May 4, 2012 | In: Opinion

Why RRSPs Are Bad

Everytime I have a meeting with someone in a Canadian bank the first question they ask me: “How come you don’t have RRSPs with us?” My immediate answer to this question is: “I don’t know, can you tell me about the benefits?” So s/he usually says the following:

  • It’s a great way to maximize your tax refund.
  • It’s a great way to save money.
  • It’s like a retirement fund.
  • You can use up to $20,000 (or was it $25,000) towards buying your first home, without paying any taxes.
  • You can get the money whenever you want.
  • RRSPs are an excellent way to invest your money.

Of course, they usually forget to say the most important reasons:

  • We make tons of money out of RRSPs from people like you, sucker.
  • The government thinks that you can’t save money on your own.
  • The government thinks that it’s entitled to control your money.

Let me debunk each of the points that the bank claims are reasons of why a Canadian should go for an RRSP:

It’s a great way to maximize your tax refund

Yes it is, you will get a big refund, but it’s not like you won’t have to pay taxes on that money saved in your RRSPs. You will be taxed the year where you withdraw your money, and, with the direction that we’re heading, I’m sure that the tax rate will be higher in 30 years from now (I think then the minimum will be 50% to support all these welfare programs and bureaucratic agencies in Canada).

It’s a great way to save money

Not it’s not. It’s actually a really bad way to save money. Your money will be locked and in some cases you won’t be allowed to withdraw it from the bank without paying a penalty. That penalty can be as high as 10% of the original amount – so, if you contributed $10,000 to your RRSPs and you need the money in a year, then you will be only getting $9,000 (assuming, of course, your investment had 0% return in that period – which is very likely). Of course, that’s the bank’s penalty, you will then have to add the $10,000 (not the $9,000) to your income for the current year, which means that you will most likely fall into a higher tax bracket, which means that you will have to pay even more taxes on the money. Unless you’re a complete moron who spends everything s/he makes then RRSPs are a real bad idea.

It’s like a retirement fund

No it’s not. It’s more like a beggar’s fund. The government assumes that when you grow old your expenses are less and you’ll be living like a monk in a remote cave somewhere, spending only $1,000 or $1,250 every month. So, they think that you will only withdraw about $15,000 every year from your RRSP, which means that your taxes will be very low. But, we all know that in Canada, with $1,250 you will barely break even by the end of the month (especially if you’re paying rent or you have mortgage). So, with this beggar’s fund (that is mistakenly referred to as a “retirement fund”), you’ll be guaranteed to eat mac and cheese for the rest of your life. How cool is that? I’m sure that’s not what you had in mind for your golden years, or did you?

You can use $20,000 to buy your first home

There are many, many deductions that you can benefit from by buying your first house (or home), and you cannot deduct the same thing twice. Even if that’s not the case (which is not the case, as it is the case – a double negative!) the amount of taxes on $20,000 is $6,000 to $10,000 (if you at the highest tax bracket). A smart way of managing this is by adding $20,000 to your RRSPs the year before you intend to buy your home an then retrieve it the next year. You’ll save up to $10,000 in taxes, assuming, of course, there is no penalty for withdrawing your money that early, or if the government actually allows you to do this.

You can take the money from your RRSPs whenever you want

Yes you can. But there’s a catch for taking your money out, as you usually have to pay a penalty. Canadian banks seem to agree that 10% of your initial investment is a reasonable penalty fee if you want to take your money out in the first period.

RRSPs are an excellent way to make money

I remember I had a friend at my previous work who had a lot of money put in his RRSPs. I asked him, how much money have you made so far on your RRSPs? He told me that he lost about 10% of it so far. You see, what banks do is that they suggest mutual funds as an investment vehicle for your RRSPs. Mutual funds, as we all know, are a really bad way to invest your money, as you are always at the mercy of the fund manager, who really couldn’t care less about you.

RRSPs are bad, really bad, and if you think they are good, then maybe it’s because you’re naive enough to still think that banks actually care about you.

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