.

The latest Wealthsimple Money Diaries features Margaret Atwood, who was told in college that to find her place in the world she should find a husband and become a wife. Then she went to Harvard and became an award-winning writer.

On to the scandals:

The Competition Bureau says Ticketmaster and its parent company Live Nation allegedly used a deceptive practice known as drip pricing that saw customers pay sometimes more than 65 percent above the advertised price for concerts.

The New York Times looked into social media’s black market where celebrities, politicians, and social influencers alike pay big money for fake followers so they appear to be more popular online.

Finally, more context on Canada’s bread price fixing scandal, where Competition Bureau documents reveal allegations seven companies participated in a scheme that inflated the price of bread by at least $1.50 over a decade and a half.

Have a great weekend, everyone!

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3 Comments

  1. Loonie Doctor on February 3, 2018 at 7:57 pm

    Thanks for another great round-up. I agree with you that RRSPs can get a bad rap unjustly. Like any tool, it is how you use it. If you contribute at a high marginal rate and withdraw in a lower bracket, then the overall tax is not only deferred, but lower (common in retirement). You can also “lose” if you contribute in a low refund bracket and have a higher taxable income in retirement (unlikely for most people). Works as intended. The RRSP and TFSA are mirror images as you point out and in a dead heat in a static comparison. However, they can be used to nicely compliment each other by preferentially putting tax inefficient interest bearing investments in the RRSP (since they will be taxed at your marginal rate anyway) and aiming growth oriented capital gains generating assets to your TFSA. They make more TFSA room as they grow and you avoid the unpleasant feeling of changing capitals gains from being taxed at half your marginal rate to being taxed at the full marginal rate when you take them out of an RRSP. It is too bad that the TFSA has been curtailed to a small size relative to RRSPs – it would be nice to have contibution room for both big enough to have a fully balanced tool box.

  2. Cheryl on February 4, 2018 at 10:54 am

    Those look like some good articles to read. I’ve already opened them up on new tabs to get going on!

    I was reading something similar on RRSPs the other day, actually I think it was in the Return of the Wealthy Barber as he was comparing them to TFSAs and using a chart to show what they cost before/after tax dollars going in and going out. I don’t have a lot of money in RRSPs and that’s mainly due to being low income most of my life. I read online about people who put $500 or $1000/month into RRSP but that’s just not financially capable for so many people. I also have never seen any real benefits in the way of tax refunds for the RRSP contributions years ago when I was able to put away $200 a month towards them which was a huge financial struggle just to do that. I turned my efforts to TFSA instead and am fully funded to 2018. My RRSP consist of less than $10,000. Half of that in mutual fund RRSP at Tangerine and the rest I have some shares in Roger’s Sugar and an ETF plus a newly started group employment plan. Other than what’s going through the employer, I have no plans or leftover money to contribute any more to an RSP.

    As for bread-gate, I have a loyalty card with Save On Foods and they just sent me an email that they’ve loaded $25 onto my card, not for their role in bread price fixing because they’re not part of it, but just to be good guys to their customers who were affected. The catch is you have to spend $40 in able for that to be redeemed off the card. I’m guessing I’ll get a prompt at the self serve check out like I do when it says do you want to cash in 2000 points for that butter you bought. They also have an option that you can redirect your $25 to the food bank, so I’ll see what happens there the next time I shop, because I’d like to do that. Walmart is one of the companies that just got named by the Competition Bureau and I’m wondering what they plan to do to compensate their clients.

  3. Joe White on February 5, 2018 at 10:52 am

    This is another great reason why financial planning of some sort should be mandatory in high school. Myths like these can cause otherwise intelligent people to ignore their own best interests and make risky investments instead of sound investment decisions.
    According to Statistics Canada registered pension plans are on the decrease and senior poverty is on the increase.
    Time to get the young thinking about the old before they’re broke and in poverty themselves.

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