There are certain personal finance truths that are more obvious than how great my ass looks in these jeans.
You need an emergency fund. You need to save money. You need life insurance. Spend less than you earn. Eating at home costs less than eating out. Payday loans are the devil. Minimalism is the ticket. Experiences are better than things. Personal finance is personal.
God, that was like a thousand sports interviews all condensed into one paragraph.
Here at the ol’ FU machine, we don’t spend a lot of time on cliches. We’re (and by we, I mean me and 14 cats, all named Mr. Sparkles) BUST MYTHS LEFT RIGHT AND CENTER, BITCHES. The personal finance world is filled with all sorts of rules of thumb we continue to advocate everyone follow, even though all sorts of people shouldn’t bother. If you’re a teacher with tenure (or a government employee in general), you’re basically secured a job. Why would you have a three or a six-month emergency fund?
There are a million other examples just like that one. I don’t have the finger stamina to bust them all at once, I’m more of a wrist stamina man. But only the right one, for some reason. Anyhoo, let’s focus on RRSPs for today’s post, specifically how you might be looking at them all wrong.
Think outside the RRSP box
If you believe the prevailing personal finance logic, you’d stick your money in your RRSP until you hit 65, letting it grow tax deferred. You’d owe tax on what you withdraw, obviously, but hopefully you’re not stuck as the Wal-Mart greeter so you can take that money out at a low tax rate.
One of the reasons why folks continue to advocate the TFSA over the RRSP is the flexibility offered by the former. You can take money out of your TFSA and put it back willy-nilly, just as long as you don’t over-contribute. It allows you to take money out when you need it without paying tax.
In certain situations, a RRSP can do something very similar. Take the future mother of my babies, Taylor Swift. When she takes that year off to recover after squeezing out my giant-headed child, what are her options if she doesn’t qualify for maternity leave?
Well Nelson, she could probably use her millions of dollars to be able to make sure she doesn’t starve, you slack-jawed moron.
Okay, bad example. What about if the mother of my child is somebody of more, uh, regular means?
What’s stopping her from raiding her RRSP to help pay for living expenses, since we all know I’m a bum who will do nothing? Absolutely nothing. Sure, she’d end up having to pay a 10% withholding tax, but providing there’s no other income and she takes out less than $11,327, she ain’t paying a nickel to the feds. Even if she takes out $20,000, she’s still not paying much.
If our hypothetical woman is smart with her money, chances are she’ll have several sources of income once she hits retirement age. She’ll have CPP, OAS, maybe a pension, other investments held outside of registered accounts, a TFSA, and maybe a kid who has made the NHL. Hey, it’s my kid, he can do it.
Just as long as we don’t name him Jaxon. LEARN TO SPELL PARENTS GOD.
Sure, we can’t see what the future holds. But in certain situations, we can take an educated guess about whether it’s a good idea to withdraw some of that RRSP cash now or leave it for a future that might be far more secure than today. Remember, there is such a thing as over saving in a RRSP. It’s not a huge problem, but like my affliction Giant Penis Disorder, it does affect a small percentage of the population.
How about the Home Buyer’s Plan?
The Home Buyer’s Plan (HBP for the lazy) is the most common alternate RRSP use. It allows someone to borrow up to $25,000 from their RRSP tax free to use as a down payment on a house. You have to repay it in 15 years or else you owe tax on the amount withdrawn.
The HBP is another way for smart savers to use their RRSP money while deferring tax. Putting $25,000 back into a RRSP over 15 years is a whole $1,666 per year. If you can’t do that you’re not trying. And you’ll never get a lower tax rate than 0%.
If you just use the RRSP for its intended purpose, you’ll likely end up doing just fine. Generally speaking, more retirement savings is better than less retirement savings. If you use your RRSP to help when you have a job loss, or buying a house, or in any other situation where you can withdraw the money and pay low taxes, you can really supercharge the RRSP. You almost turn it into a TFSA with the added advantage of getting a tax refund in the first place, the whole reason why I think most folks should be using their RRSPs over their TFSAs in the first place.